We're providing a mechanism to bring in a much larger set of people in a game that has historically been dominated and rigged by Wall Street.
We have never asked for any favors or any regulatory ask, nothing like that, and he has never done anything like that.
Is it fair to say that the Trump family has a financial interest in prediction markets being legal?
Tarek, Luana, welcome to the Axios show. Thanks so much for joining us.
Prediction markets are in the zeitgeist right now, whether it's politics or sports or finance or tech. Luana, let me ask you, what's the one-sentence explanation for why America needs prediction markets?
Well, prediction markets are, think about like the stock market where you can buy yes or no shares of what's gonna happen in the future. And one of the most interesting things about prediction markets are the data that come from these markets, right? You have the best way to forecast and take a look at the future and forecast the events. And in a world nowadays with this amount of polarization, fake news, misinformation, all of that, it's very important to have an unbiased source of information that can help you see and kind of decrease the uncertainty about so many events that's gonna happen.
What's an example, a specific example that you've heard from a user, perhaps, of somebody making a decision or maybe a different decision because of something they learned from the data in Kalshi?
Well, this applies to both like people, but also like businesses and institutions, even governments. And I mean, there's a whole suite of examples. The Fed put out a paper, and the TLDR of the paper is essentially, well, this is the most accurate gauge that we have on where the economy is going. And that kind of feeds in into all of our decisions about, you know, Fed interest rates, about like where Fed policy should basically go, and then you can apply that. I mean, there's a lot of simple examples like, will the midterms go Republican or Democrat? You know, there's very clear impact to businesses or people on depending on what they do based on sort of a change of control. And so having an accurate gauge of what's gonna happen, I think helps you make better decisions, right? The easiest way to kind of visualize this is like we're making the world a little bit smarter about what's gonna happen in the future, and that's worth a lot.
Well, what's the easiest way for someone who's never downloaded Kalshi on their phone and never actually looked at it? Maybe they've heard of it, maybe they haven't. How do you describe the product itself? Not the purpose that you guys have been talking about, but how do you best describe the product?
The best analogy I think is really thinking about the stock market. When you go to the stock market, you believe Apple is gonna go become even bigger than it is today. You can buy shares of Apple. And then if you believe it's not gonna go well, you can sell those shares or you think if you already made a profit. What you can think about is you can actually do the exact same activity, but any future events. So for example, who's gonna take the Senate, right? If you believe the Democrats are going to take the Senate, you can buy a yes share and hold that. And then that's gonna have market fluctuations, the price going up and down. You can sell in the middle. So if it goes up 10%, you're like, that's enough. I wanna sell or cash out or you're gonna wait till settlement where you can make or lose money there. So the same way to think about it is really a financial market that you're changing shares.
So basically you're making financial wagers on a market for events. Why isn't that gambling?
That question that you just asked was consistently asked at every new turn of financial instruments. You know, back when the stock market, there's a lot of speculation in the South Sea Bubble. They were like, well, retail is participation. There's a lot of gambling in those markets. Now I think society has come to terms that it's not actually... there is speculation, yes. But like there's all these other kinds of uses. Grain futures actually went all the way to Supreme Court in the early 1900s, and there was a question about gambling versus not gambling there as well. But you know, what I always say is like, let's just be precise about definition. What do we mean when we say gambling? So some people are actually referring to speculation. You know, we've been hearing a lot of this argument of like it's quack like a duck and people are talking about ducks these days.
Yeah, the law is not ducks, right? The way that we should make decisions is not based on ducks.
You're right. Okay, I get that. Is it not then a loophole? If I'm sitting in California right now, we're not, we're in New York, but if I was sitting in California right now, I can't bet on tonight's Celtics game on DraftKings or FanDuel or any of those sports books. I can't walk into a casino and do it. It's illegal. However, I can do it on Kalshi for the end user. What's the difference? I understand the backend is different. It's a contract as opposed to a bet. But in the end, I'm betting on Celtics to win a game and I'm gonna win or lose based on what happens on the court.
So look, I mean, on the loophole question, if our goal was to kind of like shortcut the process, we did a very bad job at that because we started coming in-
$22 billion or something like that, it's a pretty good job.
Well, we did a good job building a company, but my point is we spent four to five years upfront getting regulated without a product. So we're a company that's like regulated at the federal level. We have a federal license for an exchange, a clearing house. Those are extremely hard to get. And now that we are so successful, a lot of companies are trying to get them and they're seeing how hard they are to get and operate. It's a bit like a bank. So if our goal is to short circuit the process, we did a pretty bad job. Ideally we would have gone offshore and launched a product fast. So no, the answer is no. And to your question, like, and going back to the sort of, is this gambling question. The mechanic of how this thing happened is critical, right? There is state regulated insurance where you go to an insurance company and ask them for insurance. And then there's like federally regulated hedging, which is you're basically putting on a hedge in an open market where your counterparty could be anybody, anyone can compete for that thing that you wanna buy.
I'm curious, though, the reason why certain states, and this isn't always true, but the reason why certain states have made sports betting, gambling, whatever you want to call it, illegal and reason why some of them have sued Kalshi, and there's currently litigation. I know you just won a case in New Jersey in the last several hours. But one of the reasons they've done it isn't so much because they feel the casinos are, or the sports books are taking advantage of their users because they're betting against their users. It's because they think it is a social ill for people to be betting, period. Technically, it's illegal for two people to make a $10 bet on a game of golf. Same argument, right?
Well, there's always the two sides. There's the legal side, which Tarek talked about, but also there's the kind of ethical side. The problem is it's very hard to change or convince consumers to not do certain things. So all you're doing is you're pushing this activity offshore. You're pushing this activity to unsafe where you don't know who the traders are. You don't have any protections. You don't have oversight.
You're saying that all very nicely as if you're not talking about a particular company. Go on.
I think there are various offshore companies that are trying to do similar things. Of course, there's a bigger one that we all know, but I think that's kind of a very big difference. You're just pushing activity offshore, but actually on the federal regulatory regime that we're seeing, it's like everything is transparent. We know everyone that's trading with the platform.
You mentioned ducks earlier and he didn't say ducks, but the one place so far you've lost legally is in Nevada, a state that certainly knows a lot about gaming. You can argue why certain things are there. But what the judge said in giving an injunction, temporary injunction, at least right now against Kalshi, was basically if I bet $100 on a basketball game through Kalshi or I do in a sports book, it feels the same to me. It was the walks like a duck, talks like a duck argument. If Nevada is the state that kind of has the most experience with gaming, would you just argue regulatory capture there or did he have a point?
I don't necessarily think there's an advantage for specific judges in specific states over their understanding of the federal law and the Commodities Exchange Act. So I wouldn't say that running casinos in Nevada necessarily correlates to experience with knowing the law or knowing the federal law. So, and yes, there's some district judges.
One thing though, in Nevada, obviously they have a lot of experience with casinos and the CFTC chair who supports prediction markets being legal, supports federal framework, et cetera, said recently that when he was asked about this, he said, well, part of the difference is that when you walk into a casino, there's all sorts of entertainment, right? There might be shows, there's food, there's drink. He said, so casino, betting in a casino is different than betting in Kalshi, but it's not necessarily different than betting on a sports book app on my couch, there's no entertainment difference.
There is a big fundamental difference. And look, I think the court pieces, let the courts decide, we won a very big one, the first appeals court this morning, which I think is actually the most important signal where this is going in our view. But there's big fundamental differences goes back to the market mechanic. Like one of them is essentially a product that is designed for customers to lose. Actually, the proof of that is that when a customer wins on a traditional sports book, they block that customer because those winnings are coming from the business model, the business itself.
If they win enough, yeah.
If they win enough or if they win and consistently, if they do research, if they get informed.
If they're good, exactly. And if they're not, actually, you get them promos and you figure out how to bring them back. And there's kind of a bit of this sort of like, I think we call like kind of marketing tactics to bring these people back. It could be like entertainment or promos and so on and so forth. That does not exist in prediction markets. It is a fundamental difference in structure where actually a lot of the people that win, the people that are doing research, are getting informed, that are traders do come to prediction markets.
Does Kalshi track... You know, it's one thing to not block big winners from continuing to be able to win or continue to be able to buy contracts. Do you do anything to stop people who have lost a lot from continuing to participate?
We have things like self-exclusion, deposit limits, trade limits, exposure limits, all those things.
Are those things the person has to set themselves or is that something that... do you ever look and say, this person is losing an enormous amount of money, we should stop them from hurting themselves?
We give them a lot of tools and also we do push them in certain directions in the UI. We don't make decisions for them.
Which is the same in the States.
Which is the same in the States and the same in like, we think it's about giving them the tools to act correctly, but we do a lot of it on our end on like, we ban things that we can do. We stop marketing to people, as I said.
So if I've lost a lot of money on Kalshi or I've stopped using Kalshi, I won't keep getting Kalshi ads in my social feeds.
Well, I mean, there's a few things here and maybe like the why we do this. Excessive speculation is existent in any financial market. It's true in sports betting, it's true in prediction markets, it's true in crypto, it's true in zero data expire options, where you see a lot of people losing their homes on trading options that blow up in the given day. It's true really kind of in all the traditional products where retail has access. Retail is always heightened risk, and we take that very seriously. What we did is we looked at what federal law requires us and we do that, which is there's a bunch of rules around that. We also looked at kind of some of the more stringent state requirements and looked at them and basically decided to apply the most stringent ones and go beyond that. So we like, we want to say we have all these different tools. And the marketing that we're mentioning is essentially, no, you cannot, if you take a billboard or exist as a company, you cannot block that from being shown to a person that has a problem, but we block them in our product. They cannot use a product anymore.
You guys recently preemptively blocked that, I think it was athletes, politicians. So I want to make sure I get this right and quote, other relevant people is the term from trading certain sports and politics markets. Had that been happening?
So we have a surveillance team, marketing integrity team that looks at every single market and looks at any weird trading behavior. And obviously we have the name, address, social security of every single person in the platform and look for anything that could be suspicious, start an investigation because a federal regulator can end up in jail if you do something bad. That's also mimics what the stock market does. We took a step further. And basically what we're doing now is that if you even sign up to Kalshi and we think there could be an issue, you're blocked from certain markets, which is going way further than the stock market.
But prior to doing that, the people you're now preemptively blocking, had you seen them trade on things that now they would be blocked from trading on?
One great example is where we put out an enforcement case, actually a couple of weeks ago, on a candidate for governor, I think of California, that was trading on his own candidacy. And we had an investigation, fines banned from the platform and all of that. So we had cases of that, but they all were correctly got by the surveillance team and solved the same way that it happens in the stock market.
Your surveillance, I'm just curious though, your company, you guys have what, about 150 employees total? Is that right? How big is the surveillance team?
I think it's 15% of that, 15, 16%.
How can that relatively small number of people surveil, as you said, 16,000 contracts. So it's one thing to say, okay, that's the person on the basketball court, that's the candidate. But their spouses, their kids, their neighbors, their best friends, how can that small number of people surveil all of that and do it well?
Well, one, you can make that argument about the entire size of our company. How can a company writ large achieve what we've achieved? And I think we have like a great team and AI is kind of like a big part of a lot of what's happening these days. But like, I think it's important. So that I think one way to kind of like answer it quite like, yes, there are bad actors in any system. There are bad actors in the stock market. If I asked you today, do you think inside trading happens in the stock market sometimes?
Although can I say though, generally speaking, there's fewer people within the stock market who can actually make something happen. There's people who have inside information and know what's going to happen, which is different than being able to make the thing.
Well, they're like hundreds of thousands of people that worked at a big tech company and you have cousins and they have relatives and they have sisters and friends and siblings, right?
But I'd also disagree that, for example, you could do something bad of a CEO of a company and that would move the stock price.
Actually, a lot of people are able to do certain-
I mean, market manipulation and insider trading are constructs that have been defined way before prediction markets. And the reason they haven't defined is because they have been a problem in traditional financial markets. Otherwise, why would we define them? It's not like market manipulation has started existing.
Okay, so as you said, so you're a small company able to do this. Do you know, like, you know-
You do know those people.
So there are a lot of lists for politicians, for sports and athletes and people that relate to them. And so those lists are very effective at flagging, like Dan, who are you? Do you have heightened risk of potential access to insider information? And if so, we can block you proactively from participating in the market.
Do you do the blocking or do you refer to CFTC?
So here's the difference. We do surveillance after the trade. And if, when we find weird patterns, which is, again, usually you see it in the data and sometimes our systems flag it, other times our community, like the traders, flag it. Because you can see that all of our data is transparent and public, which is a great way to kind of flag bad actors. And then we can punish people from fines and criminal prosecution. But we go a step beyond, actually a step beyond traditional markets and stock markets, which is you proactively block people that get flagged by these lists. Like, hey, you may be a politician, so you cannot trade on political markets that cannot be related to you.
And my question is, so you've taken enforcement action. Am I correct, though? At least I've looked. I couldn't find the CFTC itself having taken an action against an individual for insider trading on prediction markets.
There are three steps here. The first step is-
Am I wrong? Has that happened? The CFTC has not done the...
So you brought up insider trading earlier. The SEC historically brings-
Absolutely, but prediction markets have not existed for 10 years.
But you've existed for the last year.
Sorry, but insider trading cases in the SEC, they don't get resolved in six months.
No, but they get brought often within a year.
I think it depends because there is due process. If you look at a rule book on Kalshi and same with the CFTC rule book, and look, I cannot, this is a question you should ask the regulators, but like, we, sometimes we have cases and we have managed to put out two, but it takes time because once we flag something, you cannot just tell the public, hey, this person like did something bad. You have to go through a whole process. They can appeal that process. They have legal rights.
Would you expect that the CFTC will, based on what you know in terms of the communications, would you expect, say, within the next 12 months, there will be CFTC cases brought inside of trading?
We can't comment on what regulators will or will not do. What I would expect-
If you were in Kalshi and there was a yes, no bet.
Yeah, I think yes, because my expectation is like, this is a large market. They're starting to look like a financial, like, I mean, there are cases that come in the stock market. There is no system that is, like, basically, any system will have bad actors. No system is perfect. Bad actors will try to attempt fraud and they will do things that are bad. And what our job as an exchange and the job of regulators is, over time, you flag these bad actors and detect and deter. You punish them when you find someone who did something bad. And inevitably, in our markets, this is going to happen.
How do you think of this-
It should happen. It's a good thing.
Kalshi, started under the Biden administration. I know the Trump administration has been much more friendly. The CFTC has been more friendly. You didn't sue the CFTC like you did the last one. However, Kalshi obviously hired Donald Trump Jr. as a paid advisor shortly after Inauguration Day. He has become an investor in Polymarket and is an advisor over there as well. Is it fair to say that the Trump family has a financial interest in prediction markets being legal and successful?
I mean, look, we just announced Stephanie Cutter as an advisor. She's helped Democratic campaigns.
But Stephanie Cutter can't make law.
I don't think Donald Jr. can make law either.
Let me rephrase. He has a much quicker, direct line.
Look, I think-
We have never asked for any favors or any regulatory ask, nothing like that, and he has never done anything like that.
I mean, we obviously, like what happened is essentially we're a company that's a small company that all of a sudden won our lawsuit, which I think that was the most important thing that you mentioned about the change in administration. Actually, the biggest change that happened in prediction markets is the fact that we won our lawsuit against the last administration in October 2024 before the election. That is the thing that we define kind of the what is possible in prediction market. We've kind of set the law and we've shown regulators that like whether the Biden administration or the Trump administration, if you disagree with us and we believe we're right on the law, we will ask a court to rule on this thing. And this is true for any administration. And then a small company, we're very excited about people on any both sides of the aisle getting interest and having interest in our market and believing in the power of these markets. And that's basically what happened there, and we have a number of Democratic advisor. We're gonna balance on the two sides because as a financial company, we have to basically be able to work with policymakers and regulators. But we can say absolutely for sure, unequivocally, we have never asked nor we would be able to ask anything on the regulatory front from-
I'm just curious. Just push on this for one second. When you guys announced him and I wanna make sure I read this right. The press release said, and I don't know if it was either one of you who said it, but the press release, it said, Don Jr.'s quote, "Always been at the forefront of these sorts of spaces and new technologies." I thought he was a real estate and hospitality guy.
Wisdom of the crowds talking directly to people going direct and there's a rise. I mean, this goes back to the sort of the rise of distrust in traditional sources of information. As you know, there is a rise of distrust these days in mainstream media. There is a rise of distrust and even social media, actually, where people feel like news feeds are getting polarized, et cetera. And increasingly so you're seeing founders and people, thought leaders, politicians or others going direct, going directly to consumers. Prediction markets is a form of that. Like when I think about social media, they're kind of like going direct about the past. Prediction markets is a way to get informed about what's gonna happen in the future through tapping directly into the crowd wisdom instead of like listening to pundits or listening to kind of quote, unquote, authority figures. That is a space that we're talking about.
Speaking of the future. If you look on Kalshi right now, Democrats are favored significantly to win the House. They are favored just barely to win the Senate. But technically that's the binary bet at the moment. If the crowd is correct and Democrats control Congress come next January, what does that mean for Kalshi?
We talked to a lot of both sides of the aisle in Congress. And I think the most important thing that we see resonate with a lot of politicians on both sides is really the customer protection side that we talked about. It is how it is better for the end consumer, first of all, to have to pick what they prefer. We think it's pretty obvious that we have a better model for consumers and for Americans in general. So it's good for that. And then the consumer protection side that we can bring and really bring an alternative in a way better way for consumers to interact with markets, interact with the future and all of that. So we think actually nothing would change. A lot of the things that you see on like-
Even though some of the prospective bills are, it seems, and maybe you guys feel differently about this, that current elected members of Congress, it has been more Democrats than Republicans who have at least expressed publicly concerns about prediction markets.
Well, I think that a lot of the bills that you mentioned, I think they're all inside of trading related. And I think that Kalshi bans insider trading. We've always been insider trading since we started the company seven years ago, and a lot of these things are already legal in the US. And I think that actually when we talk about what we do a lot in Congress is actually just education of like there are offshore prediction markets companies or like onshore prediction market companies, there are laws. For example, we can't list war, assassination, terrorism. Those markets are prohibited. Inside of trading is prohibited and all of that. And I think a lot of the bills are coming and kind of trying to reinforce what's already law.
You guys had what? 10 point... I'm sorry. Yeah, 10.4 billion of volume in February. Am I right about that or am I-
March was a little higher. Yeah.
