Prediction Markets: Gambling or Financial Instruments? | EBC12

I hear the last panel before lunch. So we'll try to make it interesting so you guys don't fall asleep. Hmm guys don't fall asleep. Hmm , thank you for being here. My name is Ariel Labrada.

I am the CEO of Whale Capital. This is a crypto hedge fund. We've been around for a few years now, and I think this is years now, and I think this is probably one of the hottest topics in cryptocurrency right now . I think it's a combination of technology, regulation, super smart people trying to figure it out, right? It always exists, doesn't it?

Hmm, scientists and super smart people, Nobel Prize winners are talking about prediction markets, what information can it give you. So, I, um, couldn't have had better panelists today. Hmm, and we'll try to make it as lively as possible and, um, go into detail. Hmm, if you guys could introduce yourselves before we start, can we get this started, that would be great. Marina?

Of course. Hmm, good morning, and does it work? Uh morning, and does it work? Uh , yes, now. Uh, I'm Marina Villalonga.

I'm a partner, I'm a partner at Asensi Abogados, a law firm in Spain, and we're very focused on gambling and digital assets. So prediction markets are prediction markets are exactly what we are focused on right now. Thank you. Greetings. My name is Iskandar.

I am part of the crypto.com executive team. And, um, I run the exchange and, um, you know, very busy with you know, very busy with , um, prediction markets and RWA. Hmm, you know, I actually call cryptocurrency an antique at this point . But we can discuss that a little later.

Hello everyone. Hmm, my name is Christopher Sidentop. I manage sales at Capture Investments. We are the liquid asset management division of the Fred P family office. We use several strategies, a directional option and, um, a market- neutral option.

Hmm, I also run my own consulting firm, and I'm really excited to be here and discuss prediction markets today. Thank you, Grace. Hmm, I think that's one of the questions that everyone here has, right? Hmm everyone here has, right? Hmm , it depends on , it depends on where you are, what part of the world you are in .

Prediction markets are either a financial contract in the US or in Europe, in some European countries it is, like European countries it is, like Spain, right? Where we are, it is considered gambling, a bet. And then there are other jurisdictions like Gibraltar, which is something in between or nothing in between, right? And then all the people trying in all the countries are trying to figure out what the boundary actually is, right? Between what some people consider gambling and what is actually considered a financial instrument that provides market information.

Can I start? Yes, please. Good. Hmm, well, the answer to that question depends on the country where we are, because of course in Europe we have this, uh, financial regulation that applies in all countries, but for gambling that is not the case. I mean, you need to go country by country to find the specific regulation for each country.

So we can't generalize and say, "Okay, this is the line that, um, runs between the financial markets or the gambling sector ." For example, in Spain, um, there have to be three requirements to be considered gambling, namely: chance, payment for the game, and a price that can be quantified, okay? If these three requirements are met, then it is a gamble. That is why in Spain the gambling regulator considers prediction markets to be betting, gambling. Because there is a specific category for this type of betting , namely exchange bets.

So they say, “Okay, we have these three requirements. These three requirements are met, and this is a specific type of bet called exchange bets. This is a rational position that goes beyond that .” So if we change countries and go to any other countries, maybe the requirements will be different, and maybe the authorities won't consider it a bet. Therefore, we will have to conduct this analysis for each country separately.

"That's the problem we're facing now." That we did n't agree. Good. Scott, I think you guys probably have you guys probably have different experiences. You guys are a global organization that sees everything.

So it would be interesting to hear your opinion on this matter opinion on this matter . Yes, in the US it is a financial instrument because it is , um, a contract regulated by the CFTC. Right? So it is regulated like a swap or a binary option. So when a contract is listed on a regulated exchange, a CFTC exchange, right?

You must comply with the rules and comply with the rules and regulations of the CFTC. Just like if you were quoting stock futures or commodity futures. In our case, you know, we have an exchange called Nadex. We have FCM. We have DCM, which is an exchange, and we have DCO in the US.

So and we have DCO in the US. So , we have a clearing house and an exchange license. Now on this exchange we quote all these contracts, sports and non-sports. We have professional market professional market makers, some of the most experienced market makers, who set prices for stocks, fix complex prices, everything that can be bought and sold on Nasdaq, on, you know, Euronext, or whatever, right? They create markets, provide liquidity in the event of these events.

Yes, I agree, and it reminds me a lot of how it started in cryptocurrency many moons ago, it's like a fragmented, uh, you know, uh, regulatory review. Right? And in this case, uh, from what we see, the US is clearly leading the way, and they have a very, uh, you know, they have a very big, uh, you know, very good place in how to drive innovation. Can I just intervene? Of course, you are a lawyer.

Well, already. Yes, we didn't agree on this, by the way. No. What? Hmm, there are a lot of gray lines here.

Everything is blurry, so it's more normal, like... No, it's not... No, it's not... Look, it's not blurry. This is a contract regulated by the CFTC.

It is fully funded. There is full disclosure of risks. Market risks. Market makers have a market market making agreement. Everyone goes through AML and KYC policies.

There is market surveillance. This is exactly the same reliable structure as when trading futures. I agree, uh, but we can't forget we can't forget that we need to focus on the underlying asset. I mean, um, in the US the CFTC says it's a financial product, which is perfectly justified. Okay, we can, we can do it.

But there are still states, some of which claim that it's gambling and, uh, therefore it should be banned. So there's a huge struggle going on in the US , uh, because they haven't reached an internal agreement. So this may mean that things are not so clear. I think. Uh, again, with innovation, uh, you always have that, you know, markets push the boundaries of what's possible.

Uh, this is certainly new to many other regulators. Hmm, even in Europe there are ways to offer outcome markets to institutional clients, but not, for example, to retail users. Under MiFID, this is recognized as a financial instrument, and we discussed it. Hmm, we know that the FCA, for example, has been talking a lot...I read an article in EFT that they are looking at being more lenient with retail users so that they also look at forecasts, use forecasts.

Hmm, Gibraltar, I think they are kind of leaders in this in Europe, being innovative and pushing their boundaries. So, I think that's an integral part of introducing new tools, um, you know, into the world. And also, um, there's a lot of demand, especially from institutions, for using this tool. So I'd like to talk later, Ariel, about where we see demand and how that can be applied to institutions. Before we continue, Christopher needs to speak up too needs to speak up too .

We just have time. Just my final regulatory, um, point of view on Gibraltar. I think this is a very interesting case because they are the first in the world to regulate prediction markets specifically. And they don't consider them financial, ahem, activities or gambling. They believe it is the third kind.

This is a completely different thing. And therefore they need to be regulated separately. They need a special license. Uh, today, because I was talking to some lawyers from Gibraltar the other day, and, uh, I was wondering, but, uh, who is the supervisor? Financial supervisor or gambling supervisor?

How do you do this, have you created a special supervisor for this? Uh, and the gambling supervisor is currently handling this . But maybe we need a certain moment to have some clarity in the European Union , at least to know where we are, because, uh, we don't have legal certainty right now . I mean, everything is negotiable, but the Gibraltar precedent is Gibraltar precedent is interesting. Absolutely.

And then I'll shut up and hand it over to you, but, um, this seems to be the first year that MiCA has been in operation. Think about how long it took the market to get to this point . I'm glad you guys are discussing the regulatory environment in detail, because I have nothing to add. I take a slightly philosophical approach. You know, just because something has liquidity providers, market depth, and some structure doesn't necessarily mean it's not gambling.

So, I don't think this test is satisfactory on its own. To me, it's kind of like , if you can, if you can hedge a certain outcome, and by hedging I mean if you can manage the risk, and I look at it from an asset manager's perspective , then to me it's a financial contract. And I think prediction markets are a really great tool for asset managers to hedge certain risks, and we can go into that a little bit more later when we talk about different uses uses . Whether betting on Barcelona winning the Champions League or not is a financial instrument is still up for debate, but yes, I think they are two different camps. And I want to address your last point, right?

And you know, we talked about regulation, and all of this sounds maybe theoretical, because it's quite new. But if we break it down and see the reality, right? So I'll just give you a few examples. Did you mention who will win the championship this year, or I'm sure a lot of people here love football. Um, love football.

Um, Real Madrid is playing against Barcelona this year. Is this a financial contract? Is this a bet? And from Is this a bet? And from any point of view, right ?

Because that's the essence of what people are trying to understand. I would say that in this particular example particular example you mention, it could easily be considered a bet. But if you think about it, it's okay. So it depends entirely on what we're talking about? So if we say we're talking about Real Madrid and about Real Madrid and Barca, who will win, and then we make another bet related to the weather forecast, that's a different bet.

And then we make another bet make another bet related to interest rates interest rates , it's a different bet, but it's a product. I mean, we're talking about the same product. So it's very confusing because, uh confusing because, uh , if we have to look at each case individually and say, "Okay, this is a bet. This is not a bet. This is not a bet.

This is not a bet." Then this means that the prediction market platform must be very, very carefully designed. It must be designed millimeter by millimeter to avoid falling to the other side. And in every country, because, uh, it can be interpreted interpreted differently in every country. So, ultimately, it's impossible.

I mean, I love lawyers because they never answer questions, right? So, the Real Madrid vs. Barca game, what is it? Betting or financial contract? For me, it's the stakes.

Good. So I look at it from a different perspective. If a contract is listed on a CFTC-regulated exchange, it's fully funded, it's monitored, you have market makers, and so on, and I think we need to try to get the emotion out of it. Right? And I completely agree with you .

There has to be, you know, a very robust contract listing process, right? Then again, we've seen something similar in the world of cryptocurrencies, right? You know, all the thousands of altcoins and projects that were listed, you know, at some point there was a problem: let's list something that makes sense, not just a fun activity. So I think that, you know, uh, you know that, you know, uh, you know , crypto.com has 100 million users worldwide.

Right? So, first of all, we meet the requirements meet the requirements . So, yes, we will take that reliability and focus on always doing the right thing first . And then work with regulators to make sure our offering is truly compliant with local jurisdictions. But to answer the Barca vs Real Madrid question, if you were an investor in one of the two companies, right?

Then obviously that's what you want to use, primarily, for information, right? This is a price discovery. It's really good to have an order book, yes, through which, you know, millions are traded, right? Um, there is pricing information with great value. And then from there you can make a decision.

Will you buy the contract, yes or no? Right? Will you buy the underlying asset, yes or no? Right? And I think that's the first step we need to take as an industry.

But you can't deny that in this example, following this example, you indicated, uh, the vast majority will be purely recreational, not because recreational, not because I'm investing in I'm investing in Barca or Madrid. The vast majority of bets placed on this particular contract will be purely recreational. And I'm not saying you can't do it, don't do it. I mean, I say, okay, be careful, let's look at this. And you need to have all the risk disclosures.

You could lose all your money, all your children's savings, and everything related to health and safety. But how can you tell them apart? Because I think we all agree that prediction markets are a great tool for, you know, concentrating information, pricing, and I think that's what's being used on Wall Street right now with interest rate predictions and so on. Uh, how do you want to differentiate between a football bet and, you know, a financially related weather forecast, great, you know, those types of, uh, bets, because they have huge advantages, right? What I meant was that in practice it's impossible to control because you can't look at each case individually unless you create a very well-built platform that is super-controlled.

And even more, if you create this perfect platform, it will be okay for today, but maybe not next month because, uh, there are regulatory changes. We are currently facing a phenomenon that cannot and should not be denied, but it will change in the coming months or years. And we will need to monitor this. I mean, okay, I launched a platform that is completely legal today. I know every contract, and I know I'm not crossing the line.

Yes, but maybe next month you'll cross it. So we need to be very careful about this issue. No, of course. So maybe I can tell you a little bit more about the dialogues that we have as a platform. And, uh, demand from an institutional perspective is mainly about macro events, which is exactly what Christopher said, right?

It's pretty clear that, uh, the event contract is for another 100 basis points increase over the next 12 months. Will this happen? Yes, no. Weather. Right?

Will there be a second heat wave or not ? Will there be another heat wave by the end of this month in Europe? Yes, no. Right? Information value, accuracy, the ability to trade it 24/7 or at least have access to information 24/7.

Right? 24/7, right? Not 24/5, 24/7. This is already an innovation. Right?

And then trade on the way back . So the discussions that I'm having with the institution are, you know, how do we market this thing? Right? This is fully funded. This is very capital intensive.

Right? Um, what about credit risk? What about your stock market structure? All the usual things when you buy shares on the London Stock Exchange, Nasdaq or FTSE. It doesn't matter.

Same process. Same questions. The same product. Chris, you were talking about using all these contracts, right? And on Wall Street and in the financial markets, futures are used to hedge a potential event, right?

What will rise or fall? Speaking of usage, what are the uses of these tools? Or what is the use of prediction markets? What information can they provide to people, I mean, not just Wall Streeters just Wall Streeters , right? I mean, we're talking about maybe companies or people selling ice cream, right?

Uh, about the weather forecast, right? What is the real use of this? And does that matter, right? From the perspective of, you know, if this has any use, it should be considered a financial instrument, or it should be called a bet. Uh, I'm sure Scansa has many real-life examples, but, uh, there's one very publicly stated one.

Arca, a digital asset manager that has a very directional bullish portfolio through the end of the year. And they approached Galaxy to raise their price to raise their price , you know, in the prediction market. What, uh prediction market. What, uh , what is the probability of the Clarity Act being passed or not? And so they were able to hedge because the Clarity Act was not passed, which does n't seem likely to happen this year .

But, uh, this way they were able to hedge their position on this rather bullish portfolio with a contract on the forecast market. And for me, this is an ideal way to use this technology, this offering, in a financially regulated way. Skandar, you have so many customers on your platform, what do you see them doing? So, when the war between the US and Iran started, obviously everyone wanted access to how to hedge oil. And usually these geopolitical risks don't happen from Monday to Friday Monday to Friday .

They can happen any day. Right? So, they have forecasted markets and had contracts at that time. You know time. You know , you know, crude oil is above $100 for the next 30 days, so no.

Uh-huh. So, you know, we're still in the early stages, and we're building our exchange, distribution, and, you know, onboarding customers. But it was a really, really, you know, difficult moment you know, difficult moment . It's like, yes, market makers don't sleep on Sunday forecast markets. People are looking at screens.

This is a really good tool for price discovery. Yes, and if the price of Brent crude opens on Monday Wellington time or when the stock market opens in the US, you know, it will go up $20. You don't need to be a wizard to do this. You can read it from the screen. And I think we talk a lot about institutions, but that's for every person in this room.

Just taking it as information, instead of, you know, looking at a poll of 10 economists on what they think about oil over the next 30 days. You know, you have a global survey global survey that is very, very accurate. Reno, do you have any thoughts...This should be legal, by the way, right? Data consumption.

Yes, no, no, that's true. I don't want to fight anymore, Iskander. That's up to this point... Iskander, right? I think the crypto industry has always been on the cutting edge of technology, right?

Innovation. But sometimes she gets into DJN behavior, doesn't she ? Hmm, really, really, um, you're going too far, aren't you? Uh, gambling, right? Some people might even call it a casino.

Hmm, do you see the name of this asset class financial instrument, the gambling method, becoming like this, does it have the potential to become like this, do you guys think this is really an innovation that will improve our lives? I mean, it can be both, because like anything with digital assets, blockchain, or anything these days, I mean you can use it for good, or you can use it for weird things or illegal things. Of course, that's why we need some order. Uh, I mean , that's exactly what happened with the MiCA rules. This was necessary because it was a long way off for crypto assets.

Now this is gone. Is this good, is this good or is this bad? Well, we need something. We cannot act blindly without regulation. Of course, you can't stop innovation.

We all know we need to find a balance. But now regarding MiCA, there are some questions regarding MiCA 2 related to prediction markets, which also show that this is a concern. This is a real concern. We don't want this to happen in the far west either. So, of course, we can just build a few illegal platforms on the shelf anywhere.

You can always do that. If you don't get caught, that's okay. But, for sure, it will happen. Thank you, Skender. Yes, listen, we work a lot with our regulators.

We are a company that puts compliance first. Again, with 100 million users, we're not taking any risks. We follow the rules and distribute products where permitted. It's that simple. And again simple.

And again , you just mentioned MiCA, before MiCA came along, you had a bunch of firms offering, you know, digital asset services with different licenses, right? Some had more licenses than others. And perhaps we are at a similar stage now. Uh, what I hope and think is that this time the US regulator has a firm position on this issue. Although there are some discussions, and, you know, we recognize that.

Uh, that's a strong regulator, is n't it? So many other regulators will be listening and monitoring what's happening there. Especially considering that some of the biggest, you know, institutions are involved. I mean, there is a market demand, and we can't deny that. And I wouldn't say, "Okay, just don't do anything."

"Just don't do market forecasting market forecasting until it's clear." No, I mean, okay, let's do this. Let's do this well. Let's do this right. Let's try to figure out which way is right.

Maybe we'll make some mistakes. Okay, we 'll learn as we go , but, uh, in parallel, regulation will take its course. But of course, we can't stop working with prediction markets just because there's some interpretation that might be, ahem, not useful for our business. Just try to stay where we are now. This is what we have.

Let's adapt and do it right. Yeah, I think it hit the spot at the beginning by saying that it reminds me of what the cryptocurrency market was like five years ago or more. Uh, you know, with an uncertain global regulatory framework, um, experimental phase, but you need retail to come in and test the channels and platforms. This is exactly what happened in cryptocurrency. This is what allowed us to break things, rebuild, innovate, and got us to where we are now in cryptocurrency.

So I see it being on a very similar path. I am aware of time. I think we have a few more minutes. Um, and I actually like this closing because you guys agree, and and and it's fantastic. Um, but I just wanted to open this up to everyone to see if anyone has any questions before we close this.

I think there are several of them. You are the first. You are the first. Hooray. I just wanted to hear your thoughts on prediction markets in terms of betting on military action.

I know there's been some talk about this in the US. How do you feel about this? Can you repeat that because I didn't understand? Sorry. Um, there is...

So I'd like to get your thoughts on betting, do you consider it a bet or a financial contract in terms of betting on military action, or military action prediction markets in particular in the states, but also globally as well. Yes. Good. There are some restrictions on the basis of the contract. There are some things that can never be the subject of a contract.

So, it would be one of those, depending on how you ask the question. Uh, you can't , um, put a contract on wars or/ contract on wars or/ and anything related to that, theoretically. So, you may not be able to do that, depending on how you ask the question, okay? And then, there are some topics that fall completely into the gray area, and no one has a definitive answer to that . I mean, we can just guess just guess , but in principle, that wouldn't be allowed.

My opinion, always, because everything is blurry here. I don't know if you have anything to say. This is a typical question for the listing committee. Thank you. Yes, my name is Will from Vantaa.

I have been working in prediction markets for some time now . I will speak later, after lunch. Just wanted to add something to your suggestion regarding the Barcelona regarding the Barcelona vs. Real Madrid match. There was a big deal in New York when the Knicks were in the NBA Finals, and a bar made a contract that if the a contract that if the Knicks won, we would give away free beer.

They were able to hedge this risk in real time in the prediction markets, and I would say that without retail, it would have become financially impossible for them. Now my question is that MiCA is currently under review currently under review , and there are four issues related to prediction markets and PERP. And excuse the pun, but there's a binary question there. Should prediction markets be subject to MiCA or MiFID? So, which point would you mark, or are you arguing that there should be a third point?

Hmm, I was thinking about this exact question. I mean, MiCA shouldn't be entering the prediction market unless there's some kind of DLT component some kind of DLT component , okay? Not all prediction market platforms use DLT, blockchain, etc. So, uh blockchain, etc. So, uh , I think if we have any of these components, then Mika should at least include some kind of cross-reference to Mifi or something, but we can't let Mika ignore this phenomenon, I think.

Anyone else? Good. No? Hmm , great. I think we're running out of time, so, um, I don't want to bother anyone going to lunch.

Thank you very much. Contact us. We will be there for you, and we appreciate you all being here appreciate you all being here . Thank you all. Thank you.

Thank you. Thank you. Thank you.