Speculation by Design
Stocks, crypto and event contracts are not the same–legally or economically
Yesterday, in The Davos Fracture, we unpacked how Jamie Dimon, Brian Armstrong and stablecoin yield exposed the real fight over America’s financial future. We closed with a question that sits at the center of that fight:
What is the government’s responsibility when people engage in financial nihilism?
We are confident we have the solutions.
But before we get there, a quick detour–one that sets the stage perfectly.
Stay Tuned recently released an excellent podcast episode: The 1929 Stock Market Crash: Can It Happen Again? featuring Andrew Ross Sorkin. In it, Bharara, former U.S. Attorney for SDNY, wrestles with the same tension we highlighted yesterday.
He reflects:
[O]rdinary Americans should be able to participate in the market, and should be able to participate in interesting, new, lawful mechanisms to make money and to lose money. That’s on the one side, democratization.
On the other hand is a somewhat, say, paternalistic desire, I guess I was formerly on the paternalistic side, to protect people from being ripped off, and from scams, from crashes.
Exactly. Two words matter most here: lawful and protect.
And yes–crypto entered the chat immediately.
Bharara observes:
There’s a lot of talk about who should or should not be able to invest in crypto.
Stop the tape.
That single sentence represents the entire ballgame. It’s the source of confusion, the mislabeling and the regulatory paralysis. This is precisely why protection is needed from the get-go, and that’s where the existing laws are supposed to come through.
We continue to return to the same unavoidable conclusion:
One cannot invest in crypto. One can only speculate on it.
Failing to adhere to this disclosure is denying the public the protection it needs and that the law already promises.
Bharara frames the dilemma correctly: Democratization vs. protection, but seems unsure about the path forward. In our view, the solution is straightforward once you recognize that democratization and protection are not opposing forces.
We can have our cake and eat it too.
Democratize crypto trading. Don’t ban it. Let people buy it if they want to.
Protect crypto traders. Tell them the truth: They cannot invest in crypto.
The SEC needs to become a label regulator, ASAP.
How much speculation is too much?
This is where the conversation reaches a choking point. ARS puts it very plainly:
[Y]ou want the speculators, but you don’t want it to get too crazy. And how do you sort of keep that?
Bharara follows:
How many speculators do you want?
And that leads directly to two questions that always travel together:
Who has jurisdiction?
Should the regulator allow or prohibit the trading?
The answer: It depends entirely on the asset.
A picture is a thousand words, so here’s the picture–followed by our commentary:
Stocks
We use stocks as the lead example, but this category includes all long-lived, cash-flow-generating assets.
Cash flow → ability to be valued
Buying cheap (margin of safety) → investing
Buying expensive (ignoring valuation) → speculation
Buying in the middle → speculative investing
All three behaviors are lawful. The key is not to confuse them–and if you want to invest, you must do the work.
Regulatory solution: The SEC as disclosure regulator. Already exists.
History: Securities laws (1933-34) created this framework after the Great Depression.
Regulatory obstacle: What do you do when stocks get expensive?
Answer: Nothing.
Speculation to one person may be investing to another. The information is already disclosed so people can arrive at their own conclusions. The government simply cannot regulate euphoria.
Crypto
Crypto is simply the most visible example of a broader category: Non-cash-flow generating assets (commodities, art, collectibles, etc.)
Cash flow → none.
Value → yes (supply/demand)
Valuation → impossible
Investing → impossible
Speculation → universal
And this is all fine–as long as the labeling is correct.
Regulatory solution:
The SEC must regulate spot crypto through labeling. It hasn’t happened yet.1 It will either happen proactively or reactively after the next crisis (2029 would be quite the irony).
Legal reality:
Investment contracts already cover crypto. Anyone claiming otherwise is ignoring the law’s protective purpose.
“You can invest in crypto” is a harmful phrase–it’s a material misrepresentation and far too many academics, lawmakers and scholars are using it. That’s the exact opposite of what FDR had in mind.
Regulators’ role:
Spot → SEC
Futures → CFTC
But not all crypto futures belong on the market.
“Will Bitcoin hit 75,000 by 5pm tomorrow?” is not a genuine futures contract. This is mindless speculation, a bet on a random event with some chance of losing everything at expiration. Speaking of event contracts…
Event Contracts
The 800-pound gorilla in the room. Not innovative. Quite old in fact, with a deep history (podcast).
Event contracts do have cash flow–but only once, at expiration, and is contingent on whether it resolves in your favor or not. That all-or-nothing payoff potential violates the second cardinal rule in investing: Margin of safety.
Therefore:
One cannot invest in binary event contracts, one can only speculate on them.
Ignore the dangerous echo chamber (podcast) calling them “investments.” It only muddies the waters.
How much speculation is too much?
Futures markets require speculators, but contrary to prediction market optimism, that doesn’t mean that anything goes. The determination is subjective, but the responsibility is clear: the CFTC must do their job, by acting and drawing that line.
Sports is a commodity.
Arguments to the contrary are motivated by a desire for state-regulated sports betting, not by the law.
But that doesn’t make sports event contracts permissible. Even when the economic purpose provision was repealed, it continued to be CFTC’s North Star. Then Congress tightened the screws with the Special Rule in Dodd-Frank. Gambling and futures markets have been separated for 175 years–and started mixing in earnest just over 375 days ago.
The Courts will decide.
The correct defendant is the CFTC.
The correct legal framework is APA (our amicus PDF).
And yes, we are very likely headed to the Supreme Court.
Our predictions: The odds do not favor prediction markets.
Final Verdict
This isn’t complicated.
Speculation isn’t the problem—misclassifying assets is.
Different assets require different rules.
The law already knows the difference.
Are We There Yet?
Every parent is familiar with this question. (Thanks Bart & Lisa Simpson!)
Now America gets to ask it too.
The picture painted above represents the balance we believe is right–the balance between democratization and protection. We don’t need new laws to achieve this. The laws we need are already on the books (podcast), they’re simply being misapplied.
We just need to follow them.
So… Are we there yet?
We’re not.
If anything, we’re drifting in the opposite direction.
We’ll explain why in our next post.
Somewhat ironically, the label regulation scheme was in existence before the SEC; state regulators implemented it. It was the right idea applied to the wrong asset. Whether one is investing in a stock or not depends on its price, which changes daily. As such, you can never label a particular stock as speculative. With crypto, though, the idea finally finds a home, a century later.