The Legal Debate Over Sports Event Contracts on Prediction Markets
While betting on sports is nothing new in the fabric of American culture, sports event contracts offer a unique way for gamblers to get in on the action in a non-traditional form from what we have become accustomed to over time. These contracts bring a relatively new dynamic to the industry, but the legality of their offerings has come into question. This has sparked numerous debates across the United States over consumer protections and the potential loss of state revenue. As a result, a bipartisan Senate Bill has been introduced to address concerns about prediction markets offering contracts for sports events on their platforms. Introduced in March, the Prediction Markets Are Gambling Act seeks to amend the Commodity Exchange Act (CEA) and prohibit any Commodity Futures Trading Commission (CFTC) regulated company from offering not only these contracts but also other forms of gambling.
One of the main sticking points in the regulation of prediction markets is whether they are actual financial instruments or merely serve as a means to offer gambling as financial derivatives. Congress is looking to solve the problem by defining what gambling is and who should have federal oversight of prediction markets.
What Are Prediction Markets?
Prediction markets offer bettors a different way to gamble on sports than what they do at a traditional sportsbook. On these markets, users can bet on a variety of real-world outcomes, including elections, weather, stock market events, and sports. In prediction markets, users trade contracts based on the outcomes of events, either with other users on the platform or with the platform itself. This type of trading differentiates prediction markets from traditional regulated sportsbooks.
How Prediction Markets Differ From Traditional Betting
On prediction markets, users will see odds expressed as percentages for the particular outcome. If the event being bet on is an NBA game, users could choose between wagering $0.75 to win $1 on the Detroit Pistons or betting $0.25 to win $1 on the Orlando Magic. The numbers associated with these bets represent the implied probability of each result. The $0.75 price on Detroit implies a 75% probability of the Pistons winning, while the $0.25 price on the Magic implies a 25% chance of Orlando winning. During the game, these percentages will change based on the score, and users can buy more contracts during the event or sell from their positions at any time.
The Gray Area of Sports Event Contracts
Prediction markets have come under the national spotlight in recent months as lawmakers across the country are questioning the legality of this form of gambling. Lawmakers continue to debate whether they should fall under the CFTC’s jurisdiction because they resemble financial derivatives, or whether they should follow the same rules, regulations, and guidelines as state-regulated sportsbooks. When DraftKings purchased Railbird Exchange through its acquisition of Railbird Technologies, it also put prediction markets more in the news, as Railbird Exchange is already registered with the CFTC as a prediction market.
The Risks of Sports Event Contracts
The current risks to those who play sports event contracts could potentially be long-term. Putting aside who should govern this type of betting, users participate in prediction markets that operate, for the most part, without defined regulations. A lack of problem gambling services for prediction market customers, as well as age-verification issues, are two requirements of traditional state-regulated sportsbooks. Know-your-customer protections, often absent, can raise integrity and transparency concerns for users of these services. Safeguards such as addictive gambling help services are also an issue, as these platforms don’t always have measures in place to help users deal with mental health or financial well-being problems. Match-fixing can also be a major issue, as users may have inside information that is hard to monitor.
Why Sports Event Contracts Have Become So Popular
While sports event contracts aren’t all that new, their recent rise in popularity shouldn’t come as a surprise. Because they resemble a stock market-style of wagering, they are attracting a wide base of customers. These probabilities are easy to digest and reflect what the consumer believes the event’s outcome will be, rather than a sportsbook setting the odds. The ability to reach not only traditional sports bettors but also casual bettors and stock market users has increased the popularity of sports event contracts. Users of this model can view probabilities and find value, rather than focusing on winning and losing. If those using these platforms believe either team has a better chance of winning than the implied price suggests, there is value in that bet from their standpoint.
Controversies Surrounding Sports Event Contracts
Sports event contracts have faced significant scrutiny and pushback from many states across the country. Several states have banned, or are attempting to ban, this type of betting from within their borders. Many states have sent cease-and-desist letters to prediction markets, while several are currently involved in legal battles against platforms offering sports event contracts. Federal Appellate Court rulings on the CFTC’s authority over sports event contracts are becoming more frequent. States with regulated sportsbooks are pushing back against prediction markets offering contracts on sports events, as these contracts currently do not fall under their gambling regulations. Some U.S. states wanting to restrict sports event contracts that have taken action or are investigating restricting these sports event contracts include Arizona, Connecticut, Illinois, Maryland, Massachusetts, Montana, Nevada, New Jersey, New York, Ohio, and Tennessee. But whose laws they should follow, whether it is state-regulated sports gambling laws or if they should fall under the CFTC’s jurisdiction, is what has put these platforms in the public eye across the country.
What is Senate Bill S-2160?
Senate Bill S-2160 was introduced by California Democratic Senator Adam Schiff and Utah Republican Senator John Curtis in late March. Known as the Prediction Markets Are Gambling Act, the legislation aims not only to examine the seemingly rapid rise in sports event contracts across the country but also casino-style contracts offered on prediction markets that fall under the federal government’s oversight. Senate Bill S-2160 aims to ban this type of gambling nationwide and to clarify, through the CEA, what counts as a derivative. On top of that, the Bill wants to amend the CEA to prohibit any company registered with the CFTC from offering sports event contracts or casino-style games.
Federal vs. State Authority
Deciding who has jurisdiction over prediction markets offering contracts on sports events remains unanswered across the United States. If these contracts are viewed as sports gambling, then they should likely be governed by each state’s gambling regulator. However, if it is decided that they are financial instruments, they would fall under federal oversight by the CFTC. The CFTC hasn’t decided whether sports event contracts are prohibited, leading lawmakers to take matters into their own hands. As of now, they remain in a legal gray area, becoming a growing concern for lawmakers and regulators.
Potential Implications on the Sports Betting Industry
State-regulated sportsbooks stand to be the most affected by the outcome of Senate Bill S-2160. If prediction markets offering sports event contracts are federally legalized, they will be in direct competition with sportsbooks. These platforms, for the most part, already offer lower transactional fees than traditional regulated sportsbooks, thanks to peer-to-peer trading rather than the rake sportsbooks take. Sportsbooks typically take a 10% fee from bettors when they wager. For example, a customer will bet $110 on a team to win at -110 odds, and if that team wins, the bettor will receive $210 back. The sportsbook hopes that one person bets $110 on one team and another bets $110 on the opposing team at the same -110 odds, so that it collects $220 from both bets but pays out $210 to the winner.
Concerns Over Lost Revenue
If sports event contracts become federally regulated, states with legalized sports betting would see betting revenue take a huge hit. Licensed sportsbooks generate millions of dollars for the states that offer them, and having prediction markets cut into that would see huge amounts of current revenue used towards many state-wide projects disappear. Revenue from sports betting can be used by states to further develop their education systems, community programs, and overall state infrastructure. The tax revenue lost from this would amount to a substantial sum for states that now rely on it to further develop themselves.
The Future of Prediction Markets in the United States
The future of prediction markets across the country could go in so many directions. Whether they are regulated from state-to-state by gambling institutions, fall under the jurisdiction of the CFTC, or are banned exclusively remains a hot topic across the United States. In the end, it will have to be determined whether prediction markets are considered to offer financial derivatives to their customers or, in fact, sports even contracts constitute gambling. Regardless of the outcome, it will be a precedent-setting moment for the future of sports gambling nationwide.
