Arizona Sports Betting Regulators Make Major Statement

Arizona sports betting regulators are taking a standing against prediction markets.

The Arizona Department of Gaming (ADG) recently served Underdog with a Notice of Violation and Intent to Revoke. The decision was preempted by the offering prediction markets in The Grand Canyon State.

Underdog currently has a license to offer fantasy sports in Arizona. This notice from the ADG puts those operations in jeopardy.

Regulators are taking issue with Underdog’s “involvement as a technology service provider for Crypto.com, a CFTC-designated contract market that offers sports-related event contracts in the state,” per Legal Sports Report’s Alan Wilmot. Such markets have created a furor within the United States’ online sports betting industry.

Critics believe they amount to flagrant circumvention of Arizona sports betting laws. Though sports gambling is legal in The Grand Canyon State, it requires an official license to provide it. Underdog’s license only covers daily fantasy sports. While they are not directly offering prediction markets themselves, the ADG argues they’re profiting off infringement of sports betting in Arizona by facilitating the operations of companies who do.

What Will Underdog’s Response to Arizona Sports Betting Regulators Be?

Although it isn’t immediately clear how Underdog will handle the threat of revocation, the general consensus is that they will fight it. Here is Wilmot with more:

“Underdog has already stated its intent to oppose the ADG’s decision. Per A.R.S. §41-1092.03(B), Underdog may appeal the ADG’s revocation of its license ‘by filing a notice of appeal or request for hearing with the agency within thirty days after receiving the notice,’ which must include at least: (i) all information regarding questions of law that are the basis for the appeal; and (ii) all relevant supporting documentation.

“Underdog’s position will largely rely upon the arguments currently being addressed in various federal and state courts – namely, that Crypto.com operates as a CFTC-regulated DCM subject to governance under the Commodities Exchange Act and not state law and, therefore, the ADG does not have jurisdiction to police its activity. As the licensee, Underdog will bear the burden of persuading the hearing body that the ADG has acted outside the scope of its rules by punishing Underdog for activity that it does not offer in Arizona and/or otherwise improperly attempted to supersede federal law.”

As the legislative process plays out, Underdog will not be forced to shudder its Arizona operations. This mirrors how other similar situations have played out. States such as Nevada have taken action against prediction markets without being able to officially shut them down. And since Underdog doesn’t even offer prediction markets itself, it tracks that they wouldn’t forfeit their daily fantasy operations while results are pending.

Sports Prediction Markets are Becoming a Sore Spot in the United States

The stance being taken by Arizona sports betting regulators is an extension of a larger dilemma playing out around the company. Sports predictions markets have exponentially expanded over the past year or so—despite receiving plenty of push-back.

Operators of these markets continue to argue they are subject to federal regulation. In sports specifically, transactions are centered around yes-or-no outcomes. “Will the Arizona Diamondback win the World Series?” is an example of what an event-based sports contract option would like. Companies like Crypto.com, Kalshi, Robinhood, etc. believe these contracts are commodities. The payouts on them are not determined by linemakers—otherwise known as “the house.” They are reflections on the outcome of a given event. Stock-market investments are the most frequently cited analogs for this setup.

For the most part, this logic is holding up. Indeed, some of the top sports betting apps in the United States have entered the prediction-market game. Most notably, both DraftKings and FanDuel now offer them in select states.

The appeal for these companies is clear. Since states cannot currently regulate prediction markets, they can be offered even in regions that have not legalized sports betting. It’s not hard to see why states and gambling regulators take exceptions. Prediction markets are not only outside state regulation, but they are taxed differently as well.

This is Just the Beginning of the Prediction-Market

Don’t expect this issue to wind down in Arizona or anywhere else in the near future. The financial stakes are too high.

Arizona sports betting sites, for instance, pay a 10 percent tax on their revenue. Brick-and-mortar sportsbooks, meanwhile, are subject to an 8 percent tax rate. These numbers are not especially high relative to the national average. But they are easier to increase, because again, the state has more power of regulation.

To that end, we have seen other states such as Illinois significantly increase their sports betting tax rates. And then there are certain places with already loftier rates. The New York sports betting market taxes operators at a 51 percent clip. Arizona sports betting regulators will almost assuredly never seek to go that high. But again, they’re not making the same amount of money off prediction markets.

Now, sports betting sites like FanDuel and DraftKings have not launched prediction services for markets in which they already have a gambling license. They have also said that they’ll shudder prediction markets if and when states without sports betting legalize it.

But this is only part of the issue. States are peeved by companies who indirectly help broaden the prediction markets. Underdog’s tech support to Crypto.com is the quintessential example of how many layers there are to the situation. Chances are Underdog will either win its own motion or conform to Arizona’s interpretation of the law. They won’t want to lose their daily fantasy license. That industry, remember, has been hit hard by the mass legalization of traditional sports betting.

This is nevertheless a case worth monitoring. Some view prediction markets as an existential threat to the sports betting industry. Others disagree. Cases like this one from Arizona sports betting regulators will go a long way towards determining which way the overarching winds blow.

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