Sports betting is sweeping the nation, and individual states have been given the option to legalize and regulate it. But sports bets may fall within CFTC jurisdiction, the Commodity Futures Trading Commission.
In 2018, the U.S. Supreme Court decided that the Professional and Amateur Sports Protection Act of 1992, which banned sports betting, was unconstitutional. Since that time, more than 20 states have not only legalized sports betting, but also betting on a broader range of current events. To some, these wagers look like the Commodity Futures Trading Commission banned or regulated products.
The Commodity Futures Trading Commission’s jurisdiction includes “event contracts” and “binary options” which could pose a potential problem for gambling operators in states with gambling on CFTC-jurisdictional products. This is because the Supreme Court decision isn’t as broad as the states believe, and the Commodity Exchange Act prohibits individuals from doing “swaps” other than on futures exchanges except if the individuals are “eligible contract participants.”
The definition of swap includes, inter alia, event contracts, and binary options. Although the swap definition, which is based on certain contingencies, it’s not exactly the same as Commodity Exchange Act section concerning event contracts, they are similar enough to call event-based swaps “event contracts.”
The status as an Individual Eligible Contract Participant generally requires more than a $10 million discretionary investment, so very few bettors qualify as an Eligible Contract Participant. Furthermore, although the Supreme Court held that PASPA violated the principles of federalism by prohibiting states from allowing sports betting, the court also noted that if Congress directly prohibited sports betting, that would preempt state sports betting laws.
While Congress hasn’t acted on sports betting, it did enact the Commodity Exchange Act. Also, preemption is broad and may apply to sports betting due to certain sections of the CEA as well as CFTC regulations. Therefore, it’s possible that the Commodity Exchange Act’s prohibition on non-Eligible Contract Participants engaging in swaps preempts a state’s ability to legalize sports or any other gambling.
Post-PASPA Developments in State-Level Gambling
Before the Supreme Court struck down PASPA, fixed odds, full-fledged sports betting was only legal in Nevada. Post-PASPA, there is now a patchwork of state regulations, each with different tax, licensing, and market access rules. While each state’s sports betting infrastructure is unique, most include barriers to entry that benefit incumbents and disadvantaged entrepreneurs.
Many states have enacted legislation in which only licensed racetrack and casino operators can offer sports betting. That means a new online sports betting company can only operate if it partners with an existing casino or racetrack in the state. Depending on the state, each casino or racetrack can partner with up to three online sportsbooks. Thus, the casinos and racetracks have complete control over which online sportsbooks can gain entry to a state’s market. States using this system include New Jersey, Pennsylvania, and Indiana.
These rules require online sportsbooks to pay land-based “incumbents” (casinos and racetracks) to launch in each state with huge, up-front fees as well as a recurring revenue share. This system makes it very difficult for new online gambling operators to offer competitive products.
This lack of competition keeps the cost of placing a sports bet quite high; in New Jersey, the costs average $6.50 for a $100 bet. Also, a successful bettors’ access can not only be limited, but it can also be eliminated. In contrast to exchange market-makers, gambling operators can easily identify each bettor, allowing them to limit certain players who win too much money. Furthermore, on some platforms, bettors may even have to wait up to 30 seconds to have their bet approved.
Sports Betting and Other Gambling Resemble CFTC-Regulated Products
The Commodity Futures Trading Commission has brought cases against several offshore markets offering U.S. residents binary options. For example, a court described Intrade as a “‘platform where [customers] make predictions…on the outcome of real-world events,’” that will either “happen as described, or not happen.’” The Commodity Futures Trading Commission defines a binary option as “a type of option whose payoff is either fixed or zero.” The fact is, many bets look like a binary option.
The Commodity Exchange Act defines one type of swap as, “any payment dependent on the occurrence, nonoccurrence, or extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
Sports betting and other gambling events, such as betting on the Oscars, could fall within these definitions. CFTC Commissioner Brian Quintenz warned that, “the Commodity Futures Trading Commission has historically only authorized off-exchange, event contract trading in limited circumstances, on specific types of events, for academic purposes. The commission also places strict limits on the amounts retail customers can invest.”
For instance, CFTC personnel stated in a “no-action” document they would not propose action against Victoria University for conducting a nonprofit event contract market that was available to U.S. residents. The University offered winner-take-all contracts predicting outcomes that included election outcomes. This was predicated on prior relief allowing political election binary contract submarkets.
Possible CFTC Approaches to State-Level Gambling
The Commodity Futures Trading Commission has occasionally allowed developing markets to develop, as it did with swaps and recently, with cryptocurrency trading. However, in 2015, the Commodity Futures Trading Commission settled an action against a Bitcoin options trading platform for operating without Commodity Futures Trading Commission registration.
The Commodity Futures Trading Commission has also taken action involving illegal binary options and event contract sales, however, it has not taken action against any established U.S. casinos or racetracks.
The Commodity Futures Trading Commission could take numerous approaches to state-licensed gambling, including suing the operators doing nothing or providing regulatory relief.
Regulatory relief options could include no-action relief and potentially commission action under the Commodity Exchange Act. Given what’s at stake, it’s very possible the CFTC will simply wait and see, unless it is forced to act due to misconduct, Congress or private rights of action.
Applying the Commodity Futures Trading Commission’s regulatory design to sports betting could benefit the emerging market by offering operators a less-expensive, single path to licensing. It would also disadvantage the existing casinos and racetracks that exclusively benefit from the current system.