Despite Current Prevalence, Gambling Loopholes are Nothing New

If you’ve had any interaction with the outside world in the past few years, you’ve likely heard of prediction markets and sweepstakes casinos.

This proves especially true if you’re even remotely plugged into the gambling industry, whether online or land-based. Both have experienced meteoric rises in popularity, volume, and discussion, especially in recent years.

What’s notable is that both prediction markets and sweepstakes gaming employ different business strategies to circumvent traditional regulation and expand indefinitely, even in states and provinces that typically do not allow online “gambling.”

Despite the recent surge in popularity and news coverage, this business strategy is not new and has arguably led to some of the most significant advances in the regulated market to date.

The Regulated Market: What it Looks Like

Currently, the regulated online gambling market in North America comprises a multitude of legitimate casino and gambling operators offering products in a relatively large number of states and provinces.

This is especially true for online sports betting, which is currently legal in 32 states, as well as Washington, D.C., and Puerto Rico. Online casino gambling, on the other hand, is regulated and operational in seven states.

Regulation is state-by-state and left to each individual state’s government to build and manage, with established regulatory bodies in place. Considering these relatively strict regulations and the high cost of entry, it should come as no surprise that operators who focus strictly on by-the-book, regulated products are worried and frustrated with the recent rise of the grey market.

Some are choosing to throw their eggs into that grey basket, such as FanDuel and DraftKings, who recently left the American Gaming Association and withdrew their Nevada sportsbook applications after pivoting into the prediction market world.

How Operators Have Bypassed Traditional Regulation

So, the next logical question is how operators and companies, such as Kalshi, Polymarket, and an endless list of sweepstakes operators, have managed to bypass these strict regulations.

Sweepstakes casinos first hit the scene in 2006, following the passage of the Unlawful Internet Gambling Enforcement Act (UIGEA). This limited online gambling by making it illegal for financial firms to process transactions tied to unlawful internet gambling, and has continued to have ripple effects across the regulated market today, as payment processors weigh an unsteady federal vs. state landscape.

To operate, sweepstakes casinos employ a strategy that has been around since the 1800s: offering a free way to enter and play (in other words, no purchase necessary) and classifying gameplay as “sweepstakes entries” rather than gambling. They do so by offering a dual-currency platform that allows players to play for free or play for “prizes.”

Prediction markets, on the other hand, classify themselves as financial exchanges and register with the federal Commodity Futures Trading Commission (CFTC) to operate in this capacity.

Legally, this categorizes them as designated contract markets, rather than sports betting operations, where users can trade contracts with one another. The platform itself acts as a neutral exchange, similar to the stock market. From a legal perspective, this means that prediction markets do not take wagers and simply act as exchanges for “yes” or “no” propositions.

Finding Legal Loopholes is Nothing New for Gambling

Before the world of sweepstakes casinos and prediction markets, offshore casinos dominated the grey market landscape. For many, these recent options are the first time they’ve heard of alternatives to regulated gambling, but for some, the opportunity has existed for years.

These offshore casinos, many of which continue to operate, are legally licensed and regulated outside of the United States, commonly in countries such as Curaçao and Malta. These licensing bodies are more lenient, less taxed, and offer a broader worldwide reach.

Drilling down into the mechanics themselves, numerous other examples of legal loopholes have been utilized. One of which is historical horse racing, which is technically a bet on replays of horse and dog races, but in execution, it is almost indistinguishable from a traditional slot machine.

To put it another way, while sweepstakes casinos and prediction markets are relatively new, the methods employed to operate them are not.

What Does the Future Look Like?

More recently, these grey market operations have faced pressure from legislators, regulatory bodies, and legal operators.

In August of this year, New Jersey Governor Phil Murphy signed legislation banning the “sweepstakes model of wagering,” while multiple other states, including New York, California, and Tennessee, sent cease-and-desist notices to sweepstakes operators. Some sweepstakes casino operators have decided to establish legal precedent by forming a trade group, known as the Social Gaming Leadership Alliance (SGLA).

Even more recently, Massachusetts became the sixth state to warn licensed sportsbooks about launching prediction markets. New York has introduced a bill aimed at banning sports prediction markets. Even tribes have stepped in to sue prediction markets.

Prediction market operators, such as Kalshi and Polymarket, continue to argue in court that they do not offer gambling, despite Kalshi advertising that sports betting is legal in all 50 states.

In short, there will be much back and forth and many court battles to be had before we get a clear picture of the future. No doubt that much of it will be based on intent and semantics. As of now, it’s difficult to predict (no pun intended) which side will win or what type of compromise will be reached, as both sides of the lobby have significant backing in terms of numbers and finances.

As for CasinoBeats, we will continue covering the latest news fit to print from all fronts.