Earlier this month The Hill reported that the legality and regulation of the prediction markets issue, which has generated dozens of cases throughout the country, is likely headed to the Supreme Court.
The Hill cited opposing circuit court decisions on prediction markets as paving the way for the Supreme Court to consider the legal issues of these platforms that allow people to place money-backed positions on outcomes of upcoming events—including sporting events.
The federal Commodity Futures Trading Commission has taken the position that its oversight of prediction markets stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act and preempts state regulation. States have taken the position that these platforms are simply offering wagers in a manner that attempts to dodge state oversight.
In a New Jersey case, the 3rd U.S. Circuit Court of Appeals ruled in favor of federal oversight, finding that the CFTC has exclusive oversight of these event contracts, viewing them as financial swaps. Prediction markets offer wagers on a number of real-world events, but as to sports-related contracts, the 9th Circuit ruled these events fall under state gambling laws—siding with Nevada regulators.
To date, horse racing's Interstate Horseracing Act of 1978, which requires licensing of racing signals for an outlet to offer wagering, has provided some protection for the sport. This is needed because racing's business model relies on money from pari-mutuel wagering to go to the sport. Should prediction markets accept such wagers (contracts), and not return money to the sport, it could take away from the pari-mutuel handle that does benefit racing (as well as the state-regulated fixed-odds betting on racing still in its nascency in a few states).
READ: IHA Gives Racing Protection Against Prediction Markets
So the gambling world continues to evolve and perhaps the IHA will continue to protect racing. Still it's worth keeping an eye on the emerging legal opinions of this state powers vs. federal powers issue.
Should the Supreme Court take up this issue, what might be some of the standards it examines? A panel of gaming experts and gaming law experts gathered last month for the Racing and Gaming Conference at Saratoga, suggested a few standards of which courts, or the Supreme Court, may weigh.
Attorney Dennis Ehling said in trying to define prediction markets, courts could look at the economic benefit and economic purposes of the platforms. He noted that was a standard in a court decision in Connecticut that paved the way for Gov. Ned Lamont on Sept. 10 to issue cease-and-desist orders against nine prediction market operators.
"What's the underlying economic benefit of it? And if I don't come into a transaction with an exposure, and the other side doesn't come in with an exposure, we're not transferring an exposure. If we're simply transferring a risk of payment, then it's gambling," Ehling said. "Let's consider something like orange juice futures, everyone knows exactly what that reference is. ... I've got an exposure to that, right? I've got to deliver that or I've made a commitment to buy that. That's an underlying financial exposure. If you don't have an underlying financial exposure involved in a transaction, it's gambling, in my view.
"Does it matter? Yeah, it matters, because if you don't have an underlying financial exposure, you take risks differently, and that's why we regulate gambling as opposed to not regulating—or regulating differently—financial transactions."
Joe Appelbaum, founder and CEO of Waigr Inc. and former New York Thoroughbred Horsemen's Association president, said any fees collected by the prediction market platforms also figure to be something courts will look at as they sort out legal issues and regulation.
"I think the question is: 'Is it a negative sum game or not?' And what I mean by that is, 'Is someone taking a fee for me to express my opinion or to take on risk, right?'" Appelbaum said. "So all gambling games are essentially negative sum, as opposed to let's say the stock market, which is of course gambling too, but over our life over the last 100 years, it's essentially positive, right? You have to be really bad to do poorly in the stock market."
While the regulatory framework is hashed out for prediction markets, Joe Asher, founder and CEO of Boomer's Sportsbook, does not see them going away. He predicted their popularity will weigh in their favor, noting that the popularity of fantasy sports helped that activity to become accepted, but he said these platforms will need to be taxed and regulated at a rate comparable to state-regulated sports betting.
"The bottom is, 'Is this gambling that we're OK with versus gambling we're not OK with?'" Asher said before noting the details of the oversight figure to be interesting. "You do get into the taxation standpoint. One of the problems that you know (prediction market Kalshi) is going to run into headfirst, is you get a 51% tax rate on sports betting in the state of New York and (prediction markets are) paying zero, right? That's just not something that seems to be sustainable in in the long term."
