The gambling world seems to be tying itself in knots about what is gambling and should be regulated and what isn’t and/or should be exempt from gambling regulations.
There has been much discussion, some of it quite heated, about the rise of sweepstake casinos in the United States. Arguments have gone back and forth about the legality of the product. Is it gambling or just a game for fun?
Similarly, we now have Kalshi, a prediction market proposing to offer contracts on the outcomes of sporting events, which in essence are no different than placing a bet with a bookmaker. Is it a financial product or gambling? Depending on which it is will affect which body regulates it and how it is taxed.
The mechanism for playing sweepstake casinos is specifically designed to get around existing gambling regulations and/or legislation so that the product is “legal” without the need to be regulated.
The mechanism usually works something like this. When players log in each day to their sweepstake casino, they receive a number of free-game tokens that they can use to play casino games, along with a number of sweepstakes tokens, usually a comparatively low amount. When they run out of game tokens, they can go to the storefront and request more free-game tokens, but will not receive any sweepstakes tokens.
However, and this is how the operators make their money, players can go to the storefront and buy a game-token package, which includes game and sweepstakes tokens, many multiples of those received through the free route.
The free way (no purchase necessary) to obtain more of the sweepstake tokens is the critical aspect of making the product legal.
Players are allowed to write in to request sweepstake tokens for free and must follow strict instructions about how the request must appear (handwritten, specific-sized card, etc.) in order to qualify. The number of tokens is quite low and the requests per draw period is restricted. There are no restrictions (apart from KYC, etc.) on the number of game-token packages a player can purchase.
At the end of the period, usually one month, all the sweepstake tokens from that period are entered into a random grand draw. Obviously, the more tokens you enter, the greater your chances of winning the grand prize. Sweepstake tokens cannot be carried over from one period to the next.
Some operators have bonus sweepstakes during the sweepstake period. Players can enter their sweepstake tokens to win more sweepstake tokens. It’s a mechanism that boosts those with a greater number of tokens.
What this demonstrates are the contortions that operators will go through to try to ensure that their products do not get classified as gambling.
Is it gambling? For those who have bought their tokens, of course it is. Is it legal? That depends on the legal definition of gambling in the jurisdiction in which it is being offered.
As we know, a product requires three things to be considered gambling (the three-legged stool): prize, consideration, and chance: an opportunity to win a prize (something of value), having paid a consideration (something of value), where winning or losing is based on chance. If it does not have all three legs, it is not gambling.
Nearly all gambling laws use the requirement of having all three legs of the stool to classify a product as gambling. But the laws differ in their interpretations of value paid and the amount of chance required. Some laws allow that if anyone can obtain the opportunity to win without having to pay a consideration, the product is not gambling, even if some paid for the opportunity. The “free-entry model” is a classic promotion tool.
Some laws use “wholly or mainly” as a modifier of chance, while others are interpreted to mean any amount of chance. There is a whole spectrum between these two examples. Some laws allow an element of skill; others require only skill.
Obviously, some states (Idaho, Louisiana, Michigan, Montana, Nevada, and Washington) find sweepstake casinos to be illegal gambling, hence operators do not allow customers from these states to play, even if they could switch off the ability to buy game or sweepstake tokens.
This confusion is not confined to the United States. Loot boxes are considered gambling in some countries and not in others. Companies offer chances to win prizes if players make “donations” to a certain “charity”. The list goes on.
Kalshi, a U.S.-based online-prediction market platform, submitted a filing with the Commodity Futures Trading Commission (CFTC), its federal regulator, that it intends to offer contracts on outcomes of sporting events from 8 February 2024.
Because Kalshi is a market, the contracts are between two external entities and its fees for this are 7% of the “maximum expected value” of the contract. Using Kalshi’s method of calculation published on their website, the maximum fee would be for events where the outcome is evenly matched, i.e., 50/50, where the fee equates to 1.75% of the amount “bet” for each party to the contract. Remember, this is the maximum rate. For those where the odds are vastly different, the fees reduce significantly.
Are the people entering these contracts gambling? Of course they are.
The risk to the sports betting operators (and states) is that the CFTC allows Kalshi to offer these products. This would mean that they would be allowed nationwide, as the CFTC regulates on a nationwide basis. Typical books run with a 5%-8% margin, so if this form of “betting” catches on, the sportsbooks’ margins will be eroded and the taxes to the states will rapidly decline.
Will the CFTC object to Kalshi’s contracts? The previous chair, Rostin Benham, was opposed to widening the scope of contracts beyond betting on the future of commodity prices. But Chair Benham announced his resignation in January to commence on the day of President Trump’s inauguration. Caroline Pham, an existing CFTC commissioner, has stepped in as acting chair. What happens now depends on whom President Trump nominates to replace Pham.
The recent issue of $TRUMP cryptocurrency was plagued with a group of traders (some believe them to have had inside knowledge) who immediately after the launch “pumped and dumped” the currency, leaving slower “investors” nursing losses of around $2 billion.
This led to a wonderful quote from Gareth Rhodes, a former deputy superintendent at the New York State Department of Financial Services, which helps regulate the crypto industry and other financial services. He said, “This is similar to sports betting or gambling. The retail customer putting in their funds is doing so at risk of losing most if not all of it with the hope of an outsize payoff.” Wasn’t it ever thus? If anyone can show me that there is no chance element to the future price of any stock, bond, or commodity, then pigs might fly.
The “is it gambling” debate applies to a large number of financial products. The difference between investing and gambling is very small, if at all. Speaking to financial regulators, the distinction appears to be one of the intention of the “investor,” rather than the product itself.
Prize, consideration, and chance: The gambling industry tries hard to show why anything that is unregulated and could compete has all three components, is therefore gambling, and should be stopped or regulated. On the other hand, those that offer the products that meet the three-legged stool test go through extreme contortions to find the loopholes that mean either they are exempt, as in the case of sweepstake casinos, or should be regulated by a different regulator.
Technology has moved on. We are only just coming to terms with what the internet, smaller and more powerful chips, and rechargeable batteries will mean for our future. Unfortunately, we are trying to use old laws and regulations that are for the most part not fit for purpose. If we do nothing, it will be 1997 and online gambling will be a free-for-all once more.
