Super Bowl LX, taking place in Santa Clara on Sunday, is bringing plenty of excitement to California. But some are also concerned over the rise of prediction markets that allow users to “bet” on the result of the game in a roundabout way. However, all the handwringing by critics could be avoided if states like California would legalize sports betting. That sensible move would not only bolster consumer choice but also protect bettors from the dangers of black markets.
The Los Angeles Times notes that prediction markets like Kalshi (whose ads have been ubiquitous during sports telecasts this fall) have discovered a “loophole” in state laws that forbid sports betting, by allowing users to bet on outcomes of games like the Super Bowl. Instead of placing bets on either side of the game, users buy contracts by choosing “yes” or “no.” Prediction markets expand well beyond sports as well, with users monetizing their opinions on everything from Bitcoin price changes to crude oil futures.
Here is an example of how it works: in DraftKings Predictions, a user in Alabama (another state that forbids sports betting) could buy a contract on the Seahawks to win the Super Bowl by 4.5 points or more, choosing “yes” or “no.” The line on such contracts will move based on the number of users picking either side of the contracts, much like a sportsbook will adjust a point spread in an effort to get half of its bettors on either side of the line. So far, Kalshi has seen more than $150 million in volume on its Super Bowl LX winner market, with 68 percent of users predicting a Seahawks win over the Patriots.
To critics, the difference between betting on game results and contracts is mostly semantics, with multiple states suing to block prediction markets, which they argue are unlicensed gambling operations in violation of state law and tribal agreements. A nationwide class action lawsuit was filed in the Southern District of New York on February 4 against Polymarket, alleging the prediction market is in actuality an unlicensed sports betting platform prohibited under various state laws.
Alabama, California, and nine other states have so far declined to legalize sports betting in the years after the U.S. Supreme Court overturned a long-standing law that prohibited sports betting outside of Nevada.
“Right now, people can place bets on everything from who will win the Super Bowl to which party will control Congress,” said California Rep. Salud Carbajal, D-Santa Barbara. “These wagers are happening on platforms that, in many cases, operate without proper oversight or safeguards.”
Prediction markets are regulated by the Commodity Futures Trading Commission (CFTC). The Los Angeles Times noted that while the CFTC has largely taken a hands-off approach to prediction markets, new Chair Michael Selig said recently that “it is time for clear rules and a clear understanding that the CFTC supports lawful innovation in these markets.”
The Taxpayers Protection Alliance recently testified on a sports betting expansion bill in Washington state, arguing that lawmakers should allow existing partners like DraftKings and FanDuel to offer their apps throughout the state rather than only at tribal casinos as proposed. Legislators expressed concern over the prevalence of Kalshi in the state, while simultaneously offering no solutions to state residents who might want to wager on a game from the comfort of their couch.
For such lawmakers concerned about sports betting black markets and prediction markets, the solution is simple: legalize sports betting in their states and allow users to participate using apps. Americans are already betting on sports and other futures through black market apps; one analysis estimated that just $1.4 billion of $5.37 billion wagered on Super Bowl LVIII was done so in legal markets.
The American Gaming Association estimates that, “The illegal and unregulated gambling market generated an estimated $53.9 billion in annual revenue for offshore betting rings and unregulated machine operators, robbing state governments of $15.3 billion in taxes each year.” In addition, a 2020 United Nations report estimates that “global illegal sports bets total up to $1.7 trillion each year and are often used by organized crime groups for money laundering.” The report went on to say that “up to $140 billion is laundered through sports betting each year.”
It is better to allow residents to place their bets on regulated and licensed apps than in unregulated markets, for which states see no tax revenue and users worry about getting duped or funding organized crime. Prohibition is a losing bet for taxpayers and consumers.
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