The swell of gaming-style prediction market contracts is catching the attention of lotteries around the world, as two prominent trade associations are urging legislators and regulators to require event contract platforms to obtain licenses and meet requirements imposed on regulated gaming operators.
In a public statement issued Tuesday, the North American Association of State and Provincial Lotteries (NASPL) described prediction markets as a new type of gambling that attempts to “conceal its true identity” and makes “a surreptitious effort to undo established policy by blurring functional distinctions”.
NASPL referred heavily to a World Lottery Association (WLA) position paper titled “Prediction Markets: Unlicensed Betting by Another Name – Threats to Sports Integrity, Consumer Protection, and the Lottery and Betting Sector”. That paper argues that it is time for prediction markets to be regulated as if they were state-approved gaming products, regardless of the label that operators or the Commodity Futures Trading Commission (CFTC) use for them.
The WLA claimed that if lottery-equivalent event contracts were to attract just 5% of the regulated lottery sector’s annual global gross gaming revenue, it would cause an annual financial loss to “public-benefit causes” of more than $2bn worldwide.
“A predictable objection from the U.S. Commodity Futures Trading Commission (CFTC) authorized prediction market operators is that they are already regulated,” wrote the WLA, whose membership includes 25 individual state lotteries. “This paper addresses that argument directly: authorization under a financial or derivatives framework is not equivalent to a gambling licence.”
What does WLA recommend on prediction markets?
Ultimately, the WLA stated clearly that it opposes the “unregulated and unlicensed operation” of prediction markets. It made several recommendations to regulators and governments, including that they should:
- Adopt a functional definition of sports betting and event wagering
- Require all entities offering event contracts to obtain appropriate gaming or betting licenses
- Enforce existing licensing requirements, including through geoblocking and enforcement action
- Develop a framework for international coordination to avoid prediction market platforms being able “to exploit the weakest points in the global regulatory perimeter”
“We call upon all stakeholders to act with the urgency this situation demands,” concluded the WLA. “The protection of consumers and the integrity of sport are not negotiable. The regulated lottery and betting sector exists to serve the public interest, and it cannot fulfil that purpose while competing against an unlicensed, unmonitored, and unaccountable parallel industry — however innovative that industry claims to be.”
Could lottery-style prediction markets be coming?
In its paper, the WLA referenced the potential of prediction markets further encroaching upon state-regulated gaming territory by offering lottery-style or casino-style contracts in addition to sports. It noted that lottery games clearly defined and verifiable results and time-bound events meet the core criteria of event contracts.
“From a functional perspective, lottery draws are compatible with prediction market structures,” reads a section of the paper. “… In this context, their inclusion would represent a natural extension of existing prediction market offerings, rather than a qualitative change in product design.
“The same reasoning could apply beyond lotteries to other games of chance, including certain casino-type outcomes, where results are equally random and objectively determinable.”
The association warned that were lottery-style prediction markets to become popular, the financial stakes for WLA members and public-interest causes would be “material and immediate” as those products would directly undermine lottery monopolies and divert player spend away from regulated lottery channels in the U.S. and beyond.
Lotteries call for ‘urgent’ solution
The WLA paper cited estimates suggesting that at least 90% of the billions of dollars in monthly prediction market trading volume is driven by sports and other event contracts.
Noting that the proliferation of prediction markets has created “increasing tension” among the financial trading industry, existing gambling regulation and sports integrity frameworks, both the WLA and NASPL stated that the issue requires an “urgent” solution at the regulatory level.
“The WLA calls for urgent alignment between gaming and financial market regulators to close regulatory gaps and ensure prediction markets are subject to the same licensing, integrity, return to society and consumer protection standards as betting,” wrote the global body in its paper.
The WLA said that the rise of prediction markets has been fueled by what it called “deliberate regulatory arbitrage”, which is similar language to that used by Rep. Jill Tokuda (D-Hawaii) in a Congressional hearing about prediction markets on Tuesday. The WLA defined that term as the intentional exploitation of gaps and ambiguities in regulatory frameworks to avoid the costs and constraints of compliance.
NASPL warned that failing to establish appropriate regulatory parameters around event contracts will have a negative impact on the integrity of games, as well as compromise consumer protection and responsible gaming efforts and increase the challenges that law enforcement faces in attempting to combat tax evasion, money laundering, and racketeering.
The North American association joined the WLA in calling for “…urgent regulatory clarification in all jurisdictions where prediction markets offer or even plan to offer sports events or other event contracts.”
WLA proposes ‘functional’ regulatory test
Each association called for a “functional” benchmark to be applied. They argued that if a product offers a financial return that is contingent on the outcome of an event — whether it is sporting, political, or otherwise — “then it constitutes a wager or bet and must be licensed and regulated as such, irrespective of the operator’s preferred label”.
The aim, noted the global association, would be for gambling regulators to explicitly assess and determine the legality of prediction market products based on the products on offer, with a view to avoiding regulatory gaps and ensuring that functionally equivalent products have to abide by equivalent regulations.
“Where a jurisdiction chooses to classify such offerings as financial products, it should nonetheless require the application of safeguards and constraints equivalent to those applicable to gambling, given the comparable consumer-protection, integrity and harm-prevention risks involved,” added the WLA.
