The Bulletin Board
THE LEDE: Debunking the regulatory capture narrative in Arizona.
NEWS: CFTC sues three states as it jumps headfirst into the PM legal fight.
NEWS: Kentucky legislature passes sweeping gaming reform bill.
AROUND the WATERCOOLER: Tweet of the Year candidate.
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The Lede: There Is Nothing Untoward Going On in Arizona
Prediction market true believers have been framing the legal battle in Arizona as some kind of beyond-the-pale regulatory capture of the Arizona Department of Gaming (ADG), a level of projection that you almost have to applaud given prediction markets’ ties to the current administration and the cheerleading coming from its regulatory body, the Commodity Futures Trading Commission (CFTC), which is intervening and suing states (which I cover in the News section a little later in this newsletter).
Here is the original tweet that kickstarted everything:
And here are Kalshi’s surrogates jumping all over this greatly exaggerated narrative (I’ll explain why this is a non-story in a moment):
But here is the tweet I really took exception with, as Koleman Strumpf is an economics professor at Wake Forest and has been cited as an expert on prediction markets:
So let me answer his first question: Yes, you are misunderstanding something.
As I said on X in response, the $3 million is not a one-off or special payment for the Kalshi lawsuit. It’s a pre-existing revenue-sharing obligation laid out in the tribal compacts: “Tribes sent the state $33 million in the most recent quarter, and per the compacts signed in 2021: the greater of 9% or $8M goes directly to ADG for its normal running costs and regulatory expenses... including enforcement against what the state views as unlicensed gambling. That worked out to $3M last quarter.”
Further, by law, the ADG can use up to 10% of the revenue in the funds from sports betting and daily fantasy sports for regulation and enforcement activities. The licensed sportsbooks (partnered with the tribes) and DFS operators also contribute to these funds, with the expectation the regulator will enforce state law to preserve the market that they have paid a lot of money to operate in.
As I said on X: “It’s almost as if the tribes were aware someone would try to encroach on their exclusivity, and made sure their regulatory body would have the resources to defend it on their behalf.”
I’m not sure why people would expect states, tribes, and licensed sportsbooks to simply roll over.
Imagine you own a thriving liquor store in a small town. You pay way more rent than you would in other places, but the town has a bylaw that prohibits like businesses from operating within a 10-mile radius and only has a designated number of liquor licenses.
And then suddenly one day, the coffee shop across the street that opened a couple of months ago is serving beer and wine and added a small to-go cooler, claiming an obscure state law about limited low-proof liquor sales at sit-down restaurants supersedes town bylaws. Oh yeah, and the town has a three-member select board and two have resigned, leaving only the brother-in-law of the coffee shop owner to make decisions.
Annoying, but no big deal, right?
Then, a few months later, you notice they’ve cleared out a bunch of tables and doubled the alcohol section with craft beers and imports, and you’re hearing rumors they’re planning renovations to add everything from schnapps to vodka, because low-proof isn’t expressly defined in the statute, and the brother-in-law is fast-tracking a new regulation that defines low-proof as under 100.
You push back, but are painted as the bad guy. A protectionist trying to keep your monopoly on liquor sales in the area.
That’s no longer annoying. That is a maddening, ‘WTF is going on’ situation. And that’s how pretty much every state, gaming tribe, and commercial operator that hasn’t pivoted into prediction markets feels right now.
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News: CFTC Sues as Prediction Market Fight Escalates
It’s hard to overstate how chaotic the current gambling landscape has become, and how quickly it’s all happening.
In the span of just 18 months, prediction markets have created a true crossroads moment in gambling, the kind the industry usually only sees once every couple of decades.
A legal victory that cleared the way for Kalshi to offer election markets in late 2024, but Kalshi didn’t stop there. It sprinted forward, rolling out sports contracts and even multi-leg parlays. The pushback was fierce and widespread:
10 congressional bills and as many letters sent to the CFTC and its leadership.
14 states are involved in litigation with prediction markets, as are tribes in California and Wisconsin.
And while it may seem like a fight over prediction markets offering sports contracts, it’s actually much bigger than that. The quaint little fight about election betting has snowballed into an existential question: Does online gambling fall under the purview of the federal government or the states? As I’ve said before, if you think prediction markets win sports and stop there, I have a bridge to sell you.
On one side is a powerful coalition of states, tribes, and large swathes of the gambling industry. But prediction markets are not alone, they’ve gained allies on Wall Street and institutional investors, and considering the Commodity Futures Trading Commission (CFTC) has jumped into the fray and is intervening on behalf of prediction markets, it’s increasingly clear that the current presidential administration is hellbent on legitimizing and entrenching prediction markets.
Last week, in a major escalation in the federal-vs-state battle over who controls online betting and event contracts, the CFTC announced it was suing three states — Illinois, Arizona, and Connecticut — accusing them of trying to regulate or restrain federally registered prediction markets.
The CFTC’s position is: 1) Prediction market offerings are federally regulated swaps under the Commodity Exchange Act. 2) The CFTC has exclusive jurisdiction over these products when offered on registered exchanges. 3) States are unlawfully trying to “outlaw, regulate, or otherwise restrain” markets that the federal government has already approved.
The agency is asking the courts to issue injunctions blocking the states from enforcing their actions against these platforms.
Bottom Line: The CFTC’s aggressive intervention has turned what began as a niche skirmish over election contracts into a full-blown constitutional showdown over who actually regulates sports betting (and likely online gambling) in the US. The upcoming court rulings won’t merely decide the future of sports on Kalshi. It will decide who gets to draw the map for the next decade of American gambling.
News: Kentucky Passes Gambling Reform Bill
The Kentucky legislature passed a comprehensive gambling reform bill, HB 904, last week that tackles everything from sports betting and DFS to fixed-odds racing and prediction markets. The bill now awaits the signature of Gov. Andy Beshear.
The main components of the bill are:
Raises the minimum for sports betting from 18 to 21.
Prohibits certain bets (unders) on in-state collegiate athletes.
Regulates DFS and fixed-odds horse racing.
The bill has been in the works for a year, and while the above required compromise, it was a prediction market element that caused the most apprehension. The bill would impose a state tax on prediction markets and bans Kentucky licensees from any involvement (including advertising) with any prediction-market platform in the state (a previous version was even more controversial as it would have extended the prohibition to anywhere in the US).
As Steve Bittenbender, a Kentucky-based industry reporter who followed last week’s bill passage closely, noted: during Senate discussion, supporters were asked whether the language could block Churchill Downs from national TV broadcast or sponsorship deals if it has any ties to a prediction-market company.
“The bill’s language states a licensed track, sportsbook, or fantasy operator ‘shall not contract with a service provider’ that either offers event contracts in the state through a prediction market, or ‘owns, rents, licenses, advertises, operates, is partnered or affiliated with, or has a beneficial interest in, an entity that makes available to its users in any form a prediction market in the Commonwealth of Kentucky.’”
At issue was the term “service provider,” which includes sports betting licensees in Kentucky, leading to concerns that it would cause unintended headaches for the Kentucky Derby. As Bittenbender reported:
‘There’s a lot in this bill I really liked,’ Sen. Cassie Chambers-Armstrong (D-Louisville) said in explaining her ‘no’ vote. ‘However, given (Howell’s) answers that this might possibly impact the ability of Churchill Downs to air the Kentucky Derby on national television – that’s a very big issue – and I cannot in good conscience vote for this bill at this moment in time.’”
Around the Watercooler
Social media conversations, rumors, and gossip.
We have a Tweet of the Year contender:
Stray Thoughts
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