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The sudden prominence of the Commodity Futures Trading Commission (CFTC) with regard to the rise of sports-event contracts has forced the U.S. gaming industry to work outside its normal channels before Congress and the federal government.
The agency has come into the spotlight for its pending pivotal role in either green-lighting or ultimately slamming the brakes on the growing sports-event contract field, and those with an interest in potentially joining that space, or opposing it, are having to familiarize themselves with an entirely different set of processes.
“As you talk through how the CFTC operates, like the idea of self-certification and declining to take down a product that's under review, [that] really goes against everything that we understand regulated gaming to be,” said Alex Costello, vice president of government relations for the American Gaming Association (AGA), during a webinar presented last week by KPMG.
“We have to get approval for everything before it goes on the marketplace, and that's to protect gaming operators, our patrons, tribes,” Costello added.
“There's a reason why those guardrails are in place, and so the lack of guardrails is really concerning in these marketplaces.”
Another hallmark of the regulated gaming industry is concern over potential risks to licenses, as state regulators typically frown on operators who offer an unregulated gaming product in a market where such a product is expressly illegal.
“People are wary of endangering their existing licenses by the states, [because states] are being very vocal on their opposition to this,” said DJ Hennes, managing director in the financial services risk, regulatory and compliance advisory practice for KPMG.
That said, there are companies within the traditional gaming industry that remain interested in the prediction-markets space, and they are relying on advisors to bring them up to speed about what is required to participate in it.
According to Hennes, these kinds of “prudent risk management” conversations involve fundamental questions, such as: “Who is the CFTC? Who's the National Futures Association, the self-regulatory organization? What does it mean to be a designated contract market and to clear these things?”
“And I think a big question in a lot of our clients' minds is through this federal avenue, are you able to do things like parlays and in-play betting, or is it that you self-certify and the next day you can list, which would limit the ability to cash in on some of the more lucrative avenues that traditional state-based operators have.”
Robert Stoddard, lead U.S tax partner for gaming at KPMG, also pointed out that operators looking to get into the prediction-markets space will also have to adjust to a different tax structure, alongside questions of how they may expect to do that within the confines of their existing structure or instead by creating a new entity.
“If you're a regulated operator that's monitoring this very closely, I think a big part of this is understanding how well you have your current tax function and your compliance functions buttoned up in the regulated space,” Stoddard said. “Do you really understand what it means to be a CFTC-regulated exchange market from a tax perspective?”
How the CFTC will respond to the evolution of sports-event contracts remains an open question, with a formal review still ongoing into the offerings by Crypto.com and a roundtable scheduled to take place in the coming weeks on the markets.
“Event contracts have been around since the 1900s, and it makes sense logically to have event contracts on things like the weather, for agricultural and for farmers,” said Reade Jacob, counsel for the WilmerHale law firm.
“But then the question turns on the category of contrary to public interest, and so there's also going to be an argument here on whether there's economic hedging benefit, and there are arguments for and against on both sides, and we'll see how it plays out.”
The AGA's Costello said that the history of event contracts has taken the gaming lobby to parts of Congress that are not typically dealing with gaming issues.
“The CFTC is considered an agricultural entity for Congress' purposes … so all of a sudden I'm talking to folks on the [Agriculture] Committee, which is usually not part of our remit up on Capitol Hill,” Costello said.
“And so I think a fair amount of education is happening with some of these offices to explain, like our state-regulated marketplaces, what the policy decisions were in each one of these states, and the Wire Act, and all of these things that frankly, it shouldn't have been part of their portfolio, and now we're sort of bringing them into the sports-betting world.”
