A relatively dramatic week for efforts to legalize sports betting in California highlighted pre-existing concerns but also a new one, prediction markets, that have thrown a unique wrench into the works.
Key insights
- The growing business of sports event contract betting offered by federally regulated prediction markets is looming over the California legalization conversation.
- According to a key group, there’s no agreement yet between tribes and sports betting operators for the California market.
- It will be a long time before there is an agreement, and sports event contracts are now squarely part of that discussion.
After online sportsbook operators were dealt a costly defeat in 2022 at the ballot box, it has been widely recognized that California’s Native American tribes will determine if, how, and when the state will authorize event wagering.
Yet there is online gambling going on with or without the say of the tribes, and one of the newer avenues for that wagering (including, more recently, on sports) are prediction markets like Kalshi and Crypto.com that are available across the U.S., California included.
The presence of prediction markets is now looming larger and larger over discussions about authorizing a more traditional form of sports wagering in California. That concern for the state’s casino-owning tribes was highlighted by this week’s drama at the Indian Gaming Tradeshow and Convention in San Diego.
Agree to disagree
Casino Reports reported on Tuesday that the Sports Betting Alliance – BetMGM, DraftKings, Fanatics, and FanDuel – showcased a proposed model for California sports betting at the event. The site also reported an official from the California Nations Indian Gaming Association (CNIGA) said they had looked at that kind of model itself.
The news quickly caused a stir, as the story was initially headlined as the two sides agreeing in principle on the same idea.
CNIGA and the Tribal Alliance of Sovereign Indian Nations (TASIN) then issued a statement on Wednesday saying tribal leaders were “offended” the SBA invited a reporter to what they believed was a “private roundtable discussion,” and added there was no agreement.
“This breach of trust highlights why such discussions must be led by tribal governments and organizations, rather than operator-funded groups,” the two groups said.
“I spoke with several California tribal leaders tonight. It’s DOA,” Indian Gaming Association conference chairman Victor Rocha posted on X.
Riddle me this
While there may be no agreement, and now some hard feelings, it didn’t stop minds from racing about the possibilities. Some of those minds were at investment banking firm Jefferies, which published a note to clients this week based on the report out of San Diego and focused on DraftKings.
The Jefferies note said prediction markets would have played “a prominent factor in the outcome,” and raised additional questions.
“Our impression is that [online sports betting] operators would potentially pursue these markets assuming they are legal, but at significant cost, with [federally regulated futures commission merchant] licenses estimated at ~$100M before any marketing and promotions,” Jefferies said.
“If a deal does not get done in the near term, would [DraftKings] pursue prediction markets as a precursor to some future deal? Would other state regulators approve of prediction markets regarding their own state licenses?”
These and more questions are circulating around prediction markets at the moment, particularly when it comes to their recent expansion into sports event contracts. Those products offer de facto sports wagering in all 50 states, whether or not they’ve legalized sports betting. That is because prediction markets and their event contracts are regulated federally, by the Commodity Futures Trading Commission (CFTC), rather than states, as sportsbook operators are.
So while an agreement on authorizing retail or online sportsbooks in California remains elusive, there is a growing consensus among states, sportsbook operators, and tribes that prediction markets pose a growing threat to their interests.
This was highlighted by the reporting on the trade show, namely concerns that sportsbook operators denied entry to California would launch prediction markets available there instead. But similar worries have been voiced in different venues, including the public comment period for the CFTC’s upcoming roundtable for prediction markets.
Roundtable square-off
CNIGA urged the CFTC in a letter in February to clarify that sports event contracts can’t be offered by prediction markets.
“Importantly, allowing Sports Contracts to be listed and traded will interfere with the sovereign right of tribes and states to exercise their police power to regulate gaming within their respective territories—a right long recognized by courts throughout the United States,” the letter stated.
“Additionally, listing and trading Sports Contracts would decimate the value of the bargained-for-exchange made between tribes and states in their gaming compacts when tribes agree to share their gaming revenues—contributing billions to state governments—in exchange for substantial exclusivity over sports betting in their state.”
Where the CFTC will eventually land on sports event contracts remains to be seen. For now, though, the regulator has declined to stop prediction markets like Kalshi from offering them. That has led to states such as Nevada and New Jersey sending cease-and-desist letters to prediction market operators.
The current impasse over sports event contracts comes as the debate over sports betting in California continues.
The statement from CNIGA and TASIN suggests there is still a long way to go, and that the ongoing concerns include federal law, like the one concerning event contracts. Any legalization effort may require another referendum as well, which would mean waiting until 2026, 2028, or later.
“Further discussions among tribal governments are expected to take place in the coming weeks and months,” the statement said. “Let there be no false illusion: establishing an acceptable framework and governance model will take time. This is a complex matter that involves navigating federal, state, and tribal laws, which requires thorough debate and careful resolution.”
