It is time to bring rationality to the U.S. sports betting market, where Americans illegally wager billions of dollars each year. This unregulated, untaxed and subterranean economy has inextricable ties to the high-profile, nascent world of daily fantasy.
The recent charges that a DraftKings employee used inside information to participate unfairly in a contest on rival FanDuel has ignited controversy around the mushrooming daily fantasy market. Suddenly, state and federal legislators and law enforcement officials are questioning whether this infant industry requires heightened scrutiny.
This flurry of government focus on the daily fantasy market was inevitable. When Congress created the exception for fantasy sports in the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA), it intended to authorize the season-long, largely social fantasy sports leagues among friends that the major sports governing bodies -- especially the NFL -- had found were increasing their TV audience.
Congress did not intend to launch a high-octane, venture capital fueled sweepstakes business promising jackpot-like payouts on a daily basis. As DraftKings and FanDuel, along with a host of other operators including Yahoo, began to stretch the limits of the UIGEA exception beyond recognition -- and flaunted it through a torrent of ubiquitous advertising -- it was only a matter of time before government officials would react to such provocation.
Nevada immediately declared that daily fantasy companies had to obtain a betting license to operate there. State legislators elsewhere are introducing bills to regulate daily fantasy. State attorneys general are investigating the use of inside information, and it has been reported that the Justice Department is studying whether daily fantasy, as it has grown, fits within the UIGEA carve-out.
But the real question that is getting lost in this reactive frenzy is: what is the most intelligent, effective and rational way to regulate the daily fantasy industry? And this question carries larger implications since daily fantasy, as it has rapidly evolved, is much closer to gambling than it is to traditional fantasy sports.
Make no mistake -- daily fantasy is gambling, just on players, rather than teams. The 2006 law, which distinguishes between games of skill (legal fantasy) and games of chance (illegal betting), supposedly allows people to risk and win money based on the on-field success of Aaron Rodgers, Adrian Peterson and Calvin Johnson, but prohibits people from risking and winning money based on the on-field success of the Packers, Vikings or Lions.
While studying players -- or teams -- and building algorithmic models to predict performance may involve skill and improve someone's chances of winning, it is no less gambling than where experienced blackjack players improve their chances by making the right choices to maximize their odds. The player/bettor in all cases is relying on external activities over which he/she has no control.
As Seinfeld might say, "Not that there's anything wrong with that." For many centuries, and across many societies around the globe, people have been wagering on a wide menu of activities. Whether one believes it is a vice or not, it is a very popular pastime.
Numerous societies, recognizing this reality, have not tried to suppress the behavior but rather to authorize it in a regulated environment that allows it to flourish as an industry while being licensed, taxed and monitored. England's gambling market is a prime example of such an approach, where legal bookmaking is a substantial industry within the British economy and betting is simply an accepted form of recreation.
In the United States, despite all the professed shock over daily fantasy's excesses, and the near-universal prohibition on sports betting, our society has also sanctioned many forms of wagering. Almost every state operates -- indeed, promotes -- its local lottery. Lotteries are the purest form of gambling, involving no skill whatsoever. While there is other sanctioned gambling as well -- horse racing, casinos, bingo, etc. -- the widespread existence of lotteries demonstrates that a regulated betting environment has been embraced by government officials and society, and that it addresses desired behavior with a rational scheme.
Congress should now address sports betting and daily fantasy in a similar rational way. Even if one wanted to prohibit these activities, it wouldn't work; we went down that road with Prohibition. While estimates range widely, Americans bet hundreds of billions of dollars annually and illegally on sports with bookmakers serving this market. As NBA Commissioner Adam Silver wrote a year ago in urging Congress to legalize sports betting in a sound, comprehensive way, it "should be brought out of the underground and into the sunlight."
The principal concern raised by the leagues about legalization is that it could raise questions about the integrity of the game. But everyone knows that widespread gambling takes place today, so any integrity-related issues are already part of the picture. And with legalization comes the ability to monitor betting markets -- as they do in Europe -- which would actually increase the integrity of each sport and the public's confidence.
Rather than have sports gambling operate in the shadows, it should be brought out into the open. There should be a single federal statutory regime that establishes the framework for wagering on sports -- whether on players (fantasy) or on teams. Hearings, as New Jersey Congressman Frank Pallone has called for, should begin immediately on how best to build that framework. What should the role of the states be? Should there be a difference between betting on college sports versus professional sports? What input should individual sports governing bodies have? What is the best way to help people for whom betting becomes an addiction?
These are not easy issues, but all can be addressed through a thoughtful approach to creating a sensible, regulated industry. This industry exists today, just below the surface and off the radar.
Betting -- poker, Super Bowl pools, daily fantasy, casinos, slot machines, horse racing, Las Vegas and most ubiquitously, state lotteries -- is already all around us. By blasting the tiny exception in the UIGEA a mile wide, the daily fantasy industry will have served a valuable purpose if it spurs Congress to enact a sound legislative scheme to authorize and oversee the vast sports betting market.