iGaming Daily

Fernando Noodt (00:01.681)
Prediction markets have evolved from a niche financial product into one of the most consequential legal and commercial battles facing the US gaming industry. As federal regulators, state authorities, and prediction market operators clash over who has the authority to oversee these products, the outcome could reshape the future of sports vetting, financial exchanges, and gaming regulation alike. Welcome to iGaming Daily, where we will unpack the legal battle.

the growing prospect of the Supreme Court involvement and what the ongoing uncertainty means for prediction market platforms, traditional sportsbooks, and the wider gambling industry. I'm Fernando Nott, Media Manager for SBC, and your host for today in a very special f episode because we are joined by Joshu Sterling, partner at Nobank. Josh, how are you today?

Joshua Sterling (00:48.632)
Doing really well. How are sir?

Fernando Noodt (00:50.191)
All good, all good. We were just talking about a football season. an Eagles fan out of Buenos Aires myself. so looking forward to to see Jalen Harris on the pitch again, a as well as Saquon Barkley. but yeah, not what necessarily brings us today here, but joining us as well is senior business journalist for SBC America's Justin Byers. Justin a Coles fan. How are you today?

Justin Byers (01:16.225)
Go Colts first and foremost. Happy to be with you fellas today to talk some interesting topics in prediction markets.

Fernando Noodt (01:22.779)
Yeah, unfortunately not NFL. That will be for a different conversation for a different time. but before we get going, let me thank Optimove, the creator of Positionless Marketing and number one player engagement solution for iGaming and Sports Betting operators and proud partner of iGaming Daily. So Josh, it's great to have you with us. Great to to be able to have this conversation about prediction markets which have which have been, of course, on everyone's mouths over the last few months.

and con will likely continue to be the main talking point ahead of s solving this this issue, this this this important legal fight. It has turned into one of the most important legal fights in the US, in the US gambling industry. So let's begin with a bit of an overview. I wanna hear you in in general, why do you think that prediction markets have turned into one of these the of in this in this most important legal fight in the US?

Joshua Sterling (02:23.423)
Yes, well thank you very much and and very happy to be here. I appreciate the opportunity to speak with you. I think that we are in the middle of a pretty substantial fight in the federal court system here and some state courts in America, really over the fundamental question of what's a what's a bet and then what's a trade of a derivative. And there are really meaningful legal distinctions. and

Who gets to regulate based on those legal distinctions, I think, matters greatly. And that's an issue that courts nationwide are grappling with. and as you suggest, you know, it may well wind up in the United States Supreme Court. There is currently one case that is about to be put on appeal to the United States Supreme Court, and we'll see whether the Supreme Court takes it up or not. But you're right, no things don't get to the Supreme Court unless they're, well, kind of a big deal.

Fernando Noodt (03:21.053)
Yeah, absolutely. And and of course, one of the main arguments or or main discussions is whether they are gambling or something else. the CFTC of course argues that prediction markets fall under exclusive federal authority, while states say that sports contracts are simply gambling. So which side currently has the stronger legal case in your opinion, Josh?

Joshua Sterling (03:48.777)
Sure. Well, you know, I I like to do all my litigating in court. And which is to say the team here at Millbank doing litigating, I I'm more of a subject matter expert, but in any case, I we have high conviction that our arguments are correct. I think they're the right arguments under the law and those law those arguments simply are the point that there's a federal statute called the Commodity Exchange Act, which pretty clearly states that it's federal regulation of these trades.

The reason why is twofold. First of all, that statute, the Commodity Exchange Act, which I may slip and call the CEA, but that statute says that trading of agreements and derivatives on a federally licensed exchange is subject to the exclusive jurisdiction of a federal agency called the Commodity Futures Trading Commission. That was a deliberate choice when that law was passed in 1974

to eliminate what had been for fifty years sharing or concurrent jurisdiction between the federal government and the states. That just not did not work for derivatives trading. And it didn't work in the fifty years before that when it was really the states doing it by themselves, referring to things even like futures contracts on crops as quote, gambling in grain, unless it was literally a farmer trading with a you know, a grain elevator.

To lock in a price early. so so that's that's very clear that the CFTC has exclusive jurisdiction, we think based on Supreme Court precedent, that would mean that that is preemption of state laws that conflict and state laws generally. So the second question is: well, that part of the law says that the exclusive jurisdiction extends to trading things like swaps.

on these markets. And so are these instruments swaps, these event contracts, including event contracts that involve sports. So the answer to that question is they are indeed swaps. a little bit on that. the definition of swap includes an important concept of an event contract, which is sort of a contract that depends upon the occurrence, non-occurrence, or the extent of occurrence

Joshua Sterling (06:13.226)
of of an event or outcome that has potential financial economic and commercial consequences. And that's not an exact quote, but it's pretty close. So basically a trade involving a an event that has potential financial economic commercial consequences. That's very broad. Well the statute also says a swap is anything that becomes known in the future as a swap. So it's meant to be pretty darn broad.

and so we think that these contracts are swaps based on that very broad definition. The last thing I'll say is sometimes we hear, well, that definition is too broad. Surely Congress could not have meant to include sports event contracts. And to that we say, often in court, well, we don't just have to rely on the broad language. Let's look at another part of the CEA, which says that.

There can be swaps that quote involve gaming, and they can be traded on these exchanges unless the CFTC says no, doing that is against the public interest. And so what we have is a statute that very clearly says the federal government has jurisdiction, these instruments are in scope, and when there is a policy decision, a policy decision about whether having contracts involving gaming should be listed on these exchanges or not.

It's up to the federal government. That is exactly what Congress said. And sometimes people worry about what was on the mind of Congress when they said something. What I think the courts really worry about is what Congress actually said when it said it. It wrote it down and voted on it, and the president signed it into law. So that's what governs here. And so we have high conviction that this is sort of the correct way of thinking about things.

Fernando Noodt (08:03.605)
And what about the the future of this of this litigation, right? Because right now it seems like all roads all roads leads to the Supreme Court. And and if if if do you think that SCODA's intervention at this point is inevitable? And what do you think it would be deciding in case it intervenes and why is it so significant significant for the US landscape?

Joshua Sterling (08:09.411)
Sure.

Joshua Sterling (08:29.122)
Sure. Well, I guess the the best answer I can give you is I don't know if it's going to the Supreme Court or not. There's only, you know, nine people that know. I'm not one of I will say that there's certain indications that it could go up. for example, there's one case we have where we sued the state of New Jersey on behalf of a client to prevent New Jersey from asserting its laws, gambling laws against our client.

And in that connection, the state had sent, I think, a cease and assist letter saying, Don't do this, or gambling laws apply. So we sued to stop it. the first level of court, the federal district court, ruled for our client. the state of New Jersey appealed it, as was its right. that was heard by the Third Circuit Court of Appeals sitting in Philadelphia, Eagles fan over here, I think. And the the Third Circuit Court of Appeals ruled.

Two to one, it was three judges, two to one, that our client was correct. New Jersey now is seeking Supreme Court review of that appeals court decision. Now it's entirely possible that when they do that, that the Supreme Court might say, we'll take that case. Or they might not. I I can't put odds on that. I can't predict that. the other appeals courts, or that second level of federal court, there are 13 of them,

Also have similar cases, you know, in the Ninth Circuit out there in California, the Fourth Circuit down in Virginia, and then the Sixth Circuit, which we just argued last week in in Cincinnati, Ohio, my my home state, Browns fan, not Bengals fan. I don't like the Bengals at all. I digress. and so we ha we have it there, and we might also have some some cases in the second circuit in in which we'll meet in New York.

and possibly the Seventh Circuit in Chicago. So I'm about to run out of circuits here. and so when you get these cases in a lot of circuits, and those circuits decide things, they might have different views. And if there is a so-called circuit split, the Supreme Court is probably more likely to take a case. The last thing I'll say is that we also have a case in a state Supreme Court, the Massachusetts Supreme Judicial Court. We argued that a couple months ago.

Joshua Sterling (10:49.546)
They'll issue a decision. It's entirely possible that if they reach a different conclusion than did the Third Circuit Court of Appeals, that you would have a difference between a state Supreme Court and a federal appeals court. And my understanding is that is something that the Supreme Court could consider as well. whoever does not succeed in the Massachusetts Supreme Court could decide to take that to the United States Supreme Court. So we don't know. and and so we'll see.

But certainly the more courts of appeal there are, the more people making decisions independent of each other, the more likely they're gonna have differences and maybe the more likely the Supreme Court will take it.

Fernando Noodt (11:32.754)
I guess we'll have hashtag wait and see for what happens with the yeah. for the what happens in this case. But let's let's run our imaginations for for a bit. And let's say the Supreme Court ultimate ultimately picks the the case and sides with the CFTC about f federal preemption. what would that mean for state gaming regulators across the country and under authority over over the segment?

Joshua Sterling (11:35.719)
Yeah, I should have said that.

Justin Byers (11:37.628)
Yeah.

Joshua Sterling (11:47.038)
Okay.

Joshua Sterling (11:55.078)
Yeah. Right. Right. Well, in in that circumstance, in that hypothetical, I would say that the authority of the state regulators remains the same as it is today. state gaming regulators have the ability to continue to regulate sports gaming on sports books and in casinos in every state where that's allowed. And there are dozens of states where that's allowed.

It's regulated by the states. That is a different kind of business and a different kind of proposition than trading on an exchange. A few reasons I would say that. One one that's quite interesting is this federal statute called UIGEA, UGA, or the I think it's the Uniform Internet Gaming Enforcement Act. I think I might have gotten that correct.

But anyway, it deals with sort of the advent of internet gaming. and what it basically says is I think you've got to look at either side of an internet bet, which would be interstate, you know, between two states or something. And if if the better wager were illegal in either state, then you can't do it across state lines, you know. and there's a definition of better wager. I think it's the only definition we found in a federal law.

And what's really interesting about that definition is it carves out from it, it says, you know, it's not a better wager and is not subject to this law is a trade done on a CFTC regulated exchange. Honest to God, it says that. So that tells me that, okay, there is this interstate trading that individual state regulators can't touch. Okay, that's quite helpful. The other thing that's very different is the manner in which these instruments operate.

So in a s in a sports book, if you're trading with a sports book, you're betting with a sports book, you know, you you enter the trade. if if you win, the house loses. If the house wins, you lose. They set the odds, they control the odds. If you place a trade and you say would want to get out of it, I I don't a bet. I use bet and trade interchangeably as many do, because they're not legal, it doesn't matter. It's just common language, right?

Joshua Sterling (14:15.323)
So if you have a bet on with the sports book, you're pretty much locked in. You can't trade in in and out of it. Well, that's pretty significant for a couple of reasons. One is l you know, legal in legally, these are all legal reasons, the CFTC and the SEC were told by Congress to write a rule saying what a swap is in more detail. They were required to do it, they weren't making it up. This wasn't some discretionary flight of fancy. So when they were required to write this rule,

They said, look, there are certain consumer commercial transactions that are just not going to be swaps. That would include a consumer transaction that is not tradable. Okay. You can't trade in and out of a sports bet, as I understand it. on an exchange, I don't care if it's a stock exchange, some platform for bond trading, a trade, a transaction an exchange regulated by the CFTC for futures or event contract trading. You can trade in and out.

Tradability really matters. In sports books, it's not tradable. I think that's quite important. Also, structurally, exchanges by definition in the Commodity Exchange Act are something other than trading on a principle to principle basis, you and me, right? And so what that means is if you are trading on a principle-to-principle basis, you're not an exchange, you're doing something fundamentally different. it's not even tradable in our case.

And so it just makes sense there's a different kind of regulation. That ties to one last point I want to make, which is that we've often heard, particularly in, you know, morning talk shows or on X or something, that there is a duck test. You know, if it walks like a duck and it talks like a duck, it's a duck. Yeah, okay. well, if life were that simple, I don't know. I guess every things that look alike would always be the same, I guess.

But the thing that's quite interesting and actually came up in court yesterday in a discussion with with the judge there in Rhode Island is that, you know, there are many things in life that are kind of propositional, probabilistic, right? But we apply different rules to them because of important differences that are below the surface, right? So insurance is not a derivative.

Joshua Sterling (16:36.599)
There's a whole part of the Commodity Exchange Act that talks about that and a rule on top of it. Making those kinds of differences legally, because the instrument itself is different, is really important. Like states regulate insurance. Insurance is viewed differently, like insurance on a bond default is different from a credit default swap on a bond. They might operate similarly, they might have similar economic characteristics.

But somebody, someone who writes laws, drew a line, and that line is important. So too here, you know, you can bet against a house on who's gonna win. Okay, and you're locked in, and they're just the odds they gave. Or you could trade against you don't know who on an anonymous platform that matches people based on price time priority using a non-discretionary algorithm. And that pricing can change. You can get in, you can get out of it, you can go short, you can go long.

You can do all sorts of combinations of trades. That is just different. That's market trading, and there's market rules for that. That's the CFTC. There's sports wagering. There are sports betting rules for that under state law. So I think those are some really important distinctions. and you had just have to be able to have the well, the intellectual capacity to sort of go below the surface of things. And I sure think our lawyers are able to do that. And I think, you know.

When we sit down and brief and talk with judges, I think in many cases, in every case, they appreciate those differences. And then it just comes down to whether they think they're persuasive or not. And, you know, we respect the decision of all courts. Some courts we agree with and some we don't.

Fernando Noodt (18:12.976)
Yeah, absolutely. Absolutely. And Justin, I wanted to ask you, like, in terms of of how the industry looks right now, how should traditional sports book operators be thinking about prediction markets today? Do you think they they they are competitors for sport betting operators? Could they be future partners for for them or something entirely different, Justin?

Justin Byers (18:33.781)
Yeah, it's it's an interesting question because we've seen major brands like DraftKings, FanDuel launch their own prediction market products, but we've seen other traditional operators like BetMGM step aside from the business itself. So it's interesting to see how these traditional sports books are navigating that line. And at this point it seems to be there's gonna be more companionship between the two. But like Josh mentioned earlier, there are huge

structural differences. So company's are gonna have to be willing to embrace that.

Fernando Noodt (19:09.958)
Yeah, absolutely. Absolutely. And Josh, back to you with because North Carolina actually decided to push taxation on prediction markets without licensing, without regulation. do you think that's a pragmatic compromise or does it simply create more legal uncertainty in the US in general?

Joshua Sterling (19:20.379)
Yeah.

Joshua Sterling (19:31.665)
Right. I mean my understanding of that legislation is that it was sort of a pragmatic agreement between operators of prediction markets in a state who, you know, had had a concern about, well, it is you know, without getting into sort of the legal distinction that I just walked through about what's a s a sports bet and what's a derivatives trade, you know, to the extent there's any leakage from one kind of platform onto another.

you know, would have a an impact on the fiscal health of the state and collecting revenues and so forth. And so there's a tax there. I think there are other taxes that have been adopted or at least proposed in other states. And so that brings up the issue of taxing power, which is different from regulating power. And you know, taxing as I understand it is not, you know, it it's not regulating an exchange as an exchange. It's taxing. And so I think, you know, there are probably reasonable compromises to be had.

in terms of, you know, to what extent, you know, commerce in a given state is taxable at some rate. I think things could be taxed way so high and could have such burdens associated with it, it could be viewed as a form of like shadow regulation or something. But I think the fundamental notion that there could be a tax of something, is is is different. And you know, I I think there's also a little bit of inherent logic to the idea that well if you're taxing something for the most part

you're kind of acknowledging, at least acknowledging, that it is lawful behavior. And we do think it's lawful. There's a federal license that says you can do it.

Fernando Noodt (21:08.72)
Yeah, absolutely. And and speaking of what people think, recent polling suggests that many Americans still see prediction markets as gambling rather than financial products. Does public opinion matter in this legal dispute?

Joshua Sterling (21:23.684)
Well, in front of the judiciary, it's a pure legal matter, no. in front of the executive branch is a matter of proposing rules and adopting rules as the CFTC is on its way to doing here. Public comment does matter, but not a public vote, you know. And so if the public comments on the rule proposal to change how the CFTC, you know, administers the CEA, then sure, you have to take public views into consideration and

Address their comments whether you take them or not. It's really important and when I was at CFTC getting rules written, that was incredibly important. You have to track it, make sure you do it. It's accountability. you know, whether it's popular or not or viewed a particular way, could matter for legislatures and they'd have to vote. the kind of the irony of that I guess is is that, you know, prediction markets in many instances are documented.

you know, is is being better than polls. And sometimes people hire polling companies to conduct polls asking questions that might be, you know, self-serving for the people paying for the polls. And so I'm not here to question any polls. I don't know what the polls say. But, you know, polls are are sort of provably less accurate than prediction markets. A little irony there.

Fernando Noodt (22:46.22)
Yeah, yeah, definitely an irony. But I guess it it matters even a little bit more for the executive branch when there's an election coming up. But Josh Josh, I I I could listen to you all day and I had like a billion questions for you. unfortunately we're running out of time, so I'm gonna go with my last one, which is when do you think we will have more certainty about the legal future of prediction markets in the US?

Joshua Sterling (23:12.462)
Sure. Well, there's a few things to keep your eyes on. Number one, I think, is the the CFTC proposed rule about how it's gonna administer you know, event contract trading and when it sort of will say, hey, we're gonna invoke our power to determine whether these kinds of instruments are in the public interest. you know, I would expect that rule to be adopted fairly quickly. And you know, that's sort of something worth watching because it's gonna really improve on the existing rule.

And I think that's probably a very good thing to do. And I credit the agency and its leadership for taking that on. And fraught circumstances were there in litigation themselves against nine states last count. so I think that that's one area. Another area, and I'm going in in reverse excitement order here, is Congress. You know, there's a lot of good legislation that's been put forward for consideration, bipartisan legislation.

I'd highlight in particular a bill drafted by Senators McCormick and Zolibrand that I think is very sensible. All this legislation, or nearly all of it, pretty much takes as a given or explicitly says that it is the federal government and the CFDC that's going to oversee trading of prediction markets on exchanges. I think if any of that legislation gets gets passed, it'll be very helpful and it'll give us more direction about how things are going to go.

And that will inf affect the third thing to keep an eye on, which is the courts. You know, certainly if there's legislation that comes out, it could change the very nature of the dispute we're talking about, you know, one way or the other. the courts, meantime, will proceed to decide these cases. we have, including class actions and other private litigation, forty lawsuits going on right now. Includes lawsuits involving tribal interests as well.

I think it's really the circuit courts of appeal right now we can keep our eyes on, as I mentioned, the Fourth Circuit, that's the Maryland case, the Sixth Circuit going east to west, that's the the Tennessee and Ohio cases, and then the Ninth Circuit, that is the Nevada case. all those things can be decided, you know, in the next number of months, and you've got the New Jersey case out of the Third Circuit, which looks like it's going to be appealed by the Supreme Court by the beginning of September. So keep your eye on all three.

Joshua Sterling (25:35.548)
that's as summary as I can make it.

Fernando Noodt (25:38.243)
Okay, great. keep an eye on all three and SBC America's will definitely keep an eye on all three, so make sure you have subscribed to SBC America's newsletter to follow this case and all cases actually, closely. Of course follow iGaming Daily on social media as well because we will continue monitoring the situation. Josh, I'm sure we will have you back on because this has been a great episode, a great conversation. really looking forward to to to hearing you a little more.

in the future as as things develop. So thank you very much for joining us.

Justin Byers (26:14.709)
Yeah, we appreciate it.

Joshua Sterling (26:15.178)
My pleasure anytime, gentlemen. Thank you.

Fernando Noodt (26:19.505)
Yeah, thank you very much. Josh, thank you very much, Justin Byers as well, and the NA McDonald for producing this episode. I'm Fernando Nott and to our listeners out there, we'll see you in the next one. Goodbye.