Regulators Target Prediction Market Partnerships

Sports betting and fantasy sports operators that partner with prediction firms may now be facing some major repercussions – the loss of a gaming license.

Nevada regulators recently warned operators that their gaming licenses in the state could be in jeopardy if they partner with a prediction market operator. The state won a lawsuit against Kalshi, barring the prediction market company from operating in Nevada.

Arizona Moves Against Underdog

Now, Arizona has moved to rescind Underdog’s daily fantasy sports license after the company recently partnered with Crypto.com to offer prediction market contracts in the Grand Canyon State. On Dec. 5, Arizona Department of Gaming (ADG) director Jackie Johnson sent Underdog a notice of violation and intention to revoke the company’s license.

“There’s a very clear case that the operator was offering something in Arizona that we consider to be an illegal product,” Kotterman recently said at the National Council of Legislators from Gaming States winter meeting in Puerto Rico.

Arizona Ordered Crypto.com To Cease Operation In May

The move comes after the ADG demanded in May that Crypto.com no longer operate in the state. The company has continued to offer prediction market contracts in Arizona, including sports contracts that are similar to sports betting. Underdog’s partnership with the company has now brought enforcement action, according to SBC Americas.

“We warned them, they didn’t leave, then Underdog partnered with them,” Kotterman said. “We asked for information from Underdog about the nature of their relationship. We got that information, and then we decided that they were engaging in conduct that would threaten their license. They partnered with that operator, and that affects their suitability.”

Federal vs. State Regulatory Tension

Prediction market companies like Crypto.com and Kalshi have argued that their offerings are different from traditional sports betting. The companies note that they are regulated by the Commodity Futures Trading Commission (CFTC) at the federal level and, thus, do not have to adhere to state regulations.

That defense could play out in court as Underdog appears ready to fight the ADG’s efforts at license revocation.

“Arizona regulators are trying to supersede federal law, which they cannot do,” Underdog general counsel Nicholas Green said. “We will vigorously defend against this illegal action.”

Other Operators Enter Prediction Markets

Underdog is just the latest company to partner with a prediction market firm. In November, FanDuel announced a partnership with the CME Group, a leading derivatives marketplace, for the new FanDuel Predicts app.

DraftKings also recently announced it would enter the sports prediction business. Both FanDuel and DraftKings have now withdrawn applications for sports betting licenses in Nevada because of those moves.

Fanatics also announced a partnership with Crypto.com earlier this month.