Nation's first notice on intent of revocation for prediction market activities may set precedent for 2026.

As predicted, prediction markets represented the hottest topic last week at a gaming conference in Puerto Rico, and an Arizona policy decision provided fodder for regulators from other states as the four-day event concluded.

When Chris Kotterman of the Arizona governor’s office discussed a state violation notice against Underdog at the meeting of the National Conference of Legislators from Gaming States in San Juan, he noted that it likely marked the first time most of the audience had heard of the order.

A day earlier, on 12 December, a report surfaced about the Arizona Department of Gaming’s intention to pull Underdog’s DFS licence. The order surrounds the company’s prediction marketing offerings in two dozen states through a partnership with Crypto.com.

Arizona’s Case Against Underdog

The Arizona regulator had issued cease-and-desist orders against Crypto.com and two others in May, warning the companies that it viewed sports event contracts as illegal gambling. Subsequently, the department sent a letter to Underdog on 15 September advising the company not to offer event contracts or partner with another company that offers the financial derivatives on their own platform.

“This was a very clear case that the operator was offering something in Arizona that we consider to be an illegal product,” Kotterman said during an NCLGS panel discussion.

Before completing his remarks, the policy advisor indicated that Underdog’s partnership with Crypto.com “affects their suitability”, and the state needed to send a message that it would take action.

The action marks the first time that a state regulator has issued a notice with the intent to pull a daily fantasy sports licence due specifically to a company’s prediction market activities. The notice triggered a spirited debate on social media on the potential licensing implications for DFS and sportsbook operators that partner with companies that offer prediction markets.

A Slippery Slope?

The Arizona violation notice is part of a 16-page filing that includes the May cease-and-desist order and September letter to Underdog, as well as the company’s November response to Arizona regulators concerning its partnership with Crypto.com. The Department of Gaming wrote that Underdog is “aiding and abetting” Crypto’s illegal conduct in Arizona and providing it with a “facade of legitimacy”. Furthermore, the regulator determined that the relationship poses a “threat to the public interest”.

As of Tuesday, there are 14 licensed sportsbook operators in Arizona, with DraftKings, FanDuel and Fanatics among them. The latter two currently offer event contracts through prediction market platforms in states outside Arizona. DraftKings, meanwhile, reportedly plans to launch a prediction market at some point in the coming months.

Following the panel, Kotterman discussed the application of “extraterritorial issues” outside of Arizona in a brief interview with iGB. Kotterman acknowledged that FanDuel is partnering with another company (CME Group) on prediction market offerings, but said the distinction lies with the fact that the platform is not available in Arizona.

Asked if the same standards used for DFS operators will apply to those with an Arizona sports betting licence, Kotterman demurred. Instead, he limited his remarks to the Underdog/Crypto order, saying that he is unsure how the standards will be used for areas beyond daily fantasy sports.

Suitability and Out-of-State Conduct

The panel also featured Christopher Hebert, chairman of the Louisiana Gaming Control Board. Prior to the NCLGS conference on 5 December, that board issued an advisory notice on prediction markets. Per the notice, a company can only offer sports event contracts in Louisiana if it has a sports betting licence and meets the other requirements for sports wagering.

Asked by iGB if prediction market violations in another state will feed into a suitability assessment in Louisiana, Hebert declined comment, citing the pending matter.

As is the case with controversial orders pertaining to prediction markets, a major decision such as the one from Arizona generated lively discussion on X, the social media platform formerly known as Twitter.

Andrew Kim, an appellant litigator in Washington DC for law firm Goodwin, specialises in gaming law. Kim, who has written extensively on prediction markets over the last year, commented that while states have “broad discretion” in making licensing decisions, they tread in “dangerous waters” if using that discretion to “police affairs in another jurisdiction”.

Industry Reaction and Tribal Perspectives

With a heavy tribal presence in Arizona, a leader on tribal gaming issues also weighed in on the order. Victor Rocha, conference chairman for the Indian Gaming Association, wrote that he is amused by the “faux outrage” aimed at Arizona for going after Underdog. “Why is (the) chattering class surprised? Were they not paying attention? Every legal, political and media tool will be used to go after prediction markets and the companies that ratline to the platform,” he wrote.

Just as with NCLGS’ previous conference, a July meeting in Louisville, prediction markets arguably represented the most contentious issue discussed at the event.

Underdog Plans to Fight Back

In response to the Arizona order, Underdog said it will “vigorously defend” itself as state regulators are attempting to “supersede federal law” with their position on prediction markets. Nicholas Green, Underdog’s general counsel, argues that the company’s prediction market products are not available to customers in Arizona, and its relationship with Crypto.com does not involve daily fantasy sports. Underdog intends to appeal the order.

Among Wall Street analysts, Jordan Bender of Citizens wrote that the order against Underdog has larger implications, suggesting that it is “only a matter of time” before Arizona strips the licences of other operators in the state.

Bender, a gambling analyst, was joined by several Citizens colleagues who cover the financial technology space. Moreover, they wrote that the action sets a precedent for other states with legal sports betting.

The notice of intent is subject to the administrative appeal process, the department wrote in a statement. The department has not made a final determination and the licensee remains authorized to operate pending the outcome of that process.