Normalized, Not Legalized: A Response to Matthew Yglesias
A decades‑old federal framework collided with a decade of regulatory silence on sports gambling
Matthew Yglesias argues in his recent post, legal sports gambling has gone way too far. It garnered significant interest with more than 500 comments. There is no debating his success as he’s built a Substack empire generating more than $1 million a year.
Success doesn’t always mean the legal conclusions are correct. We’ve seen this many times over and not just by Yglesias. In his post, Yglesias goes off-track almost immediately:
…[T]he recent explosion in legalized, normalized sports gambling, both in prediction markets and apps, has proven sufficiently widespread and problematic to have prompted a backlash in many quarters.
Stop right there. Zoom in on the threshold question buried in his claim:
Was sports gambling actually legalized?
Or was it simply normalized?
That distinction matters and is the reason why his entire argument unravels.
Where Yglesias Misfires on Jurisdiction
After asserting that sports gambling has been “legalized,” Yglesias continues:
… [T]his move by the C.F.T.C. is trying to preempt state regulation of sports betting, even though gambling has long been regulated by the states.
Gambling games? Absolutely. Casino games are local and squarely within states’ police powers. Naturally, they are regulated by the states.
Gambling via futures? No. Since 2000, when Congress clarified the breadth of the commodity definition and created the excluded-commodity category, sports events contracts have been under CFTC jurisdiction. The Dodd-Frank Act reinforced that structure in 2010; it didn’t create it.
Courts increasingly recognize sports event contracts as sports bets–listen to our recent LexBeyond podcast Ep. 16 surrounding the Tennessee opinion (PDF). The inverse is also true–sports bets are event contracts:
In fact, this is precisely why the state-licensed sports regime is in trouble, regardless of what happens with federally “regulated” prediction markets:
Asking the Wrong Question Leads to the Wrong Answer
Yglesias proposes:
What’s called for here is federal policy that tries to foster prediction markets while preserving states’ ability to regulate gambling on sports. In practice, the only way to do that is with a bit of somewhat arbitrary line-drawing.
But this presumes that states have the ability to regulate gambling on sports. What if they don’t–and never did (since 2000)?
He then veers into the “everything is gambling” territory:
The basic reality is that there is a certain gambling-like aspect to all financial markets. Wagering on a roulette wheel and purchasing a contract in a forecasting market about an upcoming election in Nepal are in some sense the same thing. You are “predicting” how the ball will fall. You are “betting” on the election.
They are not the same thing, no matter how much it might feel that way, and the law is explicit as to what counts as gambling. There is a much cleaner way to frame what we think (hope) that Yglesias meant:
Games of chance
Event contracts that entertain
Everything else stays outside the boundary. Some examples:
Games of skill
Event contracts that serve an economic purpose
Stocks
Crypto
Collectibles.
Legally, none of these things are gambling. People can disagree over the policy, but the law is the law–and it was written by elected representatives at both the state and federal levels.
Adjacent Markets, Adjacent Mistakes
There are a couple of other places where Yglesias’s comments on event-contracts may seem to drift off-track; but in reality, all of these things are connected–remember, it’s one giant headache.
Yglesias writes:
But capitalist countries have actually managed to police the distinction between speculative investments and games of chance for as long as financial markets have existed.
Games of chance, sure. But speculative investments? It’s not clear what he meant by that. If he had prediction markets in mind, then no, those are not investments (LexBeyond podcast Ep. 13), so they can’t be speculative investments either. If you’re wondering what speculative investing actually looks like, this visual delight may help.
He then turns to daily fantasy sports:
The game of Rotisserie League Baseball evolved into “fantasy” versions of all the major sports, but remained pretty clearly distinct from gambling because gambling was illegal.
Yglesias cites fantasy sports as something “clearly distinct from gambling.” But that distinction exists only because the industry has insisted–loudly and repeatedly–that fantasy sports are “games.” Strip away that myth, and the gambling nature becomes obvious. Both traditional fantasy sports (“TFS”) and daily fantasy sports (“DFS”) are, at bottom, more complex (relative to binary options) event contracts/swaps.1 The mechanics are the same, but the branding is different.
Murphy Didn’t Do What People Think It Did
Yglesias writes:
But since the Supreme Court un-banned sports gambling at the federal level, individual states are essentially in a kind of prisoner’s dilemma.
But, SCOTUS did no such thing.
Murphy (PDF) struck down PASPA on anti-commandeering grounds. It did not authorize states to legalize sports gambling.
Yglesias continues:
The prior arrangement — federal law says you can bet on sports but you have to go to Nevada — was arbitrary and illogical, but it worked fine and overturning it has had major consequences for society with minimal democratic input.
This raises questions almost no one asks:
Did Murphy elevate the other states to Nevada’s status?
Or, did it bring Nevada back under the same federal statute that constrained everyone else?
Because SCOTUS never considered the Commodity Exchange Act, the public assumed the former. Prediction markets are now forcing the realization that it’s the latter.
States Get a Second Bite. The Federal Government Does Not.
Yglesias offers a familiar argument–the classic cost-benefit analysis that drives some gaming decisions:
There is some value in keeping sports betting mostly illegal and largely stigmatized, but there is also value to capturing gambling revenue.
States can absolutely legalize games of chance if they conclude the benefits outweigh the costs. That’s why casino gambling spreads: Revenues are immediate and measurable; costs are delayed and diffused. Further complicating the math is the fact that costs are highly subjective, and one can argue that, as a result, true costs are not even properly accounted for, but that’s an argument deserving of its own post on another day.
Having said that, the federal government does not get a second bite at the apple. For 175 years, U.S. policies have separated gambling from futures markets. Once a futures contract is deemed gambling, it’s out–permanently.
Yglesias assumes the state-level policy dynamic applies federally. It doesn’t.
The Real Harm Came from Regulatory Inaction, Not the Supreme Court
Yglesias’s view on how we’ve gotten here:
Once betting is legal enough that it is embraced by the key sports leagues and ubiquitously advertised, the value proposition to any given state of keeping it illegal is reduced. This is why we saw a huge wave of legalizations.
Yglesias’ argument that the states faced a prisoner’s dilemma and joined in on the gold rush is faulty for a simple reason. What he calls “legalization” is simply the CFTC declining to enforce the laws for years. That’s normalization–not legalization.
Yglesias concludes that the CFTC is “exacerbating the harm done by the Supreme Court.”
But the Supreme Court never caused the harm–the CFTC did–by:
Declining to act on state-regulated sports betting for years;2
Signaling to prediction markets that national sports gambling might be possible;3
Treating contrary arguments, case law, litigation positions, etc. as mere “obstacles”;4 and
Continuing to avoid action on sports event contracts.5
The Supreme Court did not pave the way for states to legalize sports gambling.
The CFTC doesn’t seem interested in protecting public interest anymore. The cop went off-duty and perhaps the best way to characterize the status quo is:
This isn’t a judiciary problem worsened by a regulatory failure.
It’s a long-standing regulatory failure that now requires a judiciary solution.
With Chevron now gone, the courts are the only venue left to clean up the mess.
Yglesias’s Policy Proposal Misses the Point
He suggests:
Create a federal regulatory status for prediction markets that is exempt from state regulation, then say that to qualify as such a market, sports-related contracts cannot exceed a certain relatively small share of revenue.
This is a vice-cap dressed up as a carveout. It introduces an arbitrary policy preference that breaks from the foundational principles separating genuine futures trading from pure gambling. It might slightly de-scale sports gambling, but it would still nationalize it–essentially a no-action letter on steroids.
There is a simpler, cleaner and legally sound path:
Enforce the laws Congress already passed.
That said, TFS is a small-stakes and more social form of gambling compared to its successor, DFS.
The CFTC announced it will initiate a review, and then didn’t drive it to a conclusion: https://www.cftc.gov/PressRoom/PressReleases/9033-25. A year later, it withdrew a proposed rulemaking on event contracts and a staff advisory: https://www.cftc.gov/PressRoom/PressReleases/9179-26