Three Paths America Could Take on Sports Gambling
Three competing legal frameworks. One word at the center of it all.
Almost every major disagreement in modern finance begins the same way: When more than one person uses the same word to reference different things.
Over the past few days, an insightful LinkedIn discussion around prediction markets reminded me of that once again. Beneath the surface was a disagreement that wasn’t really about prediction markets at all. It was about what the law means when it uses the word “gaming.” Or, even more precisely, whether Congress actually meant “gambling“ when they used the word “gaming.”
That question has been on my mind quite often as of late. In the latest episode of LexBeyond, I explored how a congressional drafting choice may have unintentionally opened a path toward the nationalization of sports gambling. The LinkedIn discussion approached the same issue from a different direction. When it comes to the future of sports gambling in America, this is yet another reminder that three competing legal frameworks lie beneath today’s prediction markets debate.
Elie’s Question
My starting point was Elie Mishory asking:
As a general point, though, gambling addiction exists across asset classes. People can “gamble” on stocks, options, crypto, real estate, etc. and that gambling can become an addiction the same way sports gambling can. Or am I wrong about that?
What is gambling? My journey with that question began more than twenty years ago with my doctoral dissertation. I didn’t know it then, but that question would follow me for the next two decades—through a start-up investment, Finance2027, Full Court Press, and most recently our LexBeyond podcast. Few legal concepts have occupied my thinking more than the meaning of that single word.
My Response
Elie, I think the quotation marks around “gambling” already contain the answer you’re looking for.
I have always believed that gambling should be understood as a legal concept, not merely a colloquial one. Most of the prediction market debate—and many of the biggest debates in finance—come down to a silent disagreement over what “gambling” means.
Use the word colloquially and almost anything you can buy feels like gambling. Use it legally and the universe becomes much smaller.
So what is gambling? The short answer is games of chance and event contracts that do not serve the public interest. One can argue that the category extends to any futures contract, not just event contracts. That argument was considerably stronger before Congress repealed section 5(g), but I think there is still room for it today. Whatever one’s view on that broader question, event contracts are unquestionably part of the analysis.
So we know that if someone is playing a game, it might be gambling. If someone is risking money on the occurrence of a future contingent event, that might be gambling too. The Brits drafted the Statute of Anne accordingly. That framework lives on in state law, creating much of today’s preemption tension.
A Second Observation
What is notably absent from the gambling definition are ownership interests in businesses, property, and other assets whose existence does not depend on the resolution of external events. The confusion goes back to Hamilton, but I do not think one can gamble on stocks, real estate, or even crypto. The proper term is speculation, not gambling. And not all speculation is reckless.
The addiction problem is real, of course. But the policy response has historically been education and disclosure. Why? Because an asset may generate cash flows, in which case subjective valuation must be respected, or it may generate utility independent of any profit motive. Calling an asset “gambling” would unnecessarily shut down markets for investors and ordinary users alike.
My own cheat sheet is simple:
• Stocks: investing or speculation, never gambling
• Crypto: speculation, never investing, never gambling
• Games: games of chance are gambling; games of skill are not
• Event contracts: entertainment claims are gambling; claims serving an economic purpose are notOnce gambling is treated as a legal concept, the debate becomes one of statutory interpretation: When Congress used the word “gaming,” did it mean gambling? I am convinced that it did.
Where John and I Diverge
John Lothian and I agree on a ton, but we diverge on the last mile. So I wanted to use this as an opportunity to further articulate my position:
I suspect what frustrates John Lothian is not so much whether the federal government has authority over sports event contracts, but three other concerns.
First, the country appears to be moving away from the principles that have historically distinguished genuine risk management from gambling.
Second, the states have likely been operating what amounts to an unlawful off-exchange swap market for years—a troubling prospect for someone who has dedicated his career to the integrity of derivatives markets.
Third, the Commission has increasingly become a one-person show, losing the diversity of viewpoints that a bipartisan five-member structure was designed to provide. Difficult questions benefit from disagreement.
Where John and I part ways, I think, is that none of those concerns answers the separate question of federal preemption.
I agree that the CFTC is not operating as Congress envisioned, that the Executive Branch may not be enforcing the law as Congress expected, and that these are serious institutional problems.
But the question of who exercises oversight is distinct from the question of what is legally permitted. Conflating them makes it harder, not easier, to address either.
Three Competing Legal Frameworks
Stepping back, I believe the debate reflects three fundamentally different legal frameworks for sports gambling in America:
Federal regulation;
State regulation; or
Neither.
Most discussions begin with the question of whether the federal government or the states have the authority to regulate sports gambling. I agree that this is the right starting point, but it’s certainly not the ending point.
Once the proper legal framework is identified, a second question follows: Is sports gambling actually permitted under that body of law?
In my view, the states largely answered the first question incorrectly but the second correctly. The federal government, by contrast, appears to be answering the first question correctly while stopping before the second.
This is precisely how the third possibility opens up. It begins with the same jurisdictional question as the other two: Does federal or state law govern? But answering that question does not complete the analysis. It simply identifies the body of law that must be interpreted next.
The remaining question—and, in my view, the one too often overlooked—is whether that body of law actually permits sports gambling. Only after answering both questions can we know whether the proper legal framework points to federal regulation, state regulation, or neither.
In other words, the real disagreement isn’t about prediction markets. It begins much earlier—with the meaning of a single word.
