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Congress Should Stay out of Sports Betting Regulation

For the first time in twenty-five years, Americans can legally wager on the outcome of sporting events outside of Nevada. Thanks to a Supreme Court decision in May that deemed a federal law banning states from legalizing sports betting, five states now offer legal, regulated sports betting markets. After more than two decades of stagnation at the federal level, it took four states fewer than four months to roll out licensing and regulatory systems for the activity. Next week, however, a House subcommittee will consider proposals to regulate this burgeoning new industry at the federal level based on the idea that Congress is somehow better equipped than the states. They are wrong and stripping the states, once again, of their power to regulate sports betting will negatively affect consumers, state revenue, and preserve the black market. It would, however, benefit a select group of special interests.

After a failed attempt to hold a hearing in June, insiders report that the Subcommittee on Crime, Terrorism, Homeland Security, and Investigations in the House Judiciary Committee has scheduled a hearing on sports betting for September 27th. The title of the hearing is “Post-PASPA: An Examination of Sports Betting in America,” referring to the Professional and Amateur Sports Protection Act of 1992 (PASPA); a law that blocked all states that didn’t already offer legal sports betting from ever doing so in the future (really only Nevada, at the time). In May, the U.S. Supreme Court deemed PASPA a violation of the 10th Amendment to the Constitution—unlawfully handcuffing state legislatures on regulating sports betting. Next week’s hearing will, most likely be broadly focused, merely aimed at making sense of what the court’s decision means. However, they might also consider proposals for Congress to wrest control of sports betting regulation, yet again, from the states.

Check out this interactive map at njgames.org for the current legal status of sports betting in each U.S. state.

Schumer’s Federal Framework

Of particular concern is the regulatory framework laid out by Sen. Chuck Schumer (D-NY) in August. While immediately following the Supreme Court ruling, Sen. Orrin Hatch (R-UT)—one of the original architects of PASPA—advocated for federal guidelines focused on consumer protections, Schumer’s proposal is distinctly centered on protecting the profits of sports leagues.

Schumer’s plan contains the logical requirements of limiting sports betting to those over 21 years old, instituting measures to combat problem gambling, and preventing criminal activity. But, it would also require sportsbooks (those taking bets, e.g. casinos) to rely exclusively on “league data” to determine the outcome of bets.

League “Data Monopoly”

At heart, this is an anti-competitive requirement that will do little more than give the leagues a government instituted monopoly. Data about game outcomes is widely and publicly available through many sources (e.g., sports broadcasting), but the lifeblood of sports betting is on in-play bets: wagers on myriad “events” within the game, including how, when, and where goals were scored or who assisted. This makes the data about in-game activities highly valuable and, in Europe, companies compete to sell this data to sportsbooks on the basis of price, speed, and accuracy. Schumer’s proposed framework, however, would eliminate this competition, essentially giving the leagues the power to ransom their data, forcing sportsbooks to pay as much as the leagues want for the data.

On top of a price monopoly for league data, Schumer’s provision would also give the leagues an extraordinary bargaining advantage over sportsbooks in almost any other contract negotiation. If the sportsbooks reject the leagues demands, the leagues can simply refuse to sell them data for one or all types of bets. This is little more than a way to transfer profits from sports betting businesses to sports leagues.

Over the last year, as it became clear that PASPA was on its way out, the sports leagues have lobbied state lawmakers heavily for a cut of the gambling profits. They have used several different arguments, including the assertion that the sportsbooks ought to pay the leagues for increased costs of preventing match-fixing and for use of the leagues’ trademarked images and intellectual property. Thus far, the states have uniformly rejected the leagues’ demands for a payout. Likely, that is because state lawmakers understand that doing this would prevent the legal sports betting industry from being able to offer bets, odds, and payouts attractive enough to convince bettors to migrate away from the illegal market. It would also limit the tax revenue states might collect. Schumer, whose home state of New York headquarters all of the major U.S. sports leagues, doesn’t seem concerned about the effect his suggested data monopoly would have on consumers or the states.

Corruption in Sports

For most of the members of Congress advocating for federal regulation of sports betting, their main concern is protecting the integrity of our nation’s sporting events. The fear is that widespread legal sports gambling will lead to increases in match-fixing, eroding fan faith in game integrity. Of course, sports gambling is already widespread, despite (or more accurately, because of) the prohibition. In fact, match-fixing is far more likely to occur when there is a large illegal gambling market. What Schumer and others fail to recognize is that their proposed regulations will only make it more attractive for consumers stay on the black market, preserving criminal activity and increasing the risk of corruption in sports.

Match-fixers profit on fixed games by bribing or coercing players and officials to modify their play or calls in a certain way and then betting on outcomes they already know will occur. Their ability to profit, however, depends on the ability to make large wagers without getting caught. In an unregulated black market with little oversight, this is much easier. The larger that market, the more corrupters can profit and the greater is their motivation to attempt to corrupt games. This is the dangerous scenario Congress created when it barred states from legalizing sports betting in 1992, spurring the rise of a $150 billion a year illegal betting industry.

State vs. Federal Regulation

Now that Supreme Court has restored the states’ power to regulate sports betting, authorities finally have a chance to chip away at this illegal betting market. Doing so would be an effective way to not only protect consumers, but also to reduce the profitability from—and hence attractiveness of—attempts to corrupt sporting events. This, however, will not happen if Congress enacts rules like those proposed by Sen. Schumer.

Bans don’t work and prosecuting illegal betting rings only makes room for the next illegal operation to take its place. The only hope to combat illegal sports betting is to draw consumers out away from the black market and into the legal one. But making legal betting at least as attractive as illegal betting depends on legal operators’ ability to compete with the types of bets, odds, and payouts offered by illegal operators. Schumer’s “data monopoly” proposal would make that all but impossible.

One can debate what exact features a sports betting regulatory regime should have to guarantee consumer safety and game integrity, but it is difficult to argue that Congress will develop and implement such regulations better than the states. Since the Supreme Court decision in May, there has been a flurry of activity among state legislatures with many passing legislation and some already offering legal sports betting. Clearly, the states are more responsive to a changing landscape than Congress. While it’s possible that, in their haste to establish legal sports betting markets, state might enact suboptimal legislation, the states have demonstrated that they are capable and willing of acting quickly to amend their regulatory schemes. Congress, on the other hand, couldn’t manage to do anything about sports betting for twenty-five years, despite the growing illicit market and number of American consumers left unprotected.  

If Schumer and others in Congress truly care about consumers and sports integrity, they should leave regulations up to the states. In this scenario, at the very least, states will be able to modify regulations that prove ineffective and experiment with the most effective regulatory standards. If we give this power to Congress, on the other hand, we could be stuck with the rules it decides on for the next three decades—no matter the unintended consequences.