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Congress Already Ruined Sports Betting Once; Don't Let Them Do it Again

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After a prohibition lasting more than two decades, Americans outside Nevada can at last bet on sports without breaking the law.

The newfound freedom is thanks to a May ruling by the Supreme Court that overturned the federal law blocking states from legalizing sports betting. Since then, the four states that have now joined Nevada in offering legal gambling on sports are already reaping the benefits, collecting millions in tax revenue and licensing fees. More importantly, legalization also undermines the vast illegal sports gambling industry — a win for consumers and sports integrity.

So, why is Congress discussing a proposal that could bring this progress to an abrupt end?

The federal ban aided the rise of illegal sports betting, an estimated $150 billion a year industry in the U.S., that for 25 years Congress did nothing to stop. Yet, laughably, some in Congress now insist that the federal government is better equipped to regulate the burgeoning legal industry.

At the Sept. 27 hearing, the House Judiciary Committee will broadly focus on what the Supreme Court ruling means but may also entertain ideas for federal sports betting regulation. So far, the only proposed framework for federal sports betting regulations comes from Sen. Chuck Schumer, D-N.Y. Like those who originally argued for the sports betting “ban,” Schumer argues federal interference in sports betting is necessary to protect sporting events from criminals who might try to corrupt the games and profit by wagering on fixed outcomes. However, the plan details make it clear the motivation for regulating sports betting is less about safeguarding consumers or markets than about protectionism and rent-seeking.

Even before the Supreme Court ruling, stakeholders knew the end was near for the federal sports gambling ban. As far back as January 2017, the major U.S. sports leagues began lobbying state lawmakers to ensure that, were sports betting legalized, the rules would guarantee the leagues a cut of the gambling profits. A key part of the leagues’ plan was an “integrity fee,” a requirement that bet makers pay the leagues 1 percent of all bets wagered on their games. That might sound like a pittance, but the fee would actually amount to about 20 percent of gambling operators' profits since they only keep a portion of the money wagered, paying out the rest to winners.

State legislators have uniformly rejected the leagues’ demand for integrity fees, likely understanding that doing so would limit the nascent legal gambling industry’s ability to attract customers and generate tax revenue for states.

But, while they failed to convince state lawmakers to take up their cause, the leagues seem to have had better luck with Congress. Though Schumer’s plan doesn’t mention “integrity fees,” it would grant leagues something even more powerful and lucrative: a price monopoly.

In addition to age restrictions, protections for problem gamblers, and rules to prevent criminal behavior, Schumer’s framework would require gambling operators to rely exclusively on “league data” to determine the outcome of bets. What this means is that the gambling operators would be prevented from using third-party sources of information about games (even public sources) and forced to buy the data needed to make bets from the leagues. In other words, Schumer’s proposal gifts the leagues a data monopoly, allowing the leagues to charge as much as they want for their data.

Data about game outcomes is widely and publicly available through many sources (e.g. sports broadcasting), but the lifeblood of sports betting is in-play betting: wagers on “events” that occur during game play, such as how, when, and where goals are scored, who assisted in goals, etc. This makes providing data about in-game activities a highly valuable service. In Europe, third-party data companies compete to sell such data to sportsbooks on the basis of price, speed, and accuracy. Schumer’s proposed framework, however, would eliminate that 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 that, giving the leagues a data monopoly also allows them to decide what types of bets gambling companies can even make because they can simply withhold data if they don’t want certain bets made. This would give the leagues an extraordinary advantage over the gambling industry when negotiating all manner of contracts.

Schumer’s proposal would certainly be a windfall for the leagues (all of which are headquartered in Schumer’s home state), but would do nothing to safeguard consumers or the integrity of sporting events. The opposite, actually.

Match-fixing is more likely to occur when betting markets are illegal because illegal markets have less oversight. So, it is easier for criminals to hide their behavior and profit in unregulated markets. And, the more the criminals profit by illegal gambling, the more money and incentive they have to attempt to corrupt players and officials. Congress set the stage for this exact scenario in the U.S. when it barred states from regulating sports betting, giving consumers no other option but the black market, which grew in size to meet demand. Now, they are considering proposals that will make it harder, if not impossible, for legal gambling operators to offer the same types of games, odds, and payouts as the illegal market, ensuring that customers continue to spend their money illegally.

One can debate the merits of the specific laws that might govern sports gambling, but it is difficult to argue Congress would be more effective at regulating the industry than the states. For 25 years, Congress refused to admit that its prohibition was failing and that it had actually spurred the creation of an enormous black market. State legislatures, however, needed only a handful of months to respond to the changing landscape, listen to stakeholder demands, and execute the will of their constituents.

While the states might fumble as they develop new regulatory regimes over sports betting, at least they have the ability to revisit and amend ineffective laws. If we allow Congress to again set the rules that govern sports gambling, we will be stuck with those rules and their unintended consequences for decades to come.

Originally published at Washington Examiner.