Federal loopholes may have opened the door for sports betting alternatives that skirt Texas’ gambling ban

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With football season ramping up, various social media sites have seen a swarm of new advertisements urging users to download various apps that would allow them to win big on the outcomes of upcoming sporting events.

Some ads make an even more enticing claim to potential Texas bettors: that placing money on the games is newly legal. One ad from prediction market app Polymarket states that football trading is “now legal” in Texas. Other ads imply there are workarounds to the state's strict gambling ban.

“I found a way to bet on the NFL even though we live in Texas,” reads a simulated text in one Instagram ad from prediction market app Kalshi.

Through prediction markets and daily fantasy sports, also known as DFS, Texans have more access than ever to win — or lose — money based on the outcome of sporting events. And it can be done without leaving the state, where betting on contests or games is both illegal and a sticking point among state officials.

Despite the ads’ claims, no new state or federal laws related to gambling regulation passed this year, except for a restriction on online lottery ticket couriers. Repeated efforts in the Texas Legislature to legalize sports betting, casinos and DFS have all faltered, leaving the games unregulated and unclear on these digital alternatives beyond a nearly decade-old nonbinding opinion from Attorney General Ken Paxton.

The lack of legal movement has not stopped online sites from giving Texas players alternatives to sports betting from exploding in availability. The two new ways of playing lean on federal regulations rather than state law to provide their services to players. Executives from DFS and prediction market businesses have pushed back on being linked to sports betting, claiming their peer-to-peer services are skill-based or federally regulated financial transactions, respectively.

While other states have taken aggressive legal action to counter the businesses’ spread, Texas has done little to deter their growth, despite targeting other online gaming services earlier in the year. Supporters said that illegal gambling has become widespread — and that these new alternatives are safer and more responsible options for a market lawmakers seemingly ignore.

“I think potentially something here that people are underrating is that in states like Texas or California, where sports betting is illegal under state law, most people will just go to an offshore book instead,” said Jack Such, head of media operations for Kalshi. “It's not like sports betting is really inaccessible. There are tons of platforms.”

Both DFS and prediction market businesses make their money through transaction fees, and players bet against each other, rather than betting against operators like traditional sportsbooks or casinos. The separation provides an extra layer of insulation, but it has not stopped the services from being widely understood to supplant sports betting, despite the denial from operators.

Gregory Gemignani, a gaming law lawyer and professor at the University of Nevada, Las Vegas, said the alternatives are “pretty much identical” to sports betting and blend elements of their respective origins — futures trading and old-school fantasy sports — with classic gambling structure.

“Taking things that we already have and just combining them, I don't think, is all that novel,” Gemignani said. “It just wasn't done before because most people saw it, especially in the industry, as another form of a sports bet, which has limitations on transmission across state lines — which would make the activity pretty unattractive.”

Yes or No gambling

Prediction markets surged in popularity in the past year, when two companies’ betting odds on the 2024 U.S. presidential race were repeatedly cited as better indicators of public opinion than traditional polling. The online sites and apps simulate bets by offering players “event contracts” that represent betting odds on anything from sports to election results, similar to buying stocks in a company. The framework allows prediction market businesses to be regulated by the federal Commodity Futures Trading Commission rather than gaming regulators.

Most bets on prediction markets’ sites are choices between “yes” or “no" on anything from the Houston Texans beating the Tampa Bay Buccaneers to whether Paxton will be the 2026 Republican Senate nominee. Kalshi CEO Tarek Mansour said in a social media post that the company had over $441 million in trade volume in the four days after the National Football League began its season.

Several ads from Kalshi specifically refer to its services as sports betting available in Texas, but Such said the phrase is “semantics” rather than an indication of legal standing.

“Bet, trade, invest, gamble, they all mean take risk for the ability to profit, in some sense,” Such said. “[A] more popular phrase sounds a little cleaner, maybe, than sports trading or sports investing, that's why we went with it. But you know, the functional differences between us and actual sports betting platforms still remain.”

Several states have sent Kalshi cease and desist letters alleging the company is illegally offering sports betting without following state law, and some states have gone as far as suing the company in federal court.

Gemignani noted that gambling restrictions have traditionally been left for states to enforce, and that sportsbooks have been relegated to in-state operations to avoid interstate trading penalties. Prediction markets’ reliance on the federal agency to avoid triggering state-level sports betting bans or regulations puts Texas’ ability to enforce its gambling laws in an unprecedented space, he said.

“The federal government doesn't really prohibit a whole lot of gambling, unless a state does,” Gemignani said. “It will prohibit some interstate wagering, like it prohibits interstate wagering on sporting events, so it'll be interesting to see how the federal Wire Act pairs up with this.”

Skill-based loophole

Where prediction markets are framed around yes or no outcomes, DFS games allow players to put money down on hand-picked teams of at least two athletes and place wagers on their performance. Traditional fantasy sports contests usually span weekslong seasons, but DFS games occur in the span of a day, creating a faster-paced opportunity to win money. The key difference, operators note, is that there is no sportsbook — players bet against each other.

DFS businesses have been more conservative in their marketing, but the idea for the games was explicitly born from a legal loophole. As Nigel Eccles, founder of the gambling operation FanDuel, was en route to Austin’s annual South by Southwest festival in 2009, he mulled over the federal Unlawful Internet Gaming Enforcement Act that banned online gambling, according to the Washington Post. The law gave certain exemptions for traditional fantasy sports, including mandating the peer-to-peer competition, predetermined prizes and a two-athlete wager minimum, which Eccles used as a framework for the DFS model.

Some DFS operators have recently dabbled in operating games where players can bet against the house, blurring the differences between traditional sports betting and their online offerings even further. PrizePicks, one of the largest DFS businesses in the U.S., offered its against-the-house “Pick ‘Em” game in several states including Texas until August, before abruptly switching to only offering its peer-to-peer “Arena” game. PrizePicks did not respond to a request for comment on the switch.

Several state attorneys general, including Paxton, have issued legal opinions claiming even peer-to-peer DFS games constituted online gambling. Paxton’s nonbinding opinion in 2016 declaring DFS games an illegal form of gambling initially stifled the businesses from operating, but the attorney general’s office has seemingly done little to enforce its interpretation of the law. Gemignani said the lax attitude provided a way for the sports betting alternatives to gain a foothold.

“You have the state's highest law enforcement body saying that fantasy sports is illegal, but apparently there's been actually no apparent enforcement that I'm aware of out of Texas,” Gemignani said. “And you know, if you're not going to enforce the laws, then people are going to ignore them.”

Paxton’s office did not respond to a request for comment. Other states have codified recognitions that the services are games of skill, not sports betting, which DFS companies point to as a sign of legitimacy.

“Notably, the overwhelming body of law from 24 states and Congress affirms that fantasy sports contests are legal games of skill,” DraftKings, an international gambling company which also provides DFS games in the state, said in a statement to The Texas Tribune. “We remain committed to engaging constructively with all relevant stakeholders, including the Office of the Attorney General.”

All bets off on enforcement and regulation

The lack of enforcement from state officials is a sharp contrast from Texas lawmakers’ latest actions on gaming. In May, the Texas Legislature banned online sales of lottery tickets through apps known as lottery couriers as part of a sweeping reform of the Texas Lottery, arguing that they had operated in a legally gray loophole.

The Texas Lottery Commission was also scrapped by legislators in the process, officially abolished in September as the Texas Department of Licensing and Regulation took over lottery operations. The lottery commission’s last executive director, Ryan Mindell, resigned from the agency in April, and in July, he began working at FanDuel as their government relations director.

FanDuel, which operates sportsbooks out of state, as well as DFS games in Texas, announced in August it would be offering its own prediction market contracts by the end of the year. FanDuel declined a request for comment.

Several bills aiming to regulate sports betting or fantasy sports over the years proposed the lottery commission handle oversight for the games, but few gained traction. Two bills aiming to provide a framework for DFS games to operate in Texas were filed in the regular session by Rep. Jared Patterson, R-Frisco, and Sen. César Blanco, D-El Paso, but were not heard.

“For years, hundreds of thousands of Texans have passionately enjoyed playing in fantasy sports contests,” Blanco said in a statement to the Tribune about Senate Bill 2752, which would have allowed the lottery commission to regulate DFS games. “However, in Texas, the current law is often misinterpreted, creating uncertainty around this type of sports entertainment.”

Blanco also said regulation of DFS in Texas would help deter Texans from seeking illicit gambling opportunities through offshore sportsbooks without age restrictions or oversight. Rep. Jeff Leach, R-Allen, echoed similar concerns in 2023 when a resolution he authored to amend the state Constitution to legalize online sports betting passed the Texas House with a two-thirds vote.

The resolution died in the Senate, led by Lt. Gov. Dan Patrick, who has long maintained that no gambling measures would pass in the state while he is in office. Patrick also led the charge against lottery couriers earlier in the year, labeling them as illegal businesses amid uncertainty about their ability to operate in the state.

Without state action or laws guiding DFS games and the applicability of state laws still uncertain on prediction markets, the score of sports betting alternatives will remain available to Texans for the foreseeable future. But Geminagni said a win for prediction markets in court may spur U.S. representatives from states that ban or regulate gambling to find ways to allow states more control over the services.

“If it turns out that the prediction market folks are right, watch what happens in Congress,” Gemignani said. “I think you're going to see 76 senators getting calls from constituents and state government officials saying, ‘Hey, put an end to this. When we wanted futures [trading] regulated at the federal level and taken away from being excluded from gambling, we weren't talking about excluding gambling from gambling.’”

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