Who’s Afraid of Online Gambling?

DraftKings logo (PRNewsFoto/DraftKings, Inc.)

It’s been a tough 72 hours for the fantasy sports world.

On Tuesday, reports about insider trading at popular online gambling daily fantasy sports sites, once confined to message board rumor mills and insider blogs, finally broke through to the mainstream press in a tough New York Times feature on the industry. The report found employees at the two largest daily fantasy sports sites, DraftKings and FanDuel, were winning copious amounts of money by playing games on the sites of competitors. ESPN later reported that DraftKings employees have won “less than $10 million” by playing daily fantasy sports at other sites.

The New York Times and subsequent ESPN reporting prompted DraftKings to pull their relentless advertising from the Worldwide Leader. Additionally, ESPN ceased running sponsored fantasy sports segments on all of their programming.

To top it all off, the New York Attorney General Eric Schneiderman announced a new inquiry into the practices of the two companies.

By Wednesday it was clear the two sites, Boston-based DraftKings and New York-based FanDuel, were in damage control mode.

The two companies took to the media to reassure players and more importantly, regulators eager to bring the hammer down on things they don’t like, that they are taking the proper steps to make sure this never happens again. In separate appearances, the two fantasy sports behemoths announced they are permanently banning employees from playing fantasy sports for cash prizes on other sites. This is a change from their comments on Tuesday where they said the bans would be temporary in nature.

They also announced that they reviewed any  possible wrongdoing with the help of the Fantasy Sports Trade Association, an industry group that includes DraftKings and FanDuel employees on its board of directors. The review, unsurprisingly, found everything to be hunky dory. Not sure that will placate the angry chattering classes calling for the sites to be reigned in. But you do you, daily fantasy sports world.

Fantasy sports are a lot of fun but these recent incidents have cast a storm cloud over the entire industry, particularly the daily fantasy sports games that have exploded in popularity in recent years. This cloud of suspicion would not exist, of course, if the federal government did not wipe out online gambling in 2006 with the hasty passage of the Unlawful Internet Gambling Enforcement Act. Instead of creating an easily regulatable and transparent marketplace for players, Congress created a complex underground labyrinth for them to jump through in order to gamble from the peace of their own home.

Sites like DraftKings and FanDuel operate in the garbage gambling law‘s carve-out that classifies their online products as games of skill not games of chance like poker or blackjack. For whatever reason, the government treats betting on individual player performance differently from betting on teams or playing poker, activities that require a hefty amount of skill and knowledge to enjoy without going broke. Sports leagues that have historically claimed they hate gambling have jumped at the chance to tie their wagons to this booming industry.

DraftKings and FanDuel are thriving within the poorly designed parameters they’ve been presented with but now it appears their inability to properly police themselves will jeopardize what’s left of the online gambling world in the United States. These missteps have regulators and their compatriots in the chattering class chomping at the bit to Do Something! about daily fantasy sports. This clamoring for Action! could lead to a ban on regular sports wagering and online poker.

Or, the opposite could happen and this bumpy experience will lead to a great liberalization of online gambling laws. Gone are the days of Jimmy The Greek, when gambling was seen as an unsavory practice that only degenerates and thugs engaged in. Gambling has become an acceptable activity that adults engage in frequently at home, at work, and at casinos that more than a third of Americans have easy access to. Efforts to prohibit gambling, especially on sports, have failed miserably. The vast majority of sports wagering in the United States is conducted on the black market, not at authorized sports books.

Some regulators, like New Jersey Rep. Frank Pallone, Jr., recognize that the federal government’s war on sports gambling has been a major failure, just like its other wars on nouns. Pallone has called for a national loosening of sports wagering restrictions and, to his credit, a regulatory framework for fantasy sports. Meanwhile in Massachusetts, Attorney General Maura Healey, a strong opponent of casinos, indicated on Wednesday she has no interest in shutting down the fledgling internet operations.

“Daily fantasy sports is a new and rapidly growing industry, and my office has been reviewing the practices of these companies to better understand how they operate. Neither federal law nor Massachusetts state statutes prohibit fantasy gaming. My focus is on ensuring that there are proper consumer protections in place,” said Healey in a statement.

It’s still too early to tell if regulators are truly interested in actually protecting the public, or making sure the government gets its cut of the action, like Schneiderman in New York.

There’s nothing wrong with online gambling or daily fantasy sports but the problems DraftKings and FanDuel are now experiencing are the fault of nanny state regulators who do not understand how markets work. Government attempts to stamp out gambling always fail and any effort to squash this version of it will fail, too. This is a great opportunity to rethink how we approach and regulate not just online gambling but gambling in general.