On May 14, the United States Supreme Court struck down a federal law that prohibited states from legalizing betting on professional and collegiate sporting events, except in Nevada, the Professional and Amateur Sports Protection Act (PASPA). Annually, over $150 billion is wagered on sports in the U.S. esports leagues.
Without the PASPA in effect, game publishers, teams, businesses and fans are now all eager to create ecosystems for legal esports gambling. It is inevitable that legal esports gambling will provide a financial windfall for the industry and further move esports into mainstream American culture. By 2020, esports betting will become a $23 billion industry, generating over $1.8 billion annually in revenue, per the market research firm Eilers & Krejcik Gaming.
Obstacles to legalization
Esports faces significant hurdles before fans can legally place their bets. States must explicitly include esports in legalization legislation and create esports gambling regulatory bodies. To help ensure the integrity of esports, expect government regulators and game developers to focus on mitigating underage esports gambling, cybersecurity breaches and cheating in esports. Soon after such laws and regulation are in place, now-existing online sports gambling providers (e.g., DraftKings, which is expected to begin to offer such betting on the massively popular esports game Fortnight) will experience a wave of revenue from esports gambling. However, new competitors will emerge offering esports gambling, each fighting for its share of growing revenue.
The classification of esports in gambling legalization legislation can determine the legality, type of government oversight, and taxation of esports gambling. Nevada classifies esports as “other events,” which is intended to include other non-traditional events, such as the World Series of Poker. States must determine whether esports gambling is classified as a “sport” and treated the same way as major traditional sports leagues (e.g., the National Football League) or as an “other event,” with unique esport-specific regulations and gambling restrictions.
Some states may first legalize the more established esports leagues, such as the Overwatch League or League of Legends North American League Championship Series, before allowing widespread betting on esports. Regardless of the initial classification, the popularity of and potential tax revenues from legal esports gambling likely will drive forward-thinking states to explicitly include esports in their sports betting legislation.
States’ concerns about legalization
Other states may be hesitant to legalize esports gambling without restriction because of esports’ integrity problems, which include underage gambling, match-fixing, and use of performance enhancing drugs (PEDs). For example, New Jersey recently excluded esports from its sports gambling legalization legislation until esports leagues can prove that all participants are adults. According to the 2016 report by Newzoo, approximately 80 percent of global esports enthusiasts are aged 10-35, and about 27 percent are aged 10-20. This is a much younger demographic than most traditional sports, so expect a handful of states to implement esports-specific government regulations and require technological safeguards to mitigate underage esports gambling.
An option for online gambling businesses is to have an online age verification systems in place to accurately verify age while avoiding fraud, though such systems are not foolproof. Underage esports gambling can also be mitigated through responsible gambling education and monitoring by esports betting providers. For example, the Overwatch League requires players to be at least age 18. NA LCS boasts that nearly every player is 18 years old or older. Expect advances in online age-verification technology, spurred by the strong market demand for legal esports gambling, to make states, such as New Jersey, more comfortable with less restrictive legalization.
Match-fixing, hacking, and performance enhancing drugs threaten esports’ integrity and disincentive states from legalizing esports gambling. Game developers and esports league officials must educate players about the legal and non-legal risks of match-fixing, such as disqualification from tournaments, forfeiture of prize money, and lifetime bans. Leagues must also implement adequate cybersecurity measures to ensure that matches cannot be hacked. To prevent cheating from use of drugs that increase concentration (e.g., Adderall and Ritalin), leagues should enforce an anti-doping policies, including random drug tests and lifetime bans.
Regulation by industry or government
Such state or game-specific industry self-regulation, which is essential to the widespread legalization of esports gambling, requires a central governing body or effective self-regulation by individual esports leagues. The Esports Integrity Commission (ESIC) currently operates to regulate esports and prevent match-fixing, hacking, and the use of PEDs. The ESIC and betting providers, such as Unikrn, work together to detect irregular betting patterns that may signal match-fixing or other issues. A comprehensive regulatory body across all major esports games and states may not be practical because of the extreme diversity in current esports offerings. Expect state-specific regulation in conjunction with additional self-governance by individual game developers.
Increased availability to gamble on esports is evitable
High demand for game-specific legal esports gambling will spur new ways to gamble on esports as states legalize the industry and esports businesses and state governments create robust regulatory environments. With this will come new interest in esports from casual sports gamblers, further ushering esports into the mainstream and generating hundreds of millions of dollars in tax revenue for state governments and profit for early-to-market esports gambling businesses and industry leaders.
Aaron Swerdlow is an attorney representing sports (traditional and esports), corporate, and emerging technology entities.
Uriah Tagle, a recent graduate of the UCLA School of Law, provided research assistance.