Billion-dollar sports gambling startups Draft Kings and FanDuel are legal because of a questionable loophole in the law

As football season kicks off and fans flock to join fantasy leagues, many are stumbling on a new way to gamble online that’s surprisingly legal.

Draft Kings is a daily fantasy sports site that allows users to bet real money on their teams, and it has raised a pile of money from venture capitalists at a valuation that exceeds $US1 billion. Its competitor FanDuel is also worth more than $US1 billion.

How is it possible that these startups are legal when sports gambling is illegal in states outside of Nevada, Delaware, Montana, and Oregon?

It’s because fantasy sports is considered a “game of skill.”

In 2006, the federal government passed a law called the Unlawful Internet Gambling Enforcement Act that established fantasy sports as a “game of skill” and not a “game of chance.” The law states that it’s legal if it:

  • (I) is not dependent solely on the outcome of any single sporting event or non-participant’s singular individual performance in any single sporting event;
  • (II) has an outcome that reflects the relative knowledge of the participants, or their skill at physical reaction or physical manipulation (but not chance), and, in the case of a fantasy or simulation sports game, has an outcome that is determined predominantly by accumulated statistical results of sporting events, including any non-participant’s individual performances in such sports events

In fantasy sports, users put together their own teams based on real-life players. The outcome of the game is determined by how each player performs, accumulating points based on real-game performances.

So unlike regular sports gambling, where you purely bet on the outcome of games, the law is classifying fantasy sports as a form of game where actual skills matter to win.

That’s a debatable idea. But regardless of which side you sit on, daily fantasy sports sites are completely legal under current laws — and will continue to flourish, racking up hundreds of millions of dollars in revenue. FanDuel reportedly generates nearly twice that of DraftKings. It brought in about $US57 million in 2014 by taking a small percentage of the betters’ entrance fees. Both companies spend a lot of money on advertising though and aren’t profitable.

Here’s how Draft Kings explains its legality on its website:

“The legality of daily fantasy sports is the same as that of season long fantasy sports. In 2006, the US Federal Government passed a law called the Unlawful Internet Gaming Enforcement Act (or UIGEA), which was designed to prevent gambling over the internet. The law included a carve out that clarified the legality of all fantasy sports…Daily fantasy sports is a skill game and is not considered gambling.”

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