Why Sportsbooks Need Regulators Instead Of Industry Norms

The Tar Heel State is inching closer to regulating online sports betting. If the state Senate approves House Bill 347, then Gov. Roy Cooper is expected to sign North Carolina online sports betting into law. After that, the North Carolina state lottery will regulate the state’s new non-tribal form of gambling. Those regulators will have to promulgate rules to govern online sportsbooks.

After launching in over 30 other states, online sportsbook companies can operate competent businesses. If HB 347 passes, North Carolina will legalize its first non-tribal and its first online gambling products. Large commercial companies, such as DraftKings and FanDuel, are more experienced with online sports betting than North Carolina’s regulators.

However, these sportsbooks still need guardrails. According to Brooklyn Law School professor William Araiza, a company impacts the world around it. Sometimes those companies affect public goods and without regulation, “that public good may go unaddressed if there is not some governmental or other entity that is watching over, literally regulate, what the private entity does.”

Consumers aren’t the only ones who are worse off without protections for public goods. Companies are worse off without a level playing field that legitimizes their industry.

How regulators benefit companies

In the 1950s, the federal government’s attention was turning to mob-run Las Vegas. US Sen. Estes Kefauver’s hearings brought new attention to the money flowing through Vegas casinos, politicians and mobsters. The Nevada Gaming Control Board was founded in 1955 to create a legitimate gambling industry.

“The [Nevada] Gaming Control Board was picking up the trash and … the whole point was to keep the Feds out,” said Richard Schuetz, a former gambling regulator. “The Feds would have taxed it into oblivion. … So [regulators] legitimized the industry by creating a regulatory structure. They built a moat around [the industry].”

The Nevada Gaming Control Board set the stage for private ownership of Vegas casinos in the 1960s. With federal scrutiny on mob-run businesses and a new regulator to legitimize a private casino industry sans mob, Vegas was able to move away from mob control and become a legitimate hotbed of tourism.

Today, online sportsbooks are protected by their own moat. Operating under different regulations in each state has granted the industry protection from offshore sportsbook scandals. The next time an offshore sportsbook refuses to pay winnings or leaves its customers’ bank accounts vulnerable to hacking and theft, licensed sportsbooks will be insulated from the worst of the backlash.

“It just takes one scandal to screw things up,” Schuetz said. “One bad actor. So what you want is a well-regulated industry, and you want to be inside the moat.”

What sets a smart regulation apart?

Regulations can’t protect consumers or companies if they’re ridiculous. They have to address some harm caused by a company’s operations. Regulations also have to be proportional to the proposed harm and balance an industry’s ability to accommodate the new restriction.

“There is no leaded gasoline anymore because the EPA promulgated a [regulation] that said no more lead in gasoline,” Araiza said. “How important was leaded gasoline? Turned out to not be that important. Companies developed engines that used unleaded gas and everyone went on their merry way.”

In the online gambling industry, regulations concerning bonus language have transformed since the industry’s legal inception. Beginning in 2018, online sportsbooks advertised risk-free bets that required bettors to risk their own money before earning bonus credits that couldn’t be withdrawn like cash. It took 33 states to legalize sports betting before Ohio prohibited risk-free bet language that was used for bonuses that required customer risk.

Risk-free bets were on their way out before Ohio’s regulatory action, but Ohio regulators’ actions against the improper use of “risk-free” eliminated a misleading marketing term. It could’ve been reactivating recovering problem gamblers. When advertised on college campuses, it could encourage bettors old enough to have debit cards but too young to sign up for licensed sportsbooks to register at offshore sites.

Ohio’s elimination of improper risk-free language was a net good for the industry and for consumers. Unfortunately, not all gambling regulations have caught up with the times like Ohio’s market restrictions.

Outdated regulations

While Ohio made an intelligent restriction in the sports betting industry, there’s still regulatory waste for state officials to eliminate.

One of the steps in acquiring a gambling license is for all the key employees to fill out a personal history form. This is meant to ensure that white-collar criminals don’t begin second careers as sportsbook or casino owners. The financial and criminal history sections of these disclosures accomplish this important task.

However, personal history disclosure forms also include this question:

“Do You Have Any Scars, Tat[t]oos Or Other Distinguishing Marks And/Or Characteristics? If So, Please Describe.”

Schultz posits that this is a holdover from when gambling regulators hired police officers who rely on similar lines of questioning to identify criminals. However, the days of scarred mobsters and tatted bookies running gambling operations are over. Regulators don’t need distinguishing marks when executives enter personal information, 15 years of residential information and lists of previous aliases, if any.

New Jersey’s multi-jurisdictional personal history disclosure form still asks for scars, tattoos or other distinguishing marks. Schuetz has written about the absurdities of that question for gambling executives.

“How many executives list their circumcision, and who’s auditing that,” Schuetz said. “Why is it necessary for [a female applicant] to explain that she had a caesarian section scar? Why is an ear piercing [disclosure] necessary?”

Colorado not only asks the same question on its multi-jurisdictional personal history form. It uses New Jersey’s same 66-page form. As of this writing, the name of the PDF on Colorado’s website is “STATE OF NEW JERSEY,” showing the influence that an early and thriving gambling market such as New Jersey has on subsequent markets.

At this pace of regulatory innovation, it’s no wonder that it took 33 launches for a state crackdown on misleading “risk-free bets.”

Experts in charge of regulations?

Expertise is vital in any regulatory organization. It can ensure an industry has protections in place for its sake and its customers. Experts can also eliminate regulations that reveal executives’ c-section scars and septum piercings, but fail to provide insight into a company’s liquidity.

However, evaluating expertise often requires expertise. Non-experts can’t drill experts on minute policy details. Without knowing the research that informs different decisions, non-experts can evaluate whether expertise is able to be used freely at a regulatory agency.

Araiza offered the example of the United States’ COVID-19 response. It was better than many third-world countries but worse than virtually every developed one. “That’s not because the CDC didn’t have good people,” Araiza said. “They had great people, but there was political leadership that was not allowing that expertise to be fully utilized.”

Gambling regulations lack the public scrutiny of COVID-19 policies. However, the same principle of analyzing the organizational processes applies.

Poor regulatory structure

A 2022 state audit found that the first year of the Colorado Division of Gaming’s sportsbook license investigations were lacking.

During the first year of sports betting, all but four of the 39 sports betting licenses were temporary. Temporary licenses have a lower standard for investigation than permanent licenses. The division couldn’t meet the minimum requirements of their own lowered standards.

One reason was because the division experienced staffing issues. Colorado sports betting was approved by voters in November 2019 and launched in May 2020. Regulators had only five months to prepare division staff, investigations and rulemaking. When the COVID-19 lockdowns began, the division had a hiring freeze. Combined with existing staff turnover, “work conducted by one investigator for a temporary license [would] likely be completed by another investigator.”

With only three investigators and one supervisor in fiscal year 2021, expertise couldn’t be effectively channelled. There were too few investigators to complete 35 temporary license and four permanent license investigations effectively. Colorado’s regulatory experts didn’t have the time or resources to ensure all concerns were met. The Colorado Division of Gaming was not structured to bring the best out of its smartest people.

Strong Regulatory Structure

In contrast, the Massachusetts Gaming Commission (MGC) has its meetings with industry stakeholders and experts publicly available to watch on the commission’s website. Residents can see how commissioners are making their decisions and what’s going into them.

Other industry experts have also praised Massachusetts regulators.

Keith Whyte, executive director of the National Council on Problem Gambling, believes in Massachusetts’ regulators’ willingness to research gaps in their knowledge to form better policies. Schuetz has been “generally impressed” with Massachusetts regulators overall. Marlene Warner, CEO of the Massachusetts Council on Gaming and Health, sees the questions the MGC has asked of applicants that have secured licenses elsewhere without launching apps encouraging, too.

The MGC does a good job of letting expert opinion inform its regulatory decisions. Public hearings include hours of testimony from industry stakeholders and other experts who play a role in shaping public policy. Political figures don’t get in the way of expertise, so expertise informs laws instead of bruising egos.

Expertise is difficult to evaluate on substance, but judging whether expert opinion is overridden or cast aside is much

How to improve trust in regulations

Even if non-experts find the regulatory process satisfactory, the pro-regulation crowd faces an uphill battle. A 2022 Gallup poll found that American confidence in government institutions hit a record low. Only 27% of surveyed Americans had a great deal or quite a lot of confidence in the institutions Gallup surveyed them about in 2022.

The modern conservative movement launched by Ronald Reagan’s presidency is based on the premise that government interference is bad on principle. That belief took hold at a time when Gallup’s confidence in institutions figure was in the mid to high 40s. Today, that belief has a far more receptive audience.

One of Araiza’s proposed solutions is involving average Americans at the level of detail they can meaningfully contribute. For a gambling regulator, that could include polling new sports betting customers about the issues most important to them. Regulators can offer a set of issues to choose from since they’ll know what needs to be done next anyway.

Araiza also offered the example of an interactive loan document the Consumer Financial Protection Board uploaded on its website. Regular people could give feedback on mortgage forms proposed regulation could’ve changed. They gave feedback on different provisions that would or wouldn’t help them take a loan.

But above all, “nothing succeeds like success,” Araiza said. “Then slowly, maybe the American people start to think, ‘Oh yeah. This is a system that we can trust. This is a system that we can participate in. This is a system we should fund.’ ”

If the North Carolina sports betting bill passes, regulators will be busy developing a regulatory framework that incorporates the best practices from other states and eliminates outdated requirements, however unlikely that may be.

Additionally, one of North Carolina gambling regulators’ biggest projects will be inspiring trust from the bettors using the state’s new online sportsbooks. Building that trust will take time, and neglecting proper regulatory practice will undermine the state regulator’s ability to inspire that trust.

Update: Legal online sportsbooks are scheduled to launch in North Carolina in 2024. Visit our exclusive bonuses page to compare all the latest NC sportsbook promos for May 2024.

About the Author

Chris Gerlacher

Christopher Gerlacher is a contributor for NC Sharp. He is a versatile and experienced writer with an impressive portfolio who has range from political and legislative pieces to sports and sports betting. He's a devout Broncos fan, for better or for worse, living in the foothills of Arvada, Colorado.