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Daily fantasy sports – baptising a new Unicorn

In the case of DFS tournaments, outcomes are not determined by chance, but are rather achieved through a player’s skill or ability, requiring a physical or mental ability and a learned capacity to carry out a result

george_mangion
George M. Mangion
3 February 2017, 2:27pm
Last year saw a legal notice in Malta which facilitates the recognition of fantasy skill games
Last year saw a legal notice in Malta which facilitates the recognition of fantasy skill games
It started in 2004 when Malta saw the promulgation of online gambling licences and since then there has been a steady growth in the industry, albeit little or no change in the regulations. Sadly, it was in 2006 when online gambling was decreed illegal in the USA by President George W. Bush and this single law has since exterminated the unstoppable online poker industry in the USA.

Since this enactment, the growth of poker, which fuelled the rise of so many transatlantic operators, started to fade. Observers hoped that with the proliferation of social media, the improved speed of the internet and cheap smartphones this technology would blazon the path for another Renaissance overshadowing the stricken US poker king.

Back in Europe, since the mid-twenties, there has been a gradual change of heart as some of the member states which previously banned online gambling (to protect their own monopolies) have started offering licences, albeit at a high tax rate. Betting companies licensed in Malta argued that if an operator is legally licensed and fully regulated in one member state (say Malta) then using the logic of the freedom of services, there should be no restrictions to provide services in other EU countries. Still, access was denied by countries such as France, Spain, Italy and Germany, which opted to protect their own domestic gambling empires (mainly horse racing, lotteries and land based casinos).

Following pressure from the European Commission (starting with the Gambelli ECJ court ruling) such countries allowed entry into their markets to accredited foreign operators – some at a high application fee. This means that operators licensed in Malta paying local gaming tax will also need to apply for a foreign licence and pay extra gaming (not corporate) tax in the country where their foreign players are domiciled. Changes in VAT regulations also made it obligatory to charge VAT on bets for players residing in countries where it is not exempt. This again, has added another overhead cost to local operators wishing to provide trans-border business. Nevertheless, the industry in Malta is regarded as a major hub in Europe. It did not let grass grow under its feet and a number of studies were commissioned to Big Four audit firms and other experts to pave the way for innovation. 

Two years ago, over €2 million in consultancies were invested by the Malta Gaming Authority (MGA) to spawn the Unicorn that will lead the nascent industry to greener pastures. The new-born Unicorn is christened as the protégé of skill-based gaming. This is a clever variant to classic board games untainted by the spicy flavour of major gambling tournaments.

Really and truly it offers participants a chance to compete based on one’s ability. Today, games of skill are available on most major media sites like AOL, MSN, and Yahoo, and are complemented by an emerging electronic sports industry that lets professional gamers compete in popular video games with real money at stake. In this regard, the local “Skill Games Regulations” have been notified to the European Commission as part of the process for the Gaming Authority to roll out its licensing framework and start to regulate such skill-based games, including fantasy sports.

Last year saw a legal notice in Malta which facilitates the recognition of fantasy skill games. The Minister for Competitiveness and Digital, Maritime and Services Economy, approved Legal Notice 271 of 2016, entitled the Fantasy Sports (Exemption) Regulations (S.L. 438.10), exempting fantasy sports from the requirement of a gambling licence issued in terms of the Lotteries and Other Games Act (Chapter 438 of the Laws of Malta) or the Remote Gaming Regulations (S.L. 438.04).

This initiative has borne fruit and last year we saw the first major DFS company apply to relocate its business in Malta. Typically, Oulala is a French company based in Malta since France does not yet shelter any major DFS providers but may soon join in the fray. It is already licensed by the UK Gambling Commission and last year struck another deal with the Cardinal House Group to expand into the Australasian and Indian subcontinent markets.

In the meantime, Oulala has struck a deal with Game Interaction Group Ltd., to introduce its model in the Italian regulated market. The latter provides a modular gaming platform which has already been certified in Italy. Quoting Francesco Arena, CEO of Game Interaction Group, he commented that DFS is taking off in Europe so we’re looking forward to offering something new to our clients, besides what we already offer within our existing platform.

Quoting MaltaToday, it announced this week that Draftkings has been granted a controlled skill games licence that will allow it to operate in Malta and other European Union states. Its users can place bets on fantasy sports related activities, potentially winning money based on their ability to predict professional sports results. Uniquely, the game is considered a game of skill, rather than chance.

Jeffrey Haas, the company’s chief international officer, said there is some controversy in the US regarding whether the company’s activities constitute gambling. The company strongly argues that the game is purely based on skill. It is good to note that recently, the company reached an agreement to merge with FanDuel, making it the largest company in the daily fantasy sports industry, with a combined five million users.

Here one may ask: what are the chances that DFS are allowed to penetrate the vast pool of players in the USA – a primary market. The answer is that already eight states in the US allow such skill games but for example not in Nevada. Last year, daily fantasy sports was approved in New York when Governor Cuomo signed into law a bill that said it did not matter that the popular pastime walks, talks and smells like good old-fashioned sports betting – it really is a game of skill and merely a form of entertainment.

However, it’s extremely unlikely that any new operator will be granted a licence in Nevada because of the legal implications of being termed “gambling” in a US jurisdiction. In Nevada, it is the casino industry lobby which appears unwilling to allow DFS to enjoy a lower barrier to entry, meaning less regulation and taxation.

This raises the question – are DFS tournaments gambling? The industry argues that cash-based tournaments in games of skill are not considered gambling because the generally accepted definition of gambling involves three specific things: (1) the award of a prize, (2) paid-in consideration (meaning entrants pay to compete) and (3) an outcome determined on the basis of chance. Without all three of these elements, a cash competition is not classified as gambling.

In the case of DFS tournaments, outcomes are not determined by chance, but are rather achieved through a player’s skill or ability, requiring a physical or mental ability and a learned capacity to carry out a result. These games commonly include the use of strategy, tactic, physical coordination, strength, technical expertise, or knowledge. By contrast, games requiring skill like poker, blackjack, etc are games with an outcome strongly influenced by random chance or uncertainty, making use of randomization devices such as dice, playing cards, or an inbuilt random number generator. To conclude, the race is on for the new-born Unicorn (soon to enjoy superior 5G technology) to trail blaze a bright future for fantasy games following a gradual opening in the US market. 

George Mangion is a senior partner of PKF, an audit and consultancy firm, and may be contacted at [email protected] or on +356 21493041.

george_mangion
George Mangion is a partner in PKF, an audit and business advisory firm
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