According to the Unlawful Internet Gambling Enforcement Act of 2006, Congress specifically allowed fantasy sports to operate under federal law because they come under the category of games of skill rather than chance. The only caveat to this act is that players may not bet on the outcome of a single game or the performance of a single player.
But fantasy sports are prohibited in five American states, which includes Arizona, Iowa, Louisiana, Montana, and Washington. However, the Fantasy Sports Trade Association is lobbying to change the laws in those states.
Traditional fantasy sports are legal under the Internet Gambling Prohibition and Enforcement Act of 2006. The Act contained a carve-out which specifically differentiated fantasy sports from online gambling or sports betting.
The rationale behind fantasy sports was always about playing with your friends, not to wager money. Even if wagering money was the case, you would not know whether you lost or won the wager until the end of the season (which is six-months). In gambling, whether it is traditional or online, you tend to lose money in a matter of hours or minutes.
Moreover, there was not much luck involved with fantasy sports because the results were spread out over a season. While a player might have one unlucky game, they could always bounce back the next week to make up for it.
The law of large number states that over a particular period of time, like a 162-game MLB season, the elements of luck get averaged out. With that in mind, fantasy sports were thought of like a game of skills, because at the end, it was not about luck, it was about whom you drafted.
Later on, with the release of daily fantasy sports, it only took a few hours of time for participants to win or lose money. The results were seemingly based more on luck than traditional fantasy sports.
The federal government is yet to pass ruling on daily fantasy sports. Therefore, it is entirely up to the states to decide how they wish to regulate it.
While states are the final authority, they do not know how to regulate it. Obviously, daily fantasy sports are a lot less like gambling but more close to full-on sports betting, which is legal only in Las Vegas. But it is a lot more like gambling than traditional betting, particularly because of the luck factor.
So what steps should the state take? For a while, they did not do anything. But in October 2015, things changed. The U.S. Justice Department and the FBI started an investigation into FanDuel and DraftKings to determine whether daily fantasy sports are actually gambling, which would be a violation under federal law. The companies responded by lawyering-up, and hiring lobbyists. They also prepared for a battle towards legalization. Their future depended on the investigation.
The state of New York and Nevada took the side of the FBI and banned the sport, making it out as a form of illegal gambling. However, other states like Illinois stepped forward to legalize fantasy sports.
The tide eventually turned and a few months later, New York passed a law legalizing daily fantasy sports. While it is not legal in all the 50 states, it does seem that the companies are progressing.
Currently, there is not much government intervention overseeing fantasy sports in the way gambling regulators are overseeing sports betting in the state of Nevada.
However, the scandal involvingDraftKings and FanDuel is a wakeup call for the government, who are now planning to oversee the industry instead of banning it outright.