Let’s start with some discussion from the Business of Betting Podcast, where Jason Trost of Smarkets and Davis Catlin mention the hurdle that regulation creates for new entrants to the gaming business.
Show: Business of Betting - Episode: E253 - Davis Catlin from Discerning Capital
Listen: Play from 11:39
"If you're just some guy sitting there couch, and you're thinking up how to make money, would you choose today to go to the regulated sports book route or would you go sweeps, Kalshi alternative, you name it, what would you do?
Yeah, the unregulated route, you know, I was fortunate when I started Smarkets, it's in 2008, 2009, 2010, it was still pretty early days and the regulation was very light touch and now it's like it's really heavy. I talked to a guy the other day that wanted to start a regulated betting exchange in the UK and I was just thinking of all the shit you would have to do for KYC AML, which literally did not exist 15 years ago."
Getting to just the right amount of regulation is probably a very difficult problem. Are there instances where regulations go too far? Sure. Are there also instances where laissez-faire approaches just don’t come close to being optimal? Sure.
There’s a regular cycle that plays out, which is:
It’s the wild west, anything goes.
A bunch of people get hurt, in part, by lack of oversight.
Policy makers enact a bunch of regulations for consumer protection.
The policy makers go too far.
Regulations get rolled back.
Go back to Step 2 and repeat indefinitely.
Especially in the case of gaming, it’s a business that is ripe to draw in folks who don’t have a better idea than “give away a bunch of free play and hope for the best… then… probably end up stiffing a bunch of customers on the way down the drain… and probably try to issue a memecoin while swirling that drain.”
Although, as to the role government should play in protecting consumers, the last week has been a pretty dark one in terms of holding out optimism that the end result will be good.
However, first allow me to return to the title of this post, which is Catch-22, a direct ripoff of the title of the Joseph Heller novel. In the novel, the Catch-22 is:
There was only one catch and that was Catch-22, which specified that a concern for one's own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn't, but if he was sane, he had to fly them. If he flew them, he was crazy and didn't have to; but if he didn't want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.
The reason that Catch-22 is great is because if you pay attention, you can see nearly all human institutions operating in states of perpetual illogical absurdity.
In the case of gaming regulations:
Even if we don’t want people to gamble, they’re going to do it anyway.
So we should legalize, enact some protections, and also collect some taxes along the way.
This will make the gaming operators very rich and they will spend their time coming up with new and more profitable ways to make money from gamblers that weren’t at all part of the original “they’re going to do it anyway” set of behaviors.
The rich operators will also be able to hire lobbyists and otherwise capture regulators.
What started as an acknowledgment that some people will gamble, so let’s not ignore reality, ends with operators as a protected class and entitled to make a profit.
The New Jersey legislature recently passed a bill which makes it illegal to engage in partnership betting. Partnership betting is the primary method that sharp groups use to bypass getting limited by the books. This is straight out of a sportsbook CEO’s wet dream.
In Wyoming, the gaming regulators actually took time to investigate claims that sharp bettors were getting limited. Their report on the matter sounds like it was written by the sportsbooks.
(Thanks to Captain Jack for helping me with various of the details in this post.)
Courtsiding is illegal in most places and can be enforced separately. The other actions aren’t cheating. If you know that Sportsbook A will move their line in response to Sportsbook B’s move, and you make a bet that you know will move Sportsbook B’s line, so that you can blast away at Sportsbook A… how is that cheating?
Also, if the sportsbook offers $1000 to open an account, and you help them out by also getting your friends to open an account, how is that cheating? The book wanted more customers in the first place. They gleefully report to Wall Street how many customers they have!
Of course these two state-level thorny issues1 pale in comparison to the tax change that was included in the Big Beautiful Bill. If you haven’t been on gambling twitter, the cliffs notes are: in the past gamblers could write off 100% of their losses. Unless there is some change, starting in 2026 that will be capped at 90% of losses.
This seems like a bad thing for the casino industry. There are recreational gamblers that will owe tax as a result of this change. Any gambler that essentially flips coins against the house (probably lots of recreational sports bettors, video poker players, blackjack players) will face a new reality where the more they bet, the more tax they’ll owe.
There have been some suspicions that the gaming industry actually snuck this tax change into the bill, to make it close to illegal to be a professional gambler. I think the jury is still out on that idea - even though the gaming lobby did praise the bill after the fact.2
But forget about the gaming industry, or whatever half smart motives you might want to assign to them. Think about the lawmakers who are essentially saying that gamblers have two choices:
Pay tax on money they didn’t make, or
Cheat on their taxes.
Of course a major problem with low trust in policy makers returns us to the top of this post, which is that market participants see no upside to opting into the regulated industry. That goes for the gamblers and the operators.
This is all very concerning, although the fact that Catch-22 was written 60 years ago is a good indication that these types of problems - i.e. the infinite absurdity regress - aren’t new.
Thorny if you think that in general government shouldn’t be in the business of protecting essentially parasitic enterprises.
In the current environment we can’t really assign sycophantic behavior to any evidence pile. It doesn’t affect the prior right now.