Arizona authorities have stripped Underdog of its fantasy sports license due to the company’s engagement in prediction markets, marking a historic event where a daily fantasy sports or sportsbook operator has lost a state permit because of involvement with event contracts.
The Arizona Department of Gaming (ADG) notified Underdog last week with a Notice of Violation and Intent to Revoke, directly associating this decision with Underdog acting as a technology service provider for Crypto.com, a platform recognized by the CFTC for offering contracts concerning sporting events.
In September, Underdog ventured into prediction markets via a partnership with Crypto.com, becoming the first DFS or sportsbook licensee to join the event contracts sector.
The ADG asserted that Crypto.com’s event contracts represent illegal sports betting in Arizona, and Underdog is facilitating their distribution through this partnership. While Underdog Predict does not permit the buying or selling of event contracts within Arizona, the regulator pointed out that “Underdog prominently displays Crypto’s event contracts on the same platform where it markets other products to Arizona residents.”
The regulator referenced Arizona Revised Statutes A.R.S. §5-1209(A)(2) and (12) as the basis for revocation, which empower action against a licensee that “knowingly assists or conspires with another to enable any person to contravene any of the laws of this state,” or whose “patterns and associations threaten the public interest of this state.”
In its notice, the ADG stated that Underdog “is providing support to Crypto’s unlawful activities in Arizona and offers an appearance of legitimacy,” further claiming that Underdog’s collaboration with Crypto.com “endangers the public interest of this State.”
Equity research analyst Jordan Bender from Citizens stated that Underdog’s situation is unlikely to be an isolated case influenced by Arizona’s regulatory actions. He mentioned that Underdog was the initial target due to its prolonged exposure to prediction markets compared to other Arizona license holders.
“We anticipate that two major companies, Fanatics— which holds a noticeable market share in Arizona (gaming license) — and PrizePicks (fantasy license), will also be affected by this ruling,” Bender remarked. Fanatics has recently initiated Fanatics Markets in partnership with Crypto.com, while PrizePicks maintains ties with Kalshi and Polymarket.
Arizona regulators have also sent cease-and-desist communications to Kalshi and Polymarket. Last Friday, Crypto.com removed its entire collection of event contracts from Arizona, as well as withdrawing sports derivatives from several states including Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, and Ohio.
Bender noted that the Underdog decision “unleashes numerous possibilities for state regulatory measures” and pointed out what he sees as regulatory inconsistency. “The selective enforcement from the state introduces uncertainty regarding Arizona’s thought process,” he commented.
Currently, DraftKings and FanDuel, the two leading sportsbook operators in the U.S., seem unaffected. These companies are the sole operators in Arizona with both fantasy sports and sports wagering licenses. While both are venturing into prediction markets, they are not engaging in the offering of sports event contracts in states where they hold sports betting licenses.
“We believe these companies have navigated a clean path to avoid conflicts with regulatory bodies and, on the surface, should remain unharmed by the Arizona decision,” Bender stated.
Underdog has expressed its intention to contest the ADG’s ruling and may file an appeal within 30 days as per Arizona law. Unless a court issues a stay, the firm’s license will not remain valid during the appeals process. This action by the ADG could potentially open avenues for licensing repercussions against Underdog in other jurisdictions.