The Inside Story of Crypto.com’s Deal With Underdog
A First-Mover Gamble That May Rewrite the CFTC Playbook.
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Let me tell you a story about prediction markets.
Back in December, Crypto.com was the first company to bring regulated sports-based prediction markets to the public. We’ve covered this here many times, so I won’t go through the details again, but it was a bold move that others soon followed.
Federally, prediction markets are treated as derivative contracts, regulated by the Commodity Futures Trading Commission (CFTC). And while the Biden-era CFTC, led by Rostin Behnam, apparently disapproved of the contracts, they were caught flat-footed, allowing the contracts to trade for weeks before requesting a takedown on January 14, 2025.
By then, competitor Kalshi had self-certified its own markets, and Donald Trump was less than a week from taking office.
Crypto.com declined to take the markets down. And the rest, they say, was history.
After Trump acceded, the CFTC gave its implicit blessing to the approach, paving the way for any Designated Contract Market (DCM), the CFTC license that allows retail trading of derivatives, to offer similar products.
Compared to traditional sports betting, sports-based prediction markets offered numerous advantages like nationwide access, fairer rules, and certain tax advantages. So naturally, many in the legacy gaming industry were worried about these newcomers.
States too had an interest in maintaining the status quo. Legacy gaming is state licensed, often remitting special taxes, and tightly regulated by state agencies. Prediction markets, on the other hand, are regulated by the CFTC and states get no say.
The result was litigation. A number of states attempted to take regulatory action to block Kalshi and other firms like Robinhood. The first, Nevada, is the historical seat of the American gaming industry, and has the most interest in maintaining a state-hegemony on it, so it surprised no-one when they sent Kalshi a strongly worded letter about the activity.
But, as we wrote at the time, they were dead wrong. The Commodity Exchange Act (CEA) that empowers firms like Kalshi and Crypto.com to offer event contracts explicitly preempts state law, and so, if it is the case that DCMs and other legal derivatives purveyors can offer sport-based event contracts, then there was little that the states could do about it. Kalshi won some early victories, and though that litigation is ongoing, my flag is firmly planted in the sand that I think the DCMs will ultimately prevail.1
Prediction Markets Proliferate
A surge of institutional interest followed Crypto.com and Kalshi’s pioneer victories in the sports-based prediction market space.
As I wrote in TheStreet back in January, the potential for federally regulated risk assets to destabilize state gambling was obvious. And that created both (i) risk to existing participants, but also (ii) opportunity for new entrants. While some would fight court battles, others would inevitably hedge by entering the market as well.
Of these, Robinhood was the first in. As a registered Futures Commission Merchant (FCM), they were able to broker Kalshi’s markets right away as semi-native products, but others soon followed. In fact, there were so many developments that I stopped covering them here. (I highly recommend checking out Dustin Gouker’s full-time coverage of the market at Event Horizon if you are curious).
Until this week, other than Robinhood, most of these deals were basically structured to try to enter the market at the top, at the DCM level. DraftKings has reportedly been in discussions to purchase the firm Railbird, a recent DCM registrant without existing operations.
These are big acquisitions. While the Railbird terms remain unknown, another major player in the space, the heretofore offshore Polymarket, acquired its own DCM/DCO2, QCEX. That price was disclosed, and it is big! Reportedly $112,000,000 big. Now, you can’t build an ominous tower on Park Avenue for that much, but nine figures is a lot for a company that is little more than a license wrapped in a C-corp.
It seems the M&A strategy is going to be effective, as Polymarket this week received relief from the CFTC to begin offering event contracts domestically, but it is hardly practical for everyone. For one, that’s a lot of money, and most of us don’t have a Peter Thiel drip-feed of capital. But more on the nose, there simply are not that many DCMs to buy. There are 23 currently designated entities, and most of those are being used!
And it's not like you can roll up to Washington and register either, it takes several years and $20 million or more, if you can get one at all. The difficulty of doing so is reportedly a nucleation site for the Winklevoss twins’ current CFTC crusade.
So if you were interested in entering the regulated prediction market space, and only ready to start now, your competitors are virtually certain to have found product market fit before you introduce a product line. There are other registered approaches, like Robinhood’s FCM, and the separate Introducing Broker (IB) registration, but these take significant time too, and likely costs in the seven-figure range.
This environment is a natural regulatory moat for the few participants who have already howed a path to market. Smaller competitors and newcomers will struggle to introduce competing products, and the existing few will probably be able to develop robust distribution before that changes.
That’s the ballgame folks. Or is it?
Crypto.com’s Deal with Underdog
This week, news broke that Crypto.com struck a deal with the daily fantasy and gaming company Underdog. Basically, the way it works is that users of Underdog will be able to purchase event contracts from North American Derivative Exchange (NADEX, d/b/a CDNA), the derivative exchange owned by Crypto.com, using the Underdog app.
There are some slightly odd idiosyncrasies to this deal, most notably that it will only be offered in sixteen states, despite federally regulated event contracts being nationwide products by design. But for the most part, it delivers exactly what you would think it would. Crypto.com has a license, and the horsepower to support nationwide sports-based prediction markets. Underdog has distribution, a mainline into the pockets of 25-34 year old men. The sum of these two things is worth more than the parts, so they’re working together.
But what makes this deal unique, and perhaps a harbinger of things to come, is the legal structure of the partnership. See, unlike the Robinhood-Kalshi deal discussed above, Underdog is not an FCM. It doesn't have any federal registration at all. Instead, it has contracted with NADEX as a “technology service provider” (TSP). This, the parties maintain, means that Underdog requires no registration at all.
To make this assessment, they’re relying on a series of no-action from the CFTC that “software vendors” that “facilitate[] the trading in these instruments by allowing customers to gather and analyze market data and place orders for trades through the Platform without having to open a separate application[,]” are not required to register as FCMs or IBs. CFTC Letter No. 08-12 (July 10, 2008). Crypto.com has built this logic out into a series of arrangements with such “tech service providers,” including the relation between NADEX, and the Crypto.com platform itself.
The advantage to this route is not just access, it’s speed. In a discussion with the Brogan Law Newsletter, Crypto.com general counsel Nick Lundgren described time to market for this type of product as brisk, saying they could come to market in as little as thirty days.
The reason it is so fast is that it piggybacks the back-end architecture from the underlying exchange. The front end acts on behalf of the exchange, shuttling customers seamlessly into an environment running on NADEX servers. Users become NADEX customers, and Underdog sits outside the flow of funds.
This likely makes the build-out extremely light, much more closely comparable to hosting a webpage in a browser than building a new financial product.
Crypto.com has interpreted existing law to say that this analogy pertains across context. In other words, if you can host it, as long as it is ultimately running through the exchange, then the regulatory remains light. According to Lundgren, “if you open up your X app or Facebook app or and they wanted to put prediction markets in. We could have a technology service provider arrangement on that. If you had CNN or Fox News articles and you wanted to put prediction market side by side to it, we could have a TSP arrangement there as well.”
The model allows a variety of vendors to access prediction markets easily, presenting a fascinating vision of the future. As fast as setting up a splash page, prediction market portals could pop up across the internet. As much as I pressed insiders on the legal margins of this paradigm, none articulated any. As it stands, these markets could simply be hosted anywhere.
With regulation as it exists today, they may be right. I’ve certainly found nothing that contradicts them. But is that the end of the story?
Grumbling From the Bleachers
It is perhaps a sign of Crypto.com’s success that there are already rumors of competitors grumbling. In the days after the deal, sources tell the Brogan Law Newsletter that Kalshi tried to “run oppo” and frame the arrangement as illegal. One even said that they may be attempting to convince contacts at the CFTC to look into the deal, though that is just a rumor.
This is starkly echoed in comments made by former CFTC commissioner Kristen Johnson as she left the agency last week.
As of today, we have too few guardrails and too little visibility into the prediction market landscape. Because the target audience for these contracts is retail customers and some market participants seem to be marching down a path to offer leveraged, margined prediction market contacts to retail investors, there is an urgent need for the Commission to express in a clear voice our expectations related to these contracts.
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Finally, the “rent or buy” my license in derivatives markets is booming as prediction markets promise to eclipse crypto markets in volumes of retail customers’ cash captured. The Commission has recently witnessed a number of newly created and legacy firms seeking licenses to offer event contracts. In a number of instances, these businesses approach the Commission seeking licenses to offer traditional products, only to quickly shift once a license is in hand and seek to self-certify prediction market contracts. In other contexts, firms that have received a license quickly auction their newly minted license to others.
As darkly as she paints the vision, former Commissioner Johnson’s view of the prediction market landscape is little different than that of its proponents. As is always the case with risk assets, the same facts lend themselves to very different conclusions depending on whether the onlooker approves or disapproves with the product itself.
Still, it seems unlikely that markets-in-every-app will be a long-term equilibrium for the prediction market industry. Even if it is true that Kalshi is complaining now, if the model bears out, they will have every incentive to place their own products on other platforms with distribution even greater than Underdog’s. With DCMs hard to come by, we could see a great risk asset arms race, with entrants competing for market share in ever more visible platforms.
And that is the part that may not last.
As much as it may be true that TSP arrangements like these are legal now, that reality is an artifact of the youth of these markets. The CFTC has no regs curtailing the ability of DCMs to place their markets in third-party venues because it has no history regulating this kind of popular, retail-facing market.
Public concern over risk assets has often swung with the pendulum of history. Much of the country legalized sports betting during the period of 2010s social liberalization, as popular attitudes swung towards the embrace of these products. But when Grambling State prop bets pop up on DoorDash wait screens in Utah, the reactionaries will come out of the woodwork.
Now that sports contracts are out of the hands of the states, it won’t be long before there are calls to the CFTC to regulate these markets more closely than it does now.
Still, this is less a condemnation than an endorsement of what Crypto.com and Underdog have done here. These markets will proliferate, one way or another, and with regulation coming, the first movers are likely to capture a plurality therein before the doors are sealed shut behind them.
The early bird gets the worm.
Until next week.
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Though if the states or other stakeholders were to bring an Administrative Procedure Act (APA) claim against the CFTC for their treatment of event contracts, I wouldn’t count them out on that front.
While the DCM is the critical registration to offer event contracts, a clearing organization is mandatory as well. Registrants need not form their own DCO, but they do need a deal with one, and controlling the entire stack in-house is seen as favorable.
Fascinating insight. The potential of TSP integrations across the industry could easily become a gold rush for digital real estate. It’s appealing in its simplicity and lack of red tape.