Predicting the past – Unintended consequences and the lesson of betting exchanges

When betting exchange Betfair officially landed in Australia with a Tasmanian licence in 2006, it sent a ripple through the local racing and wagering landscape that grew, in a completely unanticipated way, into a tidal wave.

No, betting exchanges did not, as racing and wagering executives had predicted, lead to widespread integrity and corruption issues within racing. Nor did they usurp other betting types as the dominant form of wagering for Australian punters.

In fact, 20 years on, it’s possible to argue that betting exchanges, in particular Betfair, play only a small role in Australian racing and wagering, facilitating liquidity for professional players and a handful of adventurous amateurs.

In a petroleum context, it never evolved from a lubricant into a fuel and has never really had a strong retail presence.

What it did do, however, was completely upend how Australia regulates its wagering industry.

When the WA government banned betting exchanges in 2006, citing similar ‘sky is falling’ narratives, Betfair took it to court. And not just any court. The High Court.

Most importantly it won its argument that the WA law breached Section 92 of the constitution, a provision that guarantees free trade across state boundaries. As it was licensed in Tasmania, WA couldn’t stop Betfair reaching its customers.   

The immediate expectation was that the ruling would allow Betfair to expand unfettered throughout the country.

But what emerged was something completely different. The ruling broke down state borders and allowed bookmakers licensed in other states and territories, especially the NT, to expand their offerings and marketing.

Within a decade, the Australian wagering industry was turned on its head. Tabcorp’s monopoly-based dominance was eroded, while the state-based racing authorities that had opposed the exchanges were now reaping the benefits of race fields fees on the merging corporate market, secured through another landmark High Court case brought by Racing NSW in 2012.

But Betfair, which had been the pioneer, was left in the dust of its fixed odds rivals. Disadvantaged by fees and taxes based on turnover, not profitability, it has been hamstrung.

The local Australian Betfair business is separate to the business of the global exchange, which is owned by Flutter, whose Australian arm Sportsbet has become the country’s biggest bookmaker. That has also negated its ability to compete.

This week Flutter announced that it was launching a beta version of what is has called Betfair Predicts in the UK. As the name suggests, it is a version of prediction markets like Kalshi and Polymarket, which have caused enormous upheaval in the American betting landscape over the past 12 months.

It is an interesting space for Betfair to move towards, given the perception of some regulators, including in Hong Kong where exchanges are banned, that prediction markets are the next evolution of the betting exchange.

“The similarity between prediction markets and betting exchanges, where participants bet against one another, creates integrity risks that must be effectively managed,” a missive from the International Federation of Horseracing Authorities Council on Anti-Illegal Betting and Related Crime, said.

“Prediction markets represent a structural re-packaging of sports betting under a different regulatory system.

“There is a clear danger that prediction markets and sportsbooks will converge, with prediction market platforms excluding the integrity controls that have been inbuilt into regulated betting on racing and other sports.”

It is similar language and rhetoric from racing authorities that led the WA state government to ban betting exchanges in 2006, a decision that, as discussed, had massive ramifications.

So, what implications could the growth in reach of prediction markets have for Australia?

The Australian Communications and Media Authority has already determined that it views prediction markets as gambling rather than financial trading, contrary to regulators in the USA.  

It issued a warning notice to prediction platform Polymarket in July for offering betting to Australian punters as it was not licensed to do so.

Meanwhile, financial regulator ASIC issued a ban on the sale of binary options to retail clients in 2021, citing that approximately 80 per cent of retail clients lost money trading on yes-or-no outcomes (it would be interesting to see what the comparative percentages are for wagering).

This would appear to block any regulation of prediction markets as a financial product, but let’s go a step back to the ACMA ruling.

ACMA determined that Polymarket had breached the law because it was not a “regulated interactive gambling service” and had offered in-play betting options.

Leaving aside the second aspect, and that Polymarket utilises crypto betting, which was banned in 2024, what is to stop a state deciding to licence a prediction platform, much as Tasmania did for Betfair in 2006?

Because, as things stand, prediction platforms aren’t expressly illegal in Australia. The Interactive Gambling Act did not anticipate their emergence.

So that brings us to the question, why would anyone launch a prediction platform in Australia?

There is no doubt it would be much more difficult for prediction markets to gain a foothold in a highly regulated market like Australia, as opposed to the fragmented regulatory landscape in the US, where it was able to secure a federal mandate. The betting exchange story in Australia is also a salutary one for those with ambitions.

But, as Tom Waterhouse pointed out, in the new reality of ad restrictions, bookmakers will compete on product rather than marketing.

One of the reasons that prediction markets have grown so fast in the US is that they offer a straightforward betting product: a simple yes-or-no philosophy. For a new generation of bettors, this has great appeal.

These platforms are slick and mobile optimised, and while marketing may be curtailed, there is ample opportunity for growth, plus the possibility of additional revenue for state governments.

The alternative is that the federal government looks to expressly ban prediction platforms as a betting avenue. That is possible, especially given the issues caused by prediction markets elsewhere, but problematic.

It just forces the solution back to the unregulated, or illegal market, which, in a jurisdiction where gambling advertising is restricted, is at less of a disadvantage than before.

If industry research is to be believed, then 36 per cent of the Australian gambling market is already going offshore. Most of these are making choices because of a better product. 

It is not expressly illegal for Australians to bet with these providers, and while it is a breach of law to offer these services to Australians, ACMA’s enforcement options are limited, though the federal government has proposed beefing them up.

Is it better for the regulated market to capture this demand, rather than block it and hope it goes away?

These were the very same discussions held in the six-year period between when Betfair emerged in the UK in 2000 and when it was first licensed in Tasmania in 2006.

For all those discussions, none anticipated what changes the attempts to shut out the betting exchange would prompt. The outcome was impossible to predict.

It may pay for regulators, legislators and those within the industry to reflect on that before they move to prevent the global prediction boom from hitting our shores.