Arizona revokes Underdog's fantasy sports license over prediction markets

Arizona regulators have revoked Underdog's fantasy sports licence, citing the company’s involvement in prediction markets, marking the first known instance of a daily fantasy sports or sportsbook operator losing a state permit due to exposure to event contracts.

The Arizona Department of Gaming (ADG) issued Underdog a Notice of Violation and Intent to Revoke last week, linking the action to Underdog’s role as a technology service provider for Crypto.com, a CFTC-designated contract market that offers sports-related event contracts.

Underdog launched its prediction markets offering in September through a partnership with Crypto.com, becoming the first DFS or sportsbook licence holder to enter the event contracts space.

The ADG said Crypto.com’s event contracts constitute illegal sports betting in Arizona and that Underdog is enabling their sale through its partnership. Although Underdog Predict does not allow buying or selling event contracts in Arizona, the regulator said, “Underdog makes the sale of event contracts with Crypto plain on the same site on which it advertises other products to Arizona residents.”

The regulator cited Arizona Revised Statutes A.R.S. §5-1209(A)(2) and (12) as grounds for revocation, which allow action against a licensee that “knowingly causes, aids, abets, or conspires with another to cause any person to violate any of the laws of this state,” or whose “habits and associations pose a threat to the public interest of this state.”

In its notice, the ADG said it had determined that Underdog “is aiding and abetting Crypto’s illegal conduct in Arizona and providing it with a façade of legitimacy,” adding that Underdog’s relationship with Crypto.com “poses a threat to the public interest of this State.”

Citizens equity research analyst Jordan Bender said Underdog is unlikely to be the last operator affected by Arizona’s enforcement actions. He said Underdog was targeted first because it had the longest-running exposure to prediction markets among Arizona license holders.

“The two major companies we believe this will impact are Fanatics, with a high-single-digit handle market share in AZ (gaming license), and PrizePicks (fantasy license),” Bender said. Fanatics recently launched Fanatics Markets in partnership with Crypto.com, while PrizePicks has relationships with Kalshi and Polymarket.

Arizona regulators have issued cease-and-desist letters to Kalshi and Polymarket. Crypto.com pulled its full suite of event contracts from Arizona last Friday and also withdrew sports derivatives from Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, and Ohio.

Bender said the Underdog decision “opens a can of worms” for state enforcement actions and pointed to what he described as regulatory inconsistency. “The picking and choosing from the state creates some uncertainty with the inconsistency in Arizona’s line of thinking, in our view,” he said.

DraftKings and FanDuel, the two largest sportsbook operators in the United States, appear unaffected for now. The companies are the only operators in Arizona holding both fantasy sports and sports wagering licences. While both are entering prediction markets, they are not offering sports event contracts in states where they hold sports betting permits.

“We believe both of these companies took the cleanest way possible to avoid friction with states and, on the surface, should not be impacted by the decision out of Arizona,” Bender said.

Underdog has said it intends to oppose the ADG’s decision and may appeal within 30 days under Arizona law. Unless a court grants a stay, the company’s licence will not remain active during the appeal process. The ADG’s action may also provide grounds for licensing action against Underdog in other states.