Canadian lotteries say new prediction market restrictions don’t go far enough

Canadian lottery corporations say new restrictions on prediction markets don’t go far enough, arguing that some of the trades Canadians can still make through investment platforms function more like bets than investments.

Last week, the Canadian Securities Administrators, an umbrella organization of provincial and territorial securities regulators, and the Canadian Investment Regulatory Organization, or CIRO, said in a joint statement that prediction contracts tied to sports and entertainment should not be regulated as securities or derivatives, keeping them off platforms operated by regulated investment dealers. Contracts tied to certain economic, financial and environmental outcomes, however, can still be offered.

While the guidance brings some clarity to the debate over whether prediction contracts should be regulated by securities regulators or gaming commissions, the Canadian Lottery Coalition, which represents gaming and lottery organizations in seven provinces, says the bigger question of where investing ends and gambling begins remains unresolved.

The group has registered to lobby provincial officials over prediction markets, arguing that prediction contracts still available to Canadian investors can function like gambling and should face stronger consumer protections and regulatory safeguards, warning that the products could otherwise divert revenue from provincially regulated channels.

“We appreciate the further clarity, but I just feel like it’s too far to say that it’s a line in the sand,” said Molly Cormier, executive director of the Canadian Lottery Coalition. “The time to act is now before they expand further in Canada.”

The organization represents publicly owned lottery and gaming corporations in British Columbia, Manitoba, Quebec, New Brunswick, Prince Edward Island, Newfoundland and Labrador, and Nova Scotia.

Prediction markets allow people to wager on real-world events. Two companies have received CIRO approval to provide Canadians with access to certain event contracts: Wealthsimple Inc., which partnered with U.S. prediction-market operator Kalshi, and Interactive Brokers Group Inc.

Those approvals are restricted to prediction contracts based on economic, financial, or climate-related events, and does not allow contracts for sports results or elections.

“CSA members have consulted a wide range of stakeholders over the past several months, including local gaming regulators, and intend to continue to do so in the future as assessments in this area continue,” said Ilana Kelemen, a spokesperson for the CSA, in a statement.

A 2017 ruling from Canada’s securities regulators banned the sale of short-term, yes-or-no contracts known as binary options. The CSA confirmed that because sports and entertainment events should not be regulated within securities and derivatives legislation, that means those contracts fall outside the binary-options ban in jurisdictions where it applies.

Certain event contracts “are regulated as options contracts and are subject to the same regulatory oversight as all other listed options offered by CIRO dealer members,” said Ariel Visconti, a spokesperson for CIRO, in a statement. CIRO is a self-regulatory organization that oversees all investment dealers and mutual fund dealers, as well as all trading activity on Canada’s debt and equity marketplaces.

Canada’s provincial gambling systems generate revenue that flows back to governments to support public services. The Lottery Coalition is concerned that, as prediction markets grow, some spending that would otherwise take place through provincially regulated gambling could migrate to products offered outside those systems.

Ron Segev, a partner at law firm Segev LLP who specializes in betting, said prediction markets do raise gambling-related regulatory questions, but he is skeptical that they pose a major competitive threat to traditional lottery products.

The lottery “is a completely different beast,” Mr. Segev said. “I don’t know that it would necessarily cannibalize the lottery business.”

Prediction markets may compete more directly with forms of gambling such as sports betting, he said, where customers believe their knowledge or analysis can give them an advantage in predicting an outcome.

Ms. Cormier said provincial lottery corporations have historically adapted their offerings as gambling habits and technology have changed. While she is not aware of any member currently planning to launch its own prediction-market product, she said they could consider new products that fit within their existing regulatory frameworks.