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I got interested in business models involving prediction markets and I am wondering at which point such a thing is considered gambling.

Here are the cornerstones:

  • it's a prediction market, i.e. people buy/sell shares (at a certain market price) based on their assessment of a future event (e.g. "will X be popular in two weeks?")
  • if this event occurs there is a certain payout in virtual cash, people can decide to sell their shares at any point before the occurrence of the event
  • no real cash involved only virtual, the profits gained from the prediction market are all virtual (i.e. you receive some credits that you can spend on other shares)
  • people don't need to spend real cash to "buy" virtual cash in the first place
  • however, people can use the virtual cash as vouchers with some local businesses (e.g. they can spend 10 credits and get a free X)

Is this gambling? Which aspect makes it so, if yes?

Do you know about how this topic is dealt with in the US compared to the European Union?

Thanks!

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Am I right in thinking that your bullet list is describing the business model you are interested in? If so, where is the business here - where does your revenue come from? Where does the money come from to pay for the vouchers that are redeemed at local businesses? What happens when you run out of virtual credits and in the opposite case; what happens when someone lands a jackpot and generates millions of virtual cash vouchers that they then go and redeem at their local businesses - the liability is massive. This isn't answering your question I know, which is why I've put this in comments. – edralph Apr 28 '11 at 13:11

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up vote 4 down vote

Gaming is legal gambling.

In the eyes of (my understanding of) the law, your proposed model becomes gambling when the person has the option of converting their virtual dollars to something of value.

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Yes, that's the right answer straight and to the point. As long as you are receiving something tangible or a prize which can be used for tangible goods/services (i.e. gift cards), then it pretty much goes under wagering/gambling. If it's a virtual good however, such as credits for in game goods like Zynga, then I think it's gaming. – theonlylos Aug 20 '11 at 0:57
up vote 1 down vote

I actually have been in a similar position for awhile as I've been tossing a few angles around for a venture and when it comes to the US, I recall reading awhile back some exact definitions the governments use when it comes to defining gambling.

This is far from a full guide as you seem to be overlapping with securities along with gambling regulations.

This provides a wealth of links to official government and reputable codes/laws/etc. (which is why I'm providing a Wikipedia link: http://en.wikipedia.org/wiki/Online_gambling)

In addition, this ruling is something which was brought to my attention by a contact of mine who does angel investing -- as while I thought it was just for online poker and such, it also extended to numerous other entities:

http://en.wikipedia.org/wiki/U._S._v._Scheinberg_et_al._(10_Cr._336)

And it all went down earlier this year.

Aside from that, I believe that as long as the games are for virtual currency, you are good. When you do cashouts for tangible products, it's gambling.

Zynga however mastered the art of getting people to pay money for virtual currencies and goods for games -- so that's probably a good company to focus a case study around.

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up vote 0 down vote

Long answer. The definition of gambling includes skill vs. luck. There are some who are even trying to de-list poker as gambling, but ultimately there is luck involved. Why is picking stocks not gambling? Good question.

Now to answer your question - if there is no money being exchanged by your users to you for the credits - it probably doesn't matter.

I assume you will be charging vendors to put coupons on your site and the vendors ultimately don't care if 1,000 people redeem the coupon because it means business.

I'm not sure it really answers your question, but I think you have to ask - does it matter? If it's truly free to play - I think you could look at companies like Zynga or any gambling app for precedence. Your reward system seems completely separate from the act of gambling so I'm not sure its as litigious as edralph implies.

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