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At the start of the 2020s, almost the entire sports-betting industry saw gambling on esports as the next big thing, but the industry has struggled to meet those lofty expectations.

Viewership of events such as the League of Legends World Championship soared to match some of the biggest traditional sporting events on the planet, and seemingly still had room to grow. Meanwhile, the popularity of competitive video gaming with younger audiences seemed to fill a gap for gambling operators relying on an ageing customer base. 

It appeared to make sense that a betting audience around these events would naturally form, as it has for virtually all popular traditional sports.

Yet so far, esports betting has not exactly lived up to expectations.

Exact figures for the U.S. regulated esports market are hard to come by, partly because the vertical does not generate enough revenue to justify being broken out of the “other sports” miscellany that is included in certain states' official statistics on sports wagering revenue.

Golf, mixed martial arts (MMA) and even table tennis appear on some states’ monthly wagering revenue reports, suggesting esports could be lagging behind even those less prominent sports for betting. Whatever the exact figures being wagered are, they are nowhere close to the big sports of football, basketball and soccer.

Is this driven by demand, with simply not enough people willing to bet on esports? Or by regulation, with state laws making it more difficult to get money down?

It may not be an either-or.

Brett Abarbanel, executive director of the International Gaming Institute at the University of Nevada, Las Vegas, notes that demand for esports betting can be seen in some areas, but the products often exist outside the regulated gambling space.

“Where esports betting has been brought into the regulated market, it’s been brought in in a way that makes it look a lot like traditional sports betting,” Abarbanel said. “And that’s really not the way that esports fans and gamers have been engaging with it.

“Instead, they’re much more interested in engaging in digital spaces that don’t fit so clearly into existing regulations.

“So, the demographics that have an interest in esports betting, they’re getting gambling, they’re getting media, they’re getting entertainment as a whole elsewhere. They’re not really going to go to a normal betting site; they’re definitely not going to a physical sportsbook.”

In Abarbanel’s view, esports betting mostly exists as a part of a wider ecosystem for “digital native” young people. It often blends seamlessly with cryptocurrency, streaming, platforms like Discord and even within the mechanics of games themselves.

“Look at skin betting for example, it’s no longer getting talked about as much at conferences. There have been quite a few new verticals within that now,” Abarbanel said.

“Now that there’s less attention it has blossomed, and there are still youth gambling issues associated. There are Roblox-type platforms, Metaverse-type platforms as well, where there’s a lot of gambling activity.”

But any time gambling happens outside the regulated framework, there are going to be concerns about heightened risks and a lack of safeguards. Are those questions relevant here?

“I love an easy question, and that’s a very easy question: the answer is yes,” Abarbanel said.

“Some entities that are out there are incorporating some form of responsible gambling. Maybe they have a phone number or some information on limits. But there are definitely concerns about underage exposure or big financial losses.”

The underage betting concerns are especially important given the demographics involved in esports betting, regulated or otherwise.

According to data provider Abios, a quarter of esports fans are 24 or under. Many professional players are under 21, or even under 18, as well.

Greg Gemignani, chair of the gaming practice at law firm Dickinson Wright, said the unregulated esports betting sector “harms the reputation of legitimate betting on esports”. 

That makes it harder to convince lawmakers to consider a more esports-friendly regulated betting market.

According to ��������� GamblingCompliance research, U.S. states have in recent years trended toward recognizing esports within their sports-betting laws, with legislation or regulations allowing for esports wagering in a majority of states including New Jersey, Massachusetts, North Carolina and Ohio.

Still, esports betting is either expressly prohibited or not yet allowed in several major markets, including Indiana, Pennsylvania, Illinois and New York.

There are more specific regulatory issues, too.

Gemignani notes that a lack of higher-level oversight still poses a challenge, despite the rise of esports-specific integrity bodies like the Esports Integrity Commission (ESIC). 

Without a name-brand league like the National Football League or the National Basketball Association, betting on esports events in many states is only approved on a case-by-case basis.

“The issue is that in other major sports you have well-known leagues,” Gemignani said. “And these organizations sort of maintain a set of well-known and applied rules to the games. They police the games; they police the athletes.

“With esports you don’t have that kind of unifying oversight. And in most states if you don’t have that then you need regulatory approval for each event.”

But even there, the issue comes back to demand. If large, regulated operators do not expect a huge amount of betting on esports, they are less likely to push so hard for change.

“You still need a market for it, you still need demand,” Gemignani said. “You need adult demand, from those who are eligible to wager. And I don’t think that’s quite there yet. Well, it’s there — but not anywhere near the level that it’s there for traditional sports.”

Advocacy is particularly important given that many state legislators and regulatory officials are often completely unaware of the existing market.

“People who run for office tend to be older. I wouldn’t expect them to know what Dreamhack is,” Gemignani added.

If the current status of esports betting has a lot to do with how young people consume entertainment more broadly, bringing it more firmly into the regulated market will not be easy. 

“It's not easy but that doesn’t mean we can’t do anything,” Abarbanel said. “We can’t just stick our heads in the sand and say, ‘I give up’. The biggest thing is we have to make sure we have education for not just regulators but also for the regulated industry.

“The big first step we can take is that regulated folk, and regulators themselves are aware of these spaces and think about incorporating them into the regulated space. And that doesn’t just mean legalizing. Some regulators might ban it. That’s normal. Some might write regulations to allow it.

“The really big piece here is recognizing this transformation of digital consumption.”