Are sweepstakes sportsbooks actually legal and if not, what legal loophole makes this possible?
First, we need to understand what a sportsbook actually is. Essentially, it is a sports betting platform that allows users to bet real money for sporting events, which may be in the form of straight bets, parlays, teasers or even prop bets.
In contrast to licensed sportsbooks which require regulatory approval, sweepstakes sports betting exists under sweepstakes or promotional gaming laws. Sweepstakes app offers a risk-free experience for users as it uses virtual currency or tokens. However, the issue arises when users are awarded with real-life rewards without the supervision of a gaming commission or regulatory body.
Sweepstakes sports betting operates through a dual-currency system designed to align with promotional gaming frameworks.
Platforms typically blur their betting environment into two distinct models: one utilizing non-redeemable virtual coins and another employing redeemable virtual currency.
In the non-redeemable segment, users engage in wagering with tokens that hold no real-world monetary value, ensuring that winnings remain non-convertible. On the other hand, the redeemable side allows users to wager currency that can be converted into fiat currency upon withdrawal.
This structure is often implemented by allowing users to purchase a substantial volume of non-redeemable coins, while providing an equivalent amount of redeemable currency as a promotional bonus, thereby maintaining the appearance of a sweepstakes entry rather than a direct wager.
So how is it possible that operators are able to operate such sweepstakes platforms? Currently, such platforms operate thanks to a legal loophole surrounding the legal definition of gambling.
For an activity to be classified as “gambling”, there needs to be three elements: chance, price and consideration (i.e. something of value). Hence, operators are able to self classify as sweepstakes and remove the third element of gambling of consideration, in turn need not be classified as gambling.
In the US, there are several ways this can be done. For example, non-redeemable currency where players can purchase a virtual currency that has no real-world value or sweepstakes currency which are obtained by giveaways or promotions.
Given that there is no payment required to enter such games, operators argue that users are not taking anything of value and are therefore not providing consideration. Cheddr, a platform which markets itself as “TikTok of sports wagering”, is a prime example of how a platform may rely on these sweepstake models and operate through such a legal loophole.
Historically, sweepstake laws were created to regulate promotional marketing activities such as postcard mails for random prize drawing. Currently, casinos or operators exploit this system via a dual-currency model.
Under this model, there is no monetary value and coins are merely played for fun. However, eventually, these coins can be exchanged for real money. This is still not considered as gambling under US and Canadian legal tests as previously mentioned, consideration is absent which makes the definition of gambling inexistent.
Related: When Does an In-Game Virtual Money Trigger a License?
So when does the mechanism begin to strain?
The mechanism is slowly being phased out as California’s new law in 2026 makes it unlawful for any person or operator to offer an online “sweepstakes game”, with exceptions for limited and occasional promotional initiatives.
The issue here is legality. Unlike licensed iGaming, online sweepstakes casinos in the US do not operate under gaming regulations and do not pay state gaming taxes. As such, there is a lack of AML/KYC protections and responsible gaming safeguards. In fact, there have been class action lawsuits filed against sweepstakes casino operators alleging that they are operating illegally as a gambling enterprise.
It is important to note that regulators, AGs and licensed operators are starting to prompt a regulatory crackdown on such “illegal” operations.
Many will argue that it is unfair that traditional legal casinos consistently pay substantial state fees and licensing taxes, whereas sweepstakes operators bypass this system. In the US, the sweepstakes industry has surpassed $11 billion annually and “social casinos” have slowly begun to look identical to unlicensed gambling by utilizing dual-currency models and costing tax revenue.
From the inside, a sweepstakes operator may face legal risks if it is not structured correctly.
It is essential for them to be aware of the evolving regulatory changes. In US states such as Michigan and Maryland, regulatory bodies have issued cease-and-desist orders against major platforms.
Further, operators require reliable third-party service providers who are able to process their payments. Currently, global credit card networks are enforcing MC 7995, which is the classification for betting and gambling. Processors which have previously categorized sweepstakes as standard “e-commerce softwares” are now changing their policy in order to avoid severe fines from Visa or Mastercard.
Hence, it is important for operators to be aware of such changes.
Is the issue limits of promotional law rather than gambling policies?
Traditional gambling regulations have defined its boundaries through the three elements: prize, chance and consideration. Promotional law, on the other hand, provides a specific exception with the elimination of consideration. Rather than asking if the user paid specifically for entry, the question that should be asked is whether the product being purchased actually holds any independent market value.
Given that sweepstakes model may slowly become unsustainable, operators may wish to look for new legal framework for their platforms:
Skill-based gaming framework to remove the element of chance. In New Jersey and Texas, regulators will still classify it as gambling if there is a small percentage of random number generation. Closed-loop models to remove the element of prize completely. Players will only receive rewards solely for entertainment and not real-world items.
Also read: We Round-up 7 of the Most Successful Web3 Casino Platforms and Explain How They Get Licensed
Structurally, when a product’s legal classification is undecided, businesses offer a free, alternative method of entry (known as AMEO) to avoid federal and state laws in the US.
This enables them to still generate vast revenue through virtual coin purchases without having to obtain a license and pay tax, in contrast to traditional casinos.
Additionally, AMOE enables marketers to collect valuable information from users on a mass scale under the guise of promotional entry through target advertising. Naturally, law firms benefit from businesses’ reliance on them to navigate legal risk and risk-mitigation strategies.
This uncertainty signals to founders that substance matters over form. Regulators have moved past looking at labels of “social game”, “dual-currency promotion” or “free-to-play” and will look at how the game actually operates.
Regulators have adopted different approaches to handling sweepstakes sports in the US.
In states like Michigan, Connecticut, Washington and Montana, regulators have passed legislation redefining “sweeping” to criminalize digital sweepstakes models and banning them completely. Some states such as Idaho have banned them without passing new laws by permitting gameplay but outlawing redemption of cash prizes. This effectively breaks the legal loophole that platforms have been relying on.
Outside of the US, such a concept of leveraging a dual-currency system (such as Gold Coins and Sweeps Coins) does not exist legally. The EU and major global markets have applied a strict effects-based test to ensure that platforms are legally classified and regulated as real-money gambling.
It is likely that such platforms will eventually phase out, with the legal loophole being broken, given that the legal risks outweigh the benefits of such a mechanism.
LegalBison can advise you on your classification of sweepstakes and sports betting models and if you require any compliance with AML/CFT requirements.
What is sweepstakes sports betting?
A sports betting model that uses promotional sweepstakes mechanics instead of traditional gambling licensing.
Which states allow sweepstakes gambling?
Most US states still permit sweepstakes gambling in some form. Some states such as Michigan, Montana, Connecticut and California have introduced restrictions.
Which online sweepstakes are legitimate?
Those that comply with the laws and regulations where they operate.
