[toc]In the wake of reports of an FBI probe into daily fantasy sports, people have asked me if they should be concerned about their funds at DFS sites.
Honestly, I don’t know how to answer.
Problem: We don’t know what we don’t know
On the one hand, all major DFS operators that I’m aware of explicitly assert that player funds are held in segregated accounts. And, as Joe Brennan noted on Twitter, the agreements operators have with payment processing partners (at least in the U.S.) generally include strict conditions mandating the security of player balances.
On the other hand, in the absence of independent oversight, players have an imperfect understanding of how their money is protected, and are dependent on the operators and banks to ensure that their money is handled appropriately. And there’s a definite lack of clarity regarding the policies of several major operators.
So I don’t feel comfortable asserting that funds aren’t safe. But it’s also tough for me to definitively assert that they are.
Solution: All DFS operators must increase transparency regarding the security of player funds
While no level of evidence will ever remove all doubt, there are several key areas where a reduction in ambiguity would better serve both the player and the operator.
We call on all DFS operators to immediately take the following four steps:
- Provide a comprehensive definition of player funds.
- Provide an unambiguous description of the ongoing process for confirming security of player funds.
- Provide a publicly-available third-party certification of fund security.
- Provide detailed answers regarding all plausible scenarios involving threats to player funds.
Provide a comprehensive definition of player funds
There are a number of different ways to come at the question of the total liability represented by player balances.
Here are a few questions to make the point:
- Do balances include non-monetary items like tickets to future events?
- What about bonuses?
- When do balances debit withdrawals? At the point of the request or when the request is processed?
- Do balances include monies entered in contests that have yet to start?
- How is overlay handled?
There are a number of other points where individual definitions could diverge. The point is, players need to know exactly what is protected.
Provide an unambiguous description of the ongoing process for confirming the security of player funds
Player funds are a dynamic entity that can shift rapidly in short periods of time. For example, in the first week of the NFL season, leading DFS sites reportedly took in over $50mm in deposits.
So verification must also be a dynamic entity.
Operators need to provide precise answers to questions such as:
- How often is the liability calculated? Hourly? Daily? Weekly? Monthly?
- What checks are in place to ensure compliance, internally and externally? How often are these checks executed? Audited? Stress-tested? Updated?
- What are some of the risks operators take should they fail to comply?
- Who is ultimately accountable for certifying that sufficient funds are held in a proper fashion?
Provide a publicly available, external certification of compliance
There is little reason why daily fantasy sports operators should not make some third-party certification of sufficient funds – and sufficient protection of those funds – publicly available to customers.
Daily fantasy sports has grown beyond a simple social game played among friends. It’s a world where billions of dollars will change hands this year on tens, if not hundreds, of millions in customer deposits.
Those customers deserve some external assurance that their money is being handled appropriately.
Provide detailed answers for players regarding all possible outcomes
Right now there is a serious lack of clear, forthright communication from major DFS operators to players regarding:
- What happens to player funds in various worst-case situations, like site shutdown or bankruptcy?
- How long would it take for the company to become internally aware should fraud or other force impact the security of player funds? How would such events be communicated to players and in what time frame?
These are good starting points for the conversation.
And these are exactly the sort of initiatives the industry should be undertaking as it attempts to make the argument to policymakers that regulation should bring a light touch rather than a hammer blow.
How DraftKings and FanDuel currently address the security of player funds
I highlight these two sites specifically simply because they represent the lion’s share of player deposits and are in the best position to set industry standards.
We believe all DFS sites should share in this responsibility.
In response to a request for comment, FanDuel provided the following statement:
FanDuel considers segregation of player funds a core operational principle.
We define, segregate, and reconcile player funds as follows:
– Player funds are defined as all deposits made on FanDuel. Player funds are deposited and maintained in a segregated, dedicated master client funds account.
– At all times players can see their account balance on our site. A player’s account balance represents their initial deposit plus or minus any net winnings. The total amount of money held in the player funds account is greater than the total balance of all individual player accounts.
– This process ensures that FanDuel has more than sufficient funds to meet its players’ withdrawal requests.
A page that appears to only be viewable after login offers the following answer to the question “is my money safe?”
Yes, all user money is kept in a bank account which is ring-fenced and kept separate from the company’s operational bank account.
DraftKings initially responded to our request for comment by asking “What exactly is your angle here?” and three hours later offered this statement to LSR:
DraftKings holds in cash all funds necessary to cover our customer account balances. We understand that this is a very important issue for our players and clearly articulate this on our website. Transparency in this area is integral to our business and we aim to always provide this visibility and assurance to our customers.
Here is a link: https://www.draftkings.com/help/why-is-it-legal
Here is what it says on that link:
DRAFTKINGS GUARANTEES SECURITY OF PLAYER FUNDS
Account balances held in segregated account and not used for operational expenses.
We were unable to locate additional references to the the issue in DraftKings’ terms of service or elsewhere on the site.