In many cases, gambling is relatively easy to identify. You just know it when you see it. But sometimes you do not. In some cases, gambling is not so easy to identify. Over time, questions have arisen as to whether certain transactions, often of critical importance in the moment, constitute gambling. This confusion over what constitutes gambling matters because vastly different outcomes can obtain depending upon whether a transaction is classified as gambling or not. In general, if the law classifies a transaction as gambling, then the government tends to regulate the transaction much differently than other risk transactions, typically giving the transaction heightened regulatory scrutiny to address certain problems commonly linked to gambling, such as addition. Given the significance of a transaction being categorized as gambling, the continuing confusion over what constitutes gambling is surprising.

This Article suggests that this confusion stems, in large part, from the fact that gambling is not presently well-defined under state or federal law and fails to distinguish a risk transaction that transfers an existing risk of economic profit or loss, such as a securities investment or insurance contract, from a transaction that creates risk solely through the contractual exchange of bets. In response, this Article, as its main contribution, provides a much more formal and precise definition of gambling than presently exists in the legal literature. This Article proposes a model statutory definition of gambling that includes the concept of risk creation as a limiting principle to distinguish gambling from other bilateral risk transactions. As an illustrative application of the analytic framework, the Article applies this novel definition to the regulation of synthetic trading positions and makes the case that the increased use of derivative contracts has allowed investors to enter synthetic trading positions that constitute gambling no different than placing a wager on the outcome of a sporting contest. As a second application, this Article briefly demonstrates how the analytic framework can be employed to make the purely theoretical case that trading in cryptocurrency constitutes unregulated gambling.

The Article proceeds as follows: Part II examines how the law defines the following three risk transactions: (1) securities investments, (2) insurance, and (3) gambling. Part III introduces a theoretical model of bilateral risk transactions and applies this model to the three different types of risk transactions surveyed in Part II. Part III introduces three baseline models of bilateral risk transaction: (1) bilateral risk transfer, (2) bilateral risk creation, and (3) bilateral risk destruction and extends these models to include two additional variables: (1) endogenous risk, and (2) risk mitigation. The addition of these two variables narrows the broad definition of a bilateral risk transaction to include the three risk transactions examined in Part II. Other types of bilateral risk transactions are also considered, including derivative contracts. Highlighting two main regulatory concerns in connection with bilateral risk transactions, (1) moral hazard or fraud, and (2) risk mitigation, Part IV summarizes how the current regulatory environment addresses these two concerns and explores possible regulatory gaps suggested by the baseline models.