Pennsylvania Regulators Weigh In On Prediction Markets For First Time
PA's top gaming regulator: 'With all due respect to this body, it would take years for the CFTC to create the regulatory system and oversight that state gaming authorities have in place.'
Letters to the Commodity Futures Trading Commission on the topic of sports betting via prediction markets keep pouring in. And now we know what Pennsylvania regulators think about the offerings from Kalshi and others for the first time.
The Executive Director of the Pennsylvania Gaming Control Board, Kevin O’Toole, was supposed to testify in the cancelled CFTC roundtable about prediction markets; he noted he was “disappointed” that the event didn’t happen in a letter to the CFTC.
The PGCB also submitted the full testimony O’Toole planned to offer for the roundtable. In part:
“The introduction of sports prediction markets operating under purported federal oversight poses a direct threat to the comprehensive regulatory system Pennsylvania – and many other state jurisdictions – have meticulously constructed for gaming, including sports wagering. With all due respect to this body, it would take years for the CFTC to create the regulatory system and oversight that state gaming authorities have in place and, were you to do that, it would create a redundancy to something that already exists and works exceptionally well. …
It would be our hope that the CFTC would continue to oversee futures markets, of which “sports events” should not apply, and allow state gaming regulators to regulate state gaming markets, of which sports wagering is expressly included as our respective enabling legislation provides for.
O’Toole did not come out and say that he believes that Kalshi’s offering is illegal in the commonwealth. Rather, he leaned into arguments for why federal sports event contracts and state-regulated sports betting should not exist in parallel, and why he’s not sure the CFTC is prepared to be a nationwide regulator of sports gambling.
What PA regulators think about sports event trading
Some other highlights from the 13-page document:
“…operators of sports prediction markets typically assert that their products are not ‘gambling’ under state law but rather financial derivatives or swaps. They claim primary regulatory oversight falls under the Federal Commodity Futures Trading Commission (CFTC) and that the Wire Act, which prohibits interstate sports wagering, is not applicable. This assertion creates an immediate and significant conflict regarding regulatory authority, pitting federal derivatives law against other federal laws and Pennsylvania's established power to regulate gambling activities within its borders (and, importantly, criminalize illegal gambling). This threat obviously manifests through challenges to state sovereignty and creates a complex federalism dilemma.”
“Allowing sports prediction markets to operate under the primary jurisdiction of the CFTC directly undermines this state authority. These markets effectively create a backdoor to legalized sports betting, operating parallel to, but outside of, the state-regulated system.”
“The strategy employed by prediction market operators appears to be one of regulatory arbitrage. State-regulated sports betting operators in Pennsylvania face significant financial and regulatory requirements, including thorough background investigations, licensing fees, state taxation on gross gaming revenue, and mandatory compliance with detailed rules providing consumer protections, responsible gaming provisions, and significant integrity monitoring. Furthermore, they are subject to penalties, should any of these stringent stipulations not be upheld. By seeking classification as financial derivatives under CFTC oversight, prediction markets aim to sidestep these crucial state-level requirements. This creates an inherently uneven playing field, where prediction markets could gain a competitive advantage not solely through product innovation, but by exploiting a perceived loophole between federal financial regulation and state gaming law.”
“To be clear, the CFTC is primarily a financial market regulator, lacking the specific expertise and historical mandate for overseeing consumer gambling activities.”
“This jurisdictional clash carries a significant risk resulting in inconsistent and potentially inadequate regulation. The CFTC's regulatory framework is designed primarily for derivatives markets, often involving sophisticated institutional participants, focusing on market stability, and preventing fraud within that context. In contrast, state gaming regulators like the PGCB prioritize consumer protection for the public, implementing detailed measures for responsible gaming, age verification, Know Your Customer standards, advertising standards, and problem gambling prevention and treatment. Unlike what has occurred historically in financial markets, sports prediction markets, despite their financial framing, are marketed broadly and attract retail participation, including to potentially vulnerable populations.”
“Ultimately, if prediction markets are perceived as having weaker integrity controls than state-regulated sportsbooks, it could amplify those concerns about match-fixing or the misuse of insider information, eroding the trust that is essential for the sports ecosystem. Blurring the lines between strictly regulated sports betting and these alternative platforms can lead to consumer confusion and dilute the effectiveness of hard-won integrity measures.”
“A crucial justification for regulating event contracts under the CFTC, rather than as gambling under state law, is the assertion that they serve a legitimate "economic purpose," primarily hedging risk or facilitating price discovery, as required by the Commodity Exchange Act (CEA). However, the application of this principle to contracts based on sports outcomes is questionable. Unlike derivatives based on commodities, interest rates, or even weather events, the outcome of a specific football game or tennis match generally does not create systemic economic risk that necessitates hedging for broad segments of the economy. The primary motivation for most participants trading sports event contracts is likely speculation on the outcome, which closely resembles gambling. Importantly, the PGCB believes sports prediction markets are no more than sports wagering under a different name, and contracts based upon "gaming" are expressly prohibited by the CEA.”
Whole thing here:
Other states weigh in as well
Two other state regulators offered their thoughts as well. Maryland and Illinois sent in letters; we already knew that both states had sent cease-and-desist letters to Kalshi. Kalshi is suing Maryland in federal court.
Maryland offered a one-page letter. Excerpt:
“This state-run regulatory system is dramatically undermined by the sports events contracts currently being offered by CFTC-regulated entities. As the Commission reviews these contracts, I ask that you respect the policy decisions made by our states and not allow the businesses you oversee to offer sports event contracts that violate state law and potentially other federal laws.”
Whole thing:
And Illinois, which offered a slightly longer letter; excerpt:
“None of these gaming integrity and safety standards or patron protections exist in the sports event predictions market. Indeed, the state-run regulatory system is dramatically and intentionally undermined by the sports event contracts currently being offered by CFTC-regulated entities.
As the Commission reviews these contracts, we ask that you respect the policy decisions made by Illinois and other states and prohibit the businesses you oversee from offering sports event contracts that violate state law (and potentially other federal laws) and are antithetical to sound regulation of sports betting activities.”
Whole thing:
Michigan regulators also sent in a letter; coverage of that in a previous Event Horizon newsletter.