Pennsylvania Warns of Prediction Market Threat to State Betting

Pennsylvania Gaming Control Board (PGCB) Executive Director Kevin O’Toole has formally alerted the state’s congressional delegation about the growing risks posed by sports betting prediction markets. In a letter dated October 3, O’Toole described these markets as a “significant threat” to the Commonwealth’s gaming industry, emphasizing that their federal classification as financial derivatives could undermine established state regulations.

As one of the nation’s leading markets for sports wagering, Pennsylvania consistently ranks in the top 10 for monthly betting handle and is among only four states to surpass $40 billion in post-PASPA sports wagers. O’Toole’s concerns add Pennsylvania to an increasing list of states scrutinizing prediction markets for potential regulatory and legal conflicts.

“The introduction of these markets operating under purported federal oversight poses a direct threat to the comprehensive regulatory system that Pennsylvania, and many other state jurisdictions, have meticulously constructed for gaming,” O’Toole warned.

Legal Battles and Prediction Market Expansion

Operators such as Kalshi have been active in legal challenges against state regulators. On Tuesday, Kalshi filed a lawsuit in the U.S. District Court for the Southern District of Ohio against the state’s Casino Control Commission and attorney general. The company is seeking preliminary and permanent injunctions, arguing that threats to the licenses of vendors working with Kalshi could harm its business and exceed the Commission’s authority.

Other states are also issuing cautionary notices. Last week, the Michigan Gaming Control Board warned operators that their licenses could be at risk if they engage with prediction markets offering sports event contracts. Similarly, in September, Arizona’s Department of Gaming cautioned state-regulated sportsbooks against partnering with these markets.

Concerns Over Federal Oversight

O’Toole’s letter (pdf), addressed to Pennsylvania’s 17 House representatives and two senators, John Fetterman and Dave McCormick, does not single out any specific operator. Instead, it challenges the federal oversight of the Commodity Futures Trading Commission (CFTC) and the agency’s self-certification process for prediction markets.

Citing the 2018 PASPA decision in Murphy v. NCAA, O’Toole stressed that the authority to regulate sports betting has historically been reserved for individual states. He described the CFTC’s self-certification process as “a backdoor to legalized sports betting, operating parallel to, but outside of, the state-regulated system, and without strict oversight.”

By classifying sports wagers as financial derivatives, prediction markets avoid essential state-level requirements such as background checks, licensing fees, taxation, responsible gaming protocols, and integrity monitoring. O’Toole called this “one of regulatory arbitrage” that circumvents the protections Pennsylvania has carefully built.

Integrity and Consumer Protection Risks

Highlighting the potential consequences of federally regulated prediction markets, O’Toole noted, “Even worse, the parallel tracks risk confusing patrons who engage in these markets by utilizing the veneer of a highly-regulated market when, in reality, their markets are more akin to the ‘wild west.’”

He also raised concerns about events that can be influenced by individuals, which the PGCB strictly prohibits to prevent manipulation. In contrast, the CFTC lacks the regulatory infrastructure to enforce these safeguards. Even recent guidance from the agency admitted it has “not made a determination whether any such contracts involve an activity enumerated or prohibited” under the Commodities and Exchange Act as of September 30.

O’Toole emphasized that one of the PGCB’s key powers is the ability to penalize operators who fail to meet licensing obligations. A prediction market that self-certifies would evade these penalties, creating a system with significantly less oversight for potential match-fixing, insider exploitation, or other integrity threats.

The executive director urged federal lawmakers to uphold state authority in gambling regulation, highlighting Pennsylvania’s framework as a practical model that balances innovation with consumer protection. He concluded by offering to meet with members of Congress to discuss the issue further, stressing that preserving state oversight is critical for public trust and the economic stability of the Commonwealth.