The Growing Battle Over Sports Prediction Markets: States Fight Back Against Federal Trading Platforms

Sports prediction markets are creating significant tensions between state gaming regulators and federal financial oversight, with Pennsylvania’s top gaming official becoming the latest to warn about what he calls a “significant threat” to established sports betting frameworks. This growing conflict highlights a complex regulatory battle that could reshape how Americans wager on sports.

Pennsylvania Sounds the Alarm

Kevin F. O’Toole, executive director of the Pennsylvania Gaming Control Board (PGCB), recently sent a strongly worded letter to the state’s congressional delegation expressing concern over the rising influence of sports prediction markets. His warning comes as these platforms, which claim to operate as financial derivatives rather than traditional gambling, process billions of dollars in sports-related wagers while sidestepping state oversight.

These markets effectively create a backdoor to legalized sports betting, operating parallel to, but outside of, the state-regulated system and without strict oversight.

“Sports prediction markets operate under the assertion that they are financial derivatives, or swaps, and therefore claim to not be gambling under state law,” O’Toole wrote in his letter to Pennsylvania’s two U.S. senators and 17 House representatives, adding that these markets could create legal loopholes to sports betting.

O’Toole’s concerns center on what he describes as a “dual-track system” emerging across the country: one involving carefully regulated state sports wagering and another consisting of federally framed futures trading on sporting events. This parallel system, he argues, threatens to undermine years of careful regulatory development by states following the 2018 Supreme Court ruling that struck down the Professional and Amateur Sports Protection Act.

The Pennsylvania gaming chief emphasized that state regulators like the PGCB actively monitor betting activity for suspicious patterns and coordinate with sports leagues to preserve event integrity. In contrast, prediction markets self-certify their offerings with the Commodity Futures Trading Commission (CFTC), which has not yet established specific rules for sports-related contracts.

A Legal Battlefield Across Multiple States

Pennsylvania is far from alone in its concerns. The prediction market industry, led by platforms like Kalshi and Polymarket, faces legal challenges in multiple states as regulators argue these companies are offering unlicensed sports betting.

At least eight states, including Maryland, Nevada, New Jersey, Massachusetts, Connecticut, Illinois, Ohio, and Montana, have either issued cease-and-desist orders or formally opened investigations into sports prediction markets. The legal battles have created a patchwork of court cases, with prediction market operators achieving mixed results in their attempts to block state enforcement actions.

Kalshi has secured preliminary injunctions preventing regulatory enforcement in New Jersey and Nevada but failed to obtain similar relief in Maryland. Meanwhile, Massachusetts Attorney General Andrea Campbell filed a comprehensive lawsuit against Kalshi in September, characterizing the platform’s sports contracts as “illegal and unsafe sports wagering”.

The Industry Responds at Gaming’s Biggest Conference

The regulatory pressure reached new heights at the 2025 Global Gaming Expo (G2E) in Las Vegas, where prediction markets became a central topic of discussion among industry leaders. The conference, which welcomed more than 25,000 gaming professionals from over 120 countries, featured multiple panels addressing the challenges posed by event contracts.

That’s what we’re really going to spend the next two or three years of being in court finding out

During a panel titled “Unpredictable: How the Emergence of Event Contracts Challenges the Paradigm of Regulated Gaming,” attorney Kevin King of Covington & Burling described the ongoing litigation as likely being in “the first quarter” of action. King said the main issue centers on whether federal law governing futures markets preempts state and tribal authority over sports event contracts, a question that could take years to resolve and potentially reach the Supreme Court.

“That’s what we’re really going to spend the next two or three years of being in court finding out,” said Dustin Gouker, owner of Closing Line Consulting, speaking at the G2E conference. Industry experts widely expect the issue to reach the U.S. Supreme Court by 2027 or 2028.

Federal Regulators Offer Limited Guidance

The CFTC, which oversees prediction markets as derivatives exchanges, has provided little clarity on sports event contracts. In a September 2025 advisory letter, the commission acknowledged for the first time that it has “not, to date, made a determination regarding whether any such contracts involve an activity enumerated or prohibited” under federal law.

The advisory cautioned regulated firms to prepare for potential state regulatory actions and litigation, suggesting companies should have “contingency planning, disclosures, and risk management policies and procedures” in place. However, the guidance stopped short of providing definitive answers about the legality of sports event contracts.

This regulatory uncertainty has been compounded by significant leadership changes at the CFTC. Four commissioners have resigned under the Trump administration, leaving only acting Chairwoman Caroline Pham to oversee the agency. President Trump’s initial nominee for CFTC chairman, Brian Quintenz, had his nomination withdrawn in September after a public dispute with cryptocurrency entrepreneurs Tyler and Cameron Winklevoss.

Massive Trading Volumes Fuel Concerns

The financial stakes in this regulatory battle are substantial. Kalshi, one of the largest prediction market platforms, has seen explosive growth in sports-related trading. The platform processed $2 billion in sports trading volume during the first half of 2025 and recently reported surpassing $1 billion in monthly trading volume.

Sports betting now accounts for approximately 75% of Kalshi’s trading activity, with football-related contracts driving much of the growth. During March Madness and the NBA Playoffs alone, the platform generated $513 million and $453 million in volume, respectively. In a single evening of NFL and college football on September 27, Kalshi reported $260 million in trading volume with 763,000 trades.

These figures have raised eyebrows among state regulators who view them as evidence that prediction market products function as mass-market sports betting by another name. Campbell’s office in Massachusetts noted that sports event wagers made up about 70% of Kalshi’s trading volume during a three-month period earlier in 2025.

Consumer Protection Concerns

State gaming officials argue that the fundamental issue extends beyond regulatory jurisdiction to consumer protection. Pennsylvania’s established sports betting market operates under what O’Toole describes as “strict but fair regulations” that include thorough background investigations, licensing fees, state taxation, and mandatory compliance with detailed consumer protection rules.

These protections include responsible gaming provisions, integrity monitoring, age verification, and robust dispute resolution mechanisms. State-regulated operators also face penalties if they fail to uphold regulatory requirements, creating accountability that prediction markets operating under federal oversight may lack.

The National Council on Problem Gambling has expressed concerns about prediction markets’ consumer protections. In a letter to the CFTC, the organization said prediction markets should be required to add age restrictions and other safeguards typically found in state-regulated sports betting. A 2024 analysis found that states met only 32 out of 82 player protection standards on average in their sports betting regulations, raising questions about whether federally regulated platforms would provide adequate safeguards.

Major Operators Enter the Space

The regulatory uncertainty hasn’t deterred major financial platforms from entering the prediction market space. Robinhood launched a prediction markets hub in March 2025, powered by Kalshi, allowing users to trade on sports and policy outcomes. The platform reported that 78% of active users surveyed showed interest in using prediction markets for sports-based event contracts.

By August, Robinhood expanded its offerings to include NFL and college football prediction markets, announcing plans to cover the most significant professional games and all contests involving Power Four college teams. The company has indicated interest in expanding these services internationally, with discussions already underway with regulators in the UK and Europe.

Traditional sportsbook operators have also shown interest in prediction markets. DraftKings and FanDuel have both indicated they’re considering entering the space, though they face warnings from state regulators that such moves could jeopardize their existing licenses.

States Issue Licensing Warnings

The regulatory pressure has intensified with multiple states warning their licensed gaming operators against involvement with prediction markets. Ohio, Arizona, and Michigan have all issued formal warnings to licensed operators that offering sports event contracts could put their gaming licenses at risk.

Michigan Gaming Control Board Executive Director Henry Williams sent a letter to all licensed operators warning that “any involvement in the offering of sports event contracts, directly or via an affiliate, key person, related business entity, or other association, will have implications relative to your licensure”. Similar warnings from Arizona and Ohio extend beyond state borders, cautioning that partnerships with prediction market operators in other jurisdictions could also affect licensing decisions.

The CFTC’s Diminished Capacity

The regulatory battle comes at a challenging time for the CFTC, which has seen significant staff reductions alongside commissioner departures. Former Commissioner Kristin Johnson, who resigned in September, warned in her farewell address about the risks of having “too few guardrails” on the prediction market industry.

Johnson’s departure left acting Chairwoman Caroline Pham as the sole commissioner, creating uncertainty about the agency’s ability to conduct business at a time when it’s positioned to play a leading role in digital asset regulation. Pham has indicated she plans to step down once a permanent chairman is confirmed, but Quintenz’s withdrawn nomination has left the appointment process in limbo.

Congressional Involvement Grows

Federal lawmakers have also entered the debate over prediction market oversight. A bipartisan group of U.S. senators, led by Catherine Cortez Masto of Nevada and John Curtis of Utah, sent a letter to the CFTC objecting that state laws are being overstepped. The senators gave the CFTC until October 30 to answer 11 specific questions about how the agency distinguishes between gambling and futures trading.

“We have laws on the books right now that the CFTC needs to enforce,” Cortez Masto said in a New York Times interview. “Using event contracts that facilitate sports betting illegally circumvents the authority of state and local governments”.

Public Opinion and Industry Response

Recent polling suggests the public largely views sports prediction markets as gambling that should be regulated like traditional sports betting. An American Gaming Association survey of 2,000 Americans found that roughly 85% view sports event prediction markets as gambling, with the same percentage believing sports betting should only be available through state-licensed platforms.

“Americans know a sports bet when they see one,” said AGA CEO Bill Miller. “They expect prediction markets offering sports event contracts to be held to the same rules and consumer safeguards as every other state-regulated sportsbook”.

A Parallel Unregulated Market

The prediction market controversy occurs against the backdrop of a massive illegal and unregulated gaming market that costs states billions in lost tax revenue. According to AGA research, Americans wagered more than $673 billion with illegal and unregulated operators in 2025, including $84 billion in sports betting.

While the legal sports betting market has generated $14 billion annually in tax revenue for states where it’s regulated, unregulated markets cost states nearly $13 billion in potential revenue. A significant part of these unregulated markets is constituted by crypto gambling platforms.

The growth of prediction markets operating outside state regulatory frameworks adds another layer to this revenue challenge.

Looking Ahead: Years of Legal Battles

Industry experts predict the legal and regulatory battles over prediction markets will continue for years. With cases pending in multiple federal courts and the fundamental question of federal preemption unresolved, the sports betting landscape faces continued uncertainty.

The outcome of these legal challenges could have far-reaching implications for both the gaming industry and state revenue. If courts rule in favor of prediction markets, it could fundamentally alter the state-by-state sports betting regulatory framework that has developed since 2018. Conversely, successful state challenges could force prediction market operators to seek state licenses and comply with local consumer protection requirements.

Pennsylvania’s O’Toole concluded his letter by offering to meet with members of Congress to discuss the issue further, emphasizing that maintaining the integrity of state oversight is vital to public trust and economic stability. As this regulatory battle continues, the tension between federal financial regulation and state gaming authority shows no signs of resolution.