Pennsylvania Bill Aims to Regulate Prediction Markets Without Tax

Pennsylvania is moving towards a regulated approach to prediction markets without imposing taxes. The proposed House Bill 2711, introduced on July 22, aims to set up a comprehensive regulatory framework for these markets. Unlike other states that focus on taxation, Pennsylvania's bill stands out by prioritizing operational rules and consumer protection.

Key Provisions of House Bill 2711

House Bill 2711 outlines clear requirements for the operation of prediction markets in Pennsylvania. This proposed legislation is comprehensive in scope:

• Minimum participation age: Set at 21.
• Consumer protection: Exclusion of self-excluded individuals, employees, and those with insider knowledge.
• Prohibited contracts: Includes contracts related to high school sports, individual health statuses, and "death markets" linked to mortality events.
• Fraud prevention: Operators must enforce measures to prevent fraud, market manipulation, and misuse of nonpublic information.

Overall, HB 2711 strives to delineate prediction markets from traditional gambling venues and provides enforcement authority to the Pennsylvania Attorney General and district attorneys.

Distinction from Traditional Gambling

The bill also seeks to maintain a separation between prediction markets and traditional gambling operations. Under HB 2711:

• Gaming partnerships: Restrictions are placed on partnerships where liquidity providers or market makers engage in gaming.
• Market restrictions: Prohibited revenue-sharing arrangements for entities involved in gambling activities.

The proposal delegates enforcement power to legal authorities rather than the Pennsylvania Gaming Control Board, with penalties for violations reaching up to $1 million per day for continued illegal operations.

Diverse Approaches Across States

States are increasingly implementing varied strategies regarding prediction markets. In Minnesota, a stringent law has been enacted, triggering lawsuits from the Commodity Futures Trading Commission (CFTC) and operators like Kalshi. Kentucky and Illinois have chosen to combine taxation with regulation, though both face legal challenges. North Carolina opted for a 6% tax on net trading revenue without a regulatory framework, while Tennessee has criminalized intentional outcome manipulation.

Each state's approach underscores a national trend towards addressing prediction markets. Pennsylvania's method focuses on regulation without taxation, providing a distinct path that others may consider.

Potential Implications for Platforms

The legislation affects platforms such as DraftKings and FanDuel, which may need to reassess any market-making or liquidity arrangements if the bill is enacted. This underscores the importance of compliance and regulatory alignment in evolving markets.