The US government has made its strongest argument to date that sports betting can be regulated as a financial activity, rather than as a form of gambling. In a recent court filing, the Commodity Futures Trading Commission and the Department of Justice have requested that a federal court intervene to prevent Arizona from enforcing its state gaming laws against Kalshi, a prediction market operator. The agencies contend that contracts related to sports, elections, and other real-world events are, in fact, financial derivatives known as swaps, which fall under federal jurisdiction.
If the courts agree with this assessment, it could result in the transfer of regulatory control over this rapidly expanding market from individual states to the federal government, allowing prediction platforms to operate across the country under a unified set of regulations. At the heart of this case lies a fundamental question: what constitutes a bet?
Arizona, along with a growing number of states, maintains that contracts involving sports outcomes are essentially equivalent to traditional bets and should be subject to the same regulations as gambling, including licensing requirements, age restrictions, and consumer protections. Arizona has taken a more aggressive stance by filing criminal charges against Kalshi under state betting laws, with an arraignment scheduled for April 13. However, federal regulators hold a different view.
According to their filing, the structure of these contracts, rather than the events they are tied to, is the determining factor. Because the payouts are contingent upon the occurrence of a future event with potential economic implications, these products are subject to the same legal framework as derivatives linked to commodities or interest rates.
This interpretation would place prediction markets firmly under the purview of the Commodity Exchange Act, granting the CFTC exclusive jurisdiction. It would also limit the ability of individual states to shut down or restrict these platforms, a scenario that regulators warn would lead to a fragmented, state-by-state system.
The legal battle has been ongoing for months and has yielded conflicting rulings. As previously reported, a federal appeals court in New Jersey recently ruled in favor of Kalshi, determining that its sports contracts are presumptively allowed under federal law unless the CFTC intervenes.
In contrast, courts in other jurisdictions have been more receptive to state arguments, allowing enforcement actions to proceed. The government has cautioned that permitting states to prosecute federally regulated exchanges would undermine a national market that Congress intended to be overseen at the federal level. If the courts ultimately accept the CFTC's position, prediction markets could operate nationwide under a single federal framework, effectively bypassing the state-by-state system currently governing sports betting. Conversely, if the courts reject this position, these products could be forced into existing gambling regimes or be shut down altogether in key jurisdictions.
For the time being, the federal government is taking a broad view of its authority, arguing that a contract related to the Super Bowl is not fundamentally different from one tied to oil prices or interest rates. The courts must now decide whether this comparison is valid.