The US government is now explicitly stating that sports betting can be regulated as a financial activity rather than gambling. In a recent court filing, the Commodity Futures Trading Commission (CFTC) and the Department of Justice have requested a federal court 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 essentially financial derivatives, also known as swaps, which fall under federal jurisdiction. If the courts agree with this argument, it could lead to a significant shift in the control of the rapidly growing sports betting market from individual states to the federal government, allowing prediction platforms to operate across the US under a unified set of rules. At the heart of this case lies a fundamental question: what defines a bet?
Arizona, along with several other states, views contracts on sports outcomes as equivalent to traditional wagers and believes they should be regulated as gambling, complete with licensing requirements, age restrictions, and consumer protection measures. Arizona has taken a more aggressive stance by filing criminal charges against Kalshi under state betting laws, with an arraignment set for April 13. However, federal regulators have a different perspective.
They argue that the structure of these contracts, rather than the events they are based on, is what matters. Since the payouts are contingent upon the occurrence of a future event with potential economic consequences, these products are subject to the same legal framework as derivatives tied to commodities or interest rates.
This interpretation would place prediction markets firmly under the Commodity Exchange Act, granting the CFTC what it terms 'exclusive jurisdiction.' It would also limit the ability of individual states to restrict or shut down these platforms, a scenario regulators warn would otherwise create a fragmented system with varying rules across different states. The ongoing legal battle has been escalating for months and has started to yield conflicting rulings. A federal appeals court in New Jersey recently ruled in favor of Kalshi, finding that its sports contracts are presumed to be 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 current state-by-state system governing sports betting.
Conversely, if the courts reject this argument, these products might be forced into existing gambling regimes or be shut down entirely in key jurisdictions. For the time being, the federal government is adopting 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 decision now rests with the courts to determine the validity of this comparison.