The US government has made a strong case for regulating sports betting as a financial activity rather than gambling. In a recent court filing, the Commodity Futures Trading Commission and the Department of Justice have requested a federal court to prevent Arizona from enforcing its gambling 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, which would place them under federal oversight. This move could potentially shift control of the rapidly growing market from states to the federal government, allowing prediction platforms to operate nationwide under a unified set of rules.
However, the core issue at stake is defining what constitutes a bet. Arizona, along with several other states, believes that contracts on sports outcomes are equivalent to traditional wagers and should be regulated as such, with requirements for licensing, age restrictions, and consumer protection. On the other hand, federal regulators argue that the structure of these contracts, rather than their subject matter, is what matters. Since the payouts are contingent upon the occurrence of a future event with potential economic implications, these products fall under 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 exclusive jurisdiction and limiting the ability of individual states to restrict or shut down these platforms. The ongoing legal battle has resulted in conflicting rulings, with a federal appeals court in New Jersey recently siding with Kalshi and finding 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, permitting enforcement actions to proceed. The government has warned that allowing states to prosecute federally regulated exchanges would undermine a national market intended to be overseen at the federal level. Ultimately, the outcome of this case will determine whether prediction markets can operate nationwide under a single federal framework, effectively bypassing the current state-by-state system governing sports betting, or if they will be forced into existing gambling regimes or shut down in key jurisdictions.