The US government has made its strongest argument to date that sports betting should be regulated under financial laws, rather than those governing gambling. In a recent court filing, the Commodity Futures Trading Commission and Department of Justice have requested that a federal court intervene 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, known as swaps, which fall under federal jurisdiction.
If the courts agree, this could potentially shift control of the rapidly growing prediction market from individual states to the federal government, allowing these platforms to operate nationwide under a unified set of rules. However, the core issue at the heart of the case is the definition of what constitutes a bet. Arizona, along with a growing number of states, views contracts on sports outcomes as equivalent to traditional wagers and believes they should be regulated as such, complete with licensing requirements, age restrictions, and consumer protections. Arizona has taken a more aggressive stance, filing criminal charges against Kalshi under state betting laws.
In contrast, federal regulators argue that the structure of these contracts, rather than their subject matter, is the determining factor. Since the payouts are contingent on the occurrence of a future event with potential economic consequences, these products are considered to be 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 been escalating for months, resulting in conflicting rulings.
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. However, courts in other jurisdictions have been more receptive to state arguments, allowing enforcement actions to proceed. The government has warned that permitting states to prosecute federally regulated exchanges would undermine a national market intended to be overseen at the federal level.
Ultimately, if the courts 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 could be forced into existing gambling regimes or potentially shut down 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 decision now rests with the courts to determine the validity of this comparison.