The US government is now explicitly stating that sports betting can be regulated under financial laws rather than gambling laws. 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.
They argue that contracts related to sports, elections, and other real-world events are financial derivatives known as swaps, which fall under federal oversight. If the courts agree with this argument, it could lead to a shift in control of the rapidly growing market from states to the federal government, allowing prediction platforms to operate nationwide under a unified set of rules. The core issue in this case is determining what constitutes a bet.
Arizona and several other states believe that contracts on sports outcomes are equivalent to traditional wagers and should be regulated as gambling, with requirements such as licensing, age restrictions, and consumer protections. Arizona has taken a more aggressive approach by filing criminal charges against Kalshi under state betting laws, with an arraignment scheduled for April 13. However, federal regulators have a different perspective. They argue that the structure of the contracts, rather than the events they track, is what matters.
Since the payouts depend on the occurrence of a future event with potential economic consequences, 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, where the CFTC claims to have exclusive jurisdiction. It would also limit the ability of individual states to shut down or restrict these platforms, which regulators warn would create a fragmented system. The legal battle has been ongoing for months and is now resulting in conflicting rulings.
A federal appeals court in New Jersey recently ruled in favor of Kalshi, finding 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. In its filing, the government warned that allowing states to prosecute federally regulated exchanges would undermine a national market that Congress intended to oversee 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 that governs sports betting. If the courts reject this position, the products could be forced into existing gambling regimes or shut down altogether in key jurisdictions. For now, the federal government is taking a broad view of its authority, arguing that a contract on 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.