The US government has made its strongest assertion yet that sports betting should be regulated as a financial activity rather than gambling. In a recent court filing, the Commodity Futures Trading Commission and the Department of Justice 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 financial derivatives known as swaps, which fall under federal jurisdiction.
If the courts concur, this could transfer control of the rapidly expanding market from the states to the federal government, allowing prediction platforms to operate across the country under a uniform set of regulations. However, the core issue in this case is the definition of a bet. Arizona, along with several other states, believes that contracts on sports outcomes are essentially equivalent to traditional wagers and should be subject to gambling regulations, 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.
In contrast, federal regulators argue that the structure of the contracts, rather than the events they are based on, is the determining factor. 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 linked 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 shut down or restrict these platforms.
The ongoing legal battle has been intensifying over the past few months, 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. The government has warned that permitting states to prosecute federally regulated exchanges would undermine a national market that Congress intended to oversee at the federal level. If the courts ultimately accept the CFTC's position, prediction markets could operate across the country under a single federal framework, effectively bypassing the state-by-state system that currently governs sports betting.
Conversely, if the courts reject this position, these products could be forced into existing gambling regimes or 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 on the Super Bowl is not fundamentally different from one tied to oil prices or interest rates. Ultimately, the courts will have to decide whether this comparison is valid.