The US government has made a significant move in asserting that sports betting can be regulated under financial laws rather than gambling laws. 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 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 oversight. If the courts rule in favor of this argument, it could lead to a shift in control of the rapidly growing market from individual states to the federal government, allowing prediction platforms to operate across the US under a uniform set of regulations. At the heart of this case is the question of what constitutes a bet.
While Arizona and several other states view contracts on sports outcomes as traditional wagers that should be regulated as gambling, with requirements such as licensing, age restrictions, and consumer protections, 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 on the occurrence of future events that can have economic implications, 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, giving 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 supporting Kalshi's position that its sports contracts are allowed under federal law unless the CFTC intervenes. However, courts in other jurisdictions have been more open 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 be overseen at the federal level. Ultimately, the outcome of this case will determine whether prediction markets will operate nationwide under a single federal framework, bypassing the current state-by-state system governing sports betting, or if they will be forced into existing gambling regimes or potentially shut down in key jurisdictions. 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, leaving it to the courts to decide the validity of this comparison.