The US government has made its strongest assertion to date that sports betting can be regulated as a financial activity, rather than a form of 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, specifically 'swaps', which fall under federal jurisdiction. If the courts concur, this could transfer control of a rapidly expanding market from the states to the federal government, allowing prediction platforms to operate nationwide under a unified set of regulations. At the heart of the case lies a fundamental question: what defines a wager? Arizona, along with a growing number of states, considers contracts on sports outcomes to be equivalent to traditional bets, and therefore subject to gambling regulations, including licensing requirements, age restrictions, and consumer protections.
However, federal regulators have a different perspective. In their filing, they 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 are analogous to derivatives tied to commodities or interest rates, and thus fall under the Commodity Exchange Act, where the CFTC has 'exclusive jurisdiction'. This interpretation would limit the ability of individual states to shut down or restrict these platforms, which regulators warn would otherwise result in a fragmented system.
The ongoing legal battle has been escalating for months, producing conflicting rulings. A federal appeals court in New Jersey recently ruled in favor of Kalshi, finding that its sports contracts are presumed to be allowed under federal law unless the CFTC intervenes. Nevertheless, courts in other jurisdictions have been more receptive to state arguments, allowing enforcement actions to proceed. The government has cautioned that permitting 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 governing 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 adopting a broad view of its authority, arguing that a contract on the Super Bowl is essentially no different from one tied to oil prices or interest rates, and it is now up to the courts to determine the validity of this comparison.