The US government has made its strongest argument to date 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 state gaming 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 oversight.
If the courts agree, this could result in the transfer of control over a rapidly growing market from individual states to the federal government, allowing prediction platforms to operate nationwide under a unified set of rules. At the heart of the case lies a fundamental question: what constitutes a bet?
Arizona, along with a growing number of states, maintains that contracts related to sports outcomes are equivalent to traditional wagers and should be regulated as gambling, complete with licensing requirements, age restrictions, and consumer protections. However, federal regulators hold a different view, arguing that the structure of the contracts, rather than the events they track, is the determining factor. Since the payouts are contingent upon the occurrence of a future event with potential economic consequences, 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, 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 building for 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. In contrast, 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. Ultimately, if the courts accept the CFTC's position, prediction markets could operate nationwide under a single federal framework, effectively bypassing the state-by-state system governing sports betting today. 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 an expansive 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 courts must now decide if this comparison holds true.