The US government has made its strongest case yet for regulating sports betting as a financial activity, rather than a form of gambling. In a recent court filing, the Commodity Futures Trading Commission (CFTC) and the Department of Justice have asked a federal court to prevent Arizona from enforcing its gambling laws against Kalshi, a prediction market operator.
The agencies argue that contracts related to sports, elections, and other real-world events are, in fact, financial derivatives known as 'swaps', which fall under federal oversight. If the courts agree with this assessment, it could result in a significant shift in control over the rapidly growing market, moving it from state to federal jurisdiction and allowing prediction platforms to operate nationwide under a unified set of rules. At the heart of the case lies a fundamental question: what defines a bet?
Arizona, along with a growing number of states, views contracts on sports outcomes as equivalent to traditional wagers and believes they should be regulated as gambling, complete with licensing requirements, age restrictions, and consumer protections. Arizona has taken a more aggressive stance, filing criminal charges against Kalshi under state betting laws, with an arraignment set for April 13. However, 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, which can have economic implications, 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, granting the CFTC 'exclusive jurisdiction'. It would also limit the ability of individual states to shut down or restrict these platforms, a scenario that regulators warn would create a fragmented system with varying rules across different states. The ongoing legal battle has been building momentum 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. 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.
If the courts ultimately 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. Conversely, if they reject it, these products might 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.
It is now up to the courts to decide whether this comparison is valid.