The US government is making a strong case for regulating sports betting as a financial activity rather than gambling. In a recent court filing, the Commodity Futures Trading Commission (CFTC) 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 oversight. If the courts agree, this could lead to a shift in control of the rapidly growing market from states to the federal government, allowing prediction platforms to operate nationwide under a unified set of rules. The core issue in this case is determining what constitutes a bet. Arizona and several other states consider contracts on sports outcomes to be equivalent to traditional wagers and believe they should be regulated as gambling, with licensing requirements, age restrictions, and consumer protections.
However, federal regulators have a different perspective. They argue that the structure of the contracts, rather than the events they track, is what matters. Since the payouts depend on 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. It would also limit the ability of individual states to shut down or restrict these platforms, which regulators warn would create a fragmented system. The legal battle has been escalating 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.
However, courts in other jurisdictions have been more receptive to state arguments, allowing enforcement actions to proceed. In its filing, the government cautioned that allowing 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 state-by-state system that currently governs sports betting. If they reject it, these products could 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. The courts must now decide if this comparison is valid.