The US government has made its strongest argument to date that sports betting can be regulated as a financial activity, rather than as a form of gambling. In a recent court filing, the Commodity Futures Trading Commission and the Department of Justice have requested that a federal court 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, also known as swaps, which fall under federal oversight. If the courts support this claim, it could result in the transfer of control over a rapidly growing market from individual states to the federal government, allowing prediction platforms to operate across the country under a unified set of regulations.
At the heart of this case lies a fundamental question: what constitutes a bet? Arizona, along with a growing number of states, believes that contracts related to sports outcomes are essentially identical to traditional wagers and should be regulated as such, with licensing requirements, age restrictions, and consumer protections. However, federal regulators hold a different view.
They argue that the structure of these contracts, rather than the events they are based on, is what matters. 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 restrict or shut down these platforms.
The ongoing legal battle has been escalating for months, resulting in conflicting rulings. A federal appeals court in New Jersey recently ruled in favor of Kalshi, stating that its sports contracts are presumed to be 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 across the country under a single federal framework, effectively bypassing the current state-by-state system that governs sports betting. Conversely, if the courts reject this argument, 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 a broad 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 whether this comparison is valid.