The US government has made its strongest assertion yet that sports betting can be regulated under financial laws rather than gambling laws. 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 known as swaps, which fall under federal oversight. If the courts agree, this could transfer control of a rapidly growing market from the 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 defines a bet? Arizona and several other states believe that contracts on sports outcomes are essentially the same as traditional wagers and should be regulated as gambling, with requirements for licensing, age restrictions, and consumer protections. Arizona has taken a more extreme stance by filing criminal charges against Kalshi under state betting laws, with an arraignment set for April 13.
However, federal regulators have a different perspective. In their filing, 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 future events with potential economic consequences, 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, giving the CFTC what it calls 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 sided with 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 warned 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.