The US government has made a strong case for regulating sports betting 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 gambling laws against Kalshi, a prediction market operator.
The agencies argue that contracts related to sports, elections, and other real-world events are financial derivatives, known as 'swaps,' which fall under federal jurisdiction. 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. However, the core issue remains: what constitutes a bet? Arizona and several other states consider contracts on sports outcomes to be equivalent to traditional wagers and should be regulated as gambling, with licensing requirements, age restrictions, and consumer protections.
In contrast, federal regulators believe 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 linked to commodities or interest rates. This interpretation would place prediction markets firmly under the Commodity Exchange Act, giving the CFTC exclusive jurisdiction and limiting the ability of individual states to restrict or shut down these platforms. The ongoing legal battle has resulted in conflicting rulings, with a federal appeals court in New Jersey recently siding with Kalshi, while courts in other jurisdictions have been more receptive to state arguments.
The government has warned that allowing states to prosecute federally regulated exchanges would undermine a national market intended to be overseen at the federal level. Ultimately, the courts will decide whether the CFTC's comparison between sports betting contracts and those tied to oil prices or interest rates is valid.