The US government has made a strong case for regulating sports betting as a financial activity, rather than a form of 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 single set of rules. At the heart of the case is the question of what constitutes 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 licensing requirements, age restrictions, and consumer protections. However, federal regulators disagree, arguing that the structure of the contracts, not the events they track, is what matters.
They claim that because the payouts depend on the outcome 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, giving the CFTC exclusive jurisdiction and limiting the ability of individual states to shut down or restrict these platforms. The legal battle has been ongoing 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. The government has 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 current state-by-state system that governs sports betting.
On the other hand, if the courts reject this position, 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.