The US government is strengthening its stance 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 argue 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 individual 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 consider contracts on sports outcomes to be similar to traditional wagers and believe they should be regulated as gambling, with licensing requirements, age restrictions, and consumer protections. Arizona has taken a more aggressive approach, filing criminal charges against Kalshi under state betting laws, with an arraignment scheduled for April 13.
However, federal regulators have a different perspective. They argue that the structure of the contracts, rather than the events they are based on, is what matters. Since the payouts depend on the occurrence of a future event 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 exclusive jurisdiction and limiting the ability of individual states to shut down or restrict these platforms. The ongoing legal battle has been building for months and has resulted in conflicting rulings. A federal appeals court in New Jersey recently ruled in favor of Kalshi, finding that its sports contracts are 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. On the other hand, if the courts reject this position, the 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.