The US government has made its strongest assertion yet 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 a federal court to prevent Arizona from enforcing its gambling laws against the prediction market operator Kalshi. The agencies contend that contracts related to sports, elections, and other real-world events are essentially financial derivatives, which would place them under federal jurisdiction.
If the courts concur, this could result in the transfer of control over a rapidly expanding 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 the dispute lies a fundamental question: what constitutes a wager?
Arizona, along with a growing number of states, believes that contracts pertaining to sports outcomes are equivalent to traditional bets and should be subject to gambling regulations, including licensing requirements, age restrictions, and consumer protections. Arizona has taken a more aggressive stance by filing criminal charges against Kalshi under state betting laws, with an arraignment scheduled for April 13. However, federal regulators hold a different perspective.
In their filing, they argue that the structure of the contracts, rather than the events they are tied to, is the determining factor. Since the payouts are contingent upon the occurrence of a future event with potential economic implications, these products fall under the same legal framework as derivatives linked to commodities or interest rates. This interpretation would firmly establish prediction markets 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, finding 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, permitting 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. Ultimately, if the courts accept the CFTC's stance, prediction markets could operate nationwide under a single federal framework, effectively bypassing the state-by-state system that currently governs sports betting.
Conversely, if they reject it, these products could be forced into existing gambling regimes or shut down altogether in key jurisdictions. For the time being, the federal government is adopting an expansive 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.