The US government has made a significant move to regulate sports betting as a financial activity, rather than a form of gambling. In a recent court filing, the Commodity Futures Trading Commission (CFTC) and the Department of Justice have 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, in fact, financial derivatives known as swaps, which fall under federal jurisdiction. If the courts agree with this assessment, it could lead to a shift in control of the rapidly growing prediction market from individual states to the federal government, allowing operators to function nationwide under a unified set of regulations. At the heart of the case lies a fundamental question: what constitutes a bet? Arizona, along with several other states, considers contracts on sports outcomes to be equivalent to traditional wagers and advocates for their regulation as gambling, complete with licensing requirements, age restrictions, and consumer protections.
Arizona has taken a more aggressive stance by filing criminal charges against Kalshi under state betting laws. However, federal regulators disagree, arguing that the structure of these contracts, rather than the events they are tied to, is the determining factor. Because the payouts are contingent upon the occurrence 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, 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 building 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. 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. If the courts ultimately accept the CFTC's position, prediction markets could operate nationwide under a unified federal framework, effectively bypassing the state-by-state system that currently governs sports betting. Conversely, 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 decision now rests with the courts to determine the validity of this comparison.