The US government has made its strongest argument to date that sports betting should be regulated as a financial activity, rather than 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 contend that contracts related to sports, elections, and other real-world events are financial derivatives, or 'swaps,' which fall under federal jurisdiction. If the courts concur, this could transfer control of the rapidly expanding market from states to the federal government, allowing prediction platforms to operate nationwide under a unified set of regulations. At the heart of the matter lies a fundamental question: what defines a wager?
Arizona, along with a growing number of states, asserts that contracts on sports outcomes are equivalent to traditional bets and should be regulated as gambling, complete with licensing requirements, age restrictions, and consumer safeguards. Arizona has taken a more aggressive stance, filing criminal charges against Kalshi under state betting laws, with an arraignment scheduled for April 13. However, federal regulators hold a different view.
In their filing, they argue that the structure of the contracts, rather than the events they track, 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 tied to commodities or interest rates.
This interpretation would place prediction markets firmly under the Commodity Exchange Act, granting the CFTC 'exclusive jurisdiction.' It would also limit the ability of individual states to shut down or restrict these platforms, a scenario regulators warn would create a fragmented system. 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. However, courts in other jurisdictions have been more receptive to state arguments, permitting enforcement actions to proceed.
In its filing, the government cautioned that allowing states to prosecute federally regulated exchanges would undermine a national market intended to be overseen 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 governing 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 the time being, 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 whether this comparison is valid.