The US government has made a clear stance that sports betting can be regulated as a financial activity, rather than gambling. In a recent filing, the Commodity Futures Trading Commission and the Department of Justice requested a federal court to prevent Arizona from enforcing its gaming laws against Kalshi, a prediction market operator.
The agencies argue that contracts related to sports, elections, and other real-world events are financial derivatives, also known as swaps, which fall under federal oversight. If the courts agree, this could transfer control of the rapidly growing market from the states to the federal government, allowing prediction platforms to operate nationwide under a unified set of rules.
The central issue in this case is the definition of a bet. Arizona, along with several other states, believes that contracts on sports outcomes are equivalent to traditional wagers and should be regulated as gaming, with requirements for licensing, age restrictions, and consumer protection. However, federal regulators have a different perspective. They argue that the structure of the contracts, rather than the events they track, is what matters.
Since the payouts are dependent 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, where the CFTC has exclusive jurisdiction, limiting the ability of individual states to shut down or restrict these platforms.
The ongoing legal battle has resulted in conflicting rulings, with a federal appeals court in New Jersey recently siding with 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, allowing enforcement actions to proceed.
The government has warned that permitting 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 position, prediction markets could operate nationwide under a single federal framework, effectively bypassing the current state-by-state system that governs sports betting. However, if the courts reject this position, these products could be forced into existing gaming 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, and it is up to the courts to decide if this comparison is valid.