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 known as swaps, which fall under federal jurisdiction. If the courts support this argument, it could result in the transfer of control over the rapidly growing sports betting market from individual states to the federal government, allowing prediction platforms to operate nationwide under a unified set of regulations. The central issue in this case is the definition of a bet. Arizona and several other states view contracts on sports outcomes as equivalent to traditional wagers and believe they should be regulated as gambling, with requirements for licensing, age restrictions, and consumer protection.
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 have a different perspective. 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 on the occurrence of a future event with potential economic consequences, these products are subject to the same legal framework as derivatives linked 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, which regulators warn would create a fragmented system. The ongoing legal battle has been escalating for months and has resulted in conflicting rulings.
A federal appeals court in New Jersey recently ruled in favor of Kalshi, determining 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, 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 governing sports betting.
On the other hand, if the courts reject this argument, 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 an expansive 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 if this comparison is valid.