The US government has made its strongest argument to date that sports betting should be treated as a financial activity, rather than 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 state gaming laws against Kalshi, a prediction market operator. The agencies contend 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 accept this argument, it could result in the federal government gaining control over a rapidly expanding market, allowing prediction platforms to operate across the US under a unified set of rules. However, the core issue at the heart of this case is the definition of a bet.
Arizona, along with a growing number of states, views contracts on sports outcomes as equivalent to traditional wagers, and therefore subject to state gaming regulations, including licensing requirements, age restrictions, and consumer protections. Arizona has taken a more aggressive stance, filing criminal charges against Kalshi under state betting laws, with an arraignment set for April 13. In contrast, federal regulators believe 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 comparable to derivatives linked to commodities or interest rates, and thus fall under the Commodity Exchange Act.
This interpretation would grant the CFTC exclusive jurisdiction over prediction markets, 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 court rulings. A federal appeals court in New Jersey recently ruled in favor of Kalshi, stating 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 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 argument, these products could be forced into existing gaming regimes or be 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.