“Sports Betting Contract” is a derivative! The U.S. CFTC blocks local law enforcement to fight for regulatory control of prediction markets

The U.S. federal government is making the clearest argument to date: sports betting can be treated as a financial derivative, not a gambling activity.
On Tuesday, the U.S. Commodity Futures Trading Commission (CFTC) and the Department of Justice filed documents in federal court, seeking to bar Arizona from taking enforcement action against the prediction market platform Kalshi under the state’s local gambling laws. The federal agencies argue that contracts tied to sports events, elections, and other real-world occurrences are financial derivatives known as “swaps,” and should be subject to federal regulation.
If the court ultimately adopts this view, the power to regulate prediction markets will shift from state governments to Washington. At that point, prediction market platforms would be able to operate nationwide under federal regulations, no longer constrained by the complex and fragmented patchwork of gambling laws in each state.
The core issue: What counts as gambling?
At the heart of this legal battle is a question that looks simple but actually affects how regulatory authority is allocated:

Contracts that bet on the outcomes of future events—do they count as gambling or not?

Arizona and an increasing number of state governments believe the operating model of sports betting contracts is no different from traditional gambling, and therefore should be treated as gambling for regulatory purposes, along with supporting measures such as special licenses, age restrictions, and consumer protections. Among them, Arizona’s stance is especially hardline: it has brought a criminal lawsuit against Kalshi under the state’s gambling laws, with the arraignment set for April 13.
Federal regulators take a different view. In their filing, they argue that the key to determining the legal nature of these products is not what events the contracts track, but the structure of the contracts themselves. Because the payouts from these contracts depend on whether future events occur—and those events can have potential economic impact—these products should be subject to the same legal framework as over-the-counter commodity and interest-rate derivatives.
Federal vs. state: a fight over regulatory power
If this logic holds, prediction markets would fall within the scope of regulation under the U.S. Commodity Exchange Act, with the CFTC holding “exclusive jurisdiction,” greatly weakening states’ ability to ban or restrict platforms of this kind. Regulators warn that letting states act independently will only plunge the U.S. market into fragmentation and chaos.
This legal fight has been ongoing for months, but court rulings in different places have diverged. A federal appellate court in New Jersey recently ruled that, unless the CFTC intervenes, Kalshi’s sports betting contracts should be presumed legal under federal law; however, judges in other jurisdictions have tended to side with state governments, allowing local enforcement actions to proceed.
In its filing, the federal government warned that allowing states to sue exchanges subject to federal regulation is undoubtedly undermining Congress’s original expectation of a nationally unified market under federal oversight.
The ruling outcome will determine the direction of the industry
If the court ultimately accepts the CFTC’s position, prediction markets could operate nationwide under a single federal framework; if the court rejects it, these products may be forced into state gambling regulatory systems, and could even be banned in some areas.
For now, the U.S. federal government is showing strong intent to expand its jurisdiction. In their view, contracts that bet on the outcome of the “Super Bowl” are fundamentally no different from financial derivatives that track oil prices or interest-rate fluctuations.