Ruling sports betting contracts are derivatives! The U.S. CFTC blocks local law enforcement, pushing to secure regulatory authority over prediction markets

The CFTC and the Department of Justice team up to block local governments from enforcing against the Kalshi platform, seeking to consolidate regulatory authority under federal oversight. If the courts adopt this approach, it would significantly change the legal status of prediction markets across the United States.

The U.S. federal government is now advancing its clearest claim to date: wagers on sporting events can be treated as financial derivatives, not gambling activities.

On Tuesday, the U.S. Commodity Futures Trading Commission (CFTC) and the Department of Justice filed documents with a federal court, seeking to bar the state of Arizona from taking enforcement action against prediction market platform Kalshi under local gambling statutes. The federal agencies argue that contracts related to sporting events, elections, and other real-world occurrences are financial derivatives known as “swaps,” and should therefore be subject to federal regulation.

If the court ultimately adopts the above view, the vast majority of prediction market oversight would shift from state governments to Washington. At that time, prediction market platforms would be able to operate nationwide under federal regulations, no longer constrained by the complicated and fragmented patchwork of gambling laws in each state.

The core issue: What counts as gambling?

At the heart of this legal showdown is, in fact, a question that seems simple but determines how regulatory authority is allocated:

Contracts that bet on the outcome of future events—do they count as gambling?

Arizona and an increasing number of state governments believe that the operating model of sports-event contracts is no different from traditional gambling, and therefore should be treated as gambling for regulation, along with accompanying measures such as special licenses, age restrictions, and consumer protections. Among them, Arizona’s stance is particularly hardline. The state has already brought criminal charges against Kalshi under its gambling law, with an arraignment set for April 13.

Federal regulators take a different view. In their filings, they argue that the key to determining the legal nature of these products is not what event the contracts track, but the structure of the contracts themselves. Because the payouts of these contracts depend on whether a future event occurs, and because that event can have potential economic impact, these products should be subject to the same legal framework as large commodity and interest-rate derivatives.

Federal vs. State: The fight over regulatory authority

If this logic holds, prediction markets would fall under the scope of the U.S. Commodity Exchange Act, with the CFTC holding “exclusive jurisdiction,” greatly weakening the ability of state governments to ban or restrict platforms of this kind. Regulators warn that allowing states to act independently would only lead the U.S. market into a fragmented, chaotic situation.

This legal battle has been ongoing for months, but rulings from courts in different places have diverged. Recently, the U.S. Court of Appeals in New Jersey held that, unless the CFTC intervenes, Kalshi’s sports-event contracts should be presumed lawful under federal law; but other district judges have tended to side with state governments, allowing local enforcement actions to continue moving forward.

In its filings, the federal government warns that allowing states to sue exchanges that are subject to federal regulation is undoubtedly undermining Congress’s original expectation of a nationwide market unified under federal oversight.

The outcome of the ruling 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 even banned in parts of the country.

For now, the U.S. federal government is showing a strong desire to expand its jurisdiction. In their view, contracts that bet on the outcome of the “Super Bowl” are essentially no different from financial derivatives that track oil-price or interest-rate fluctuations.

Now, it remains to be seen whether the federal courts will go along with it.

• This article is reprinted with authorization from: 《Blockcast》
• Original title: 《“Sports-event contracts” are derivatives! U.S. CFTC blocks local enforcement, fights for regulatory authority over prediction markets》
• Original author: 区块妹 MEL