Sports betting contract is a derivative product! The U.S. CFTC blocks local law enforcement while pushing for regulatory authority over prediction markets

The CFTC and the U.S. Department of Justice team up to block local governments from enforcing against the Kalshi platform, trying to bring regulatory authority under federal unified management. If the court accepts this, it would significantly change the legal status of prediction markets across the United States.

The U.S. federal government is advancing what is, to date, its clearest argument: sports betting can be treated as a financial derivative rather than a gambling activity.

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

If the court ultimately adopts the above view, regulatory control over prediction markets will shift from state governments to Washington. At that point, prediction market platforms will be able to operate nationwide under federal regulations, no longer constrained by the complex and fragmented gambling laws of individual states.

The core issue: what counts as gambling?

At the heart of this legal battle is, in reality, a seemingly simple question that nonetheless determines how regulatory power is allocated:

For contracts that bet on the outcome of future events, do they count as gambling in the first place?

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 complementary measures such as special licenses, age restrictions, and consumer protections. Among them, Arizona’s stance is particularly hardline. It has filed criminal charges against Kalshi under the state’s gambling law, with the arraignment set for April 13.

Federal regulators hold a different view. In their filing, they argue that the legal characterization of these products does not hinge on what event the contracts track, but on the contracts’ structure itself. 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 contracts and interest rate derivatives.

Federal vs. State: the battle over regulatory authority

If this logic holds, prediction markets would be brought under the scope of the U.S. Commodity Exchange Act, with the CFTC holding “exclusive jurisdiction,” greatly weakening states’ ability to ban or restrict such platforms. Regulators warn that letting states act on their own would only plunge the U.S. market into a fragmented, chaotic situation.

This legal fight has been ongoing for months, but rulings in courts around the country have diverged. A recent decision by the U.S. Court of Appeals for the state of New Jersey held that, unless the CFTC intervenes, Kalshi’s sports event contracts should be presumed lawful under federal law; however, judges in other jurisdictions have tended to side with state governments, allowing local enforcement actions to continue moving forward.

In its filing, the federal government warns that allowing states to prosecute exchanges that are subject to federal regulation would undoubtedly undermine Congress’s original expectation of a nationwide market governed by a unified federal regime.

The court’s 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 the argument, these products may be forced into the state gambling regulatory system, and even face outright bans in some areas.

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

Now, it comes down to whether the federal courts will go along with it.

• This article is reproduced with authorization from: 《Blockcast》（《區塊客》）
• Original title: 《“Sports event contracts” are derivatives! U.S. CFTC blocks local enforcement, fights for regulatory authority over prediction markets》
• Original author: Block Sister MEL（區塊妹 MEL）