The fight over who gets to regulate prediction markets has moved into its most consequential phase yet, and the federal government just showed up with its heaviest legal firepower.
In a filing late Tuesday, the Commodity Futures Trading Commission and the Department of Justice asked a federal court to block Arizona from enforcing its gambling laws against prediction market platform Kalshi.
The core argument seems deceptively simple in the sense that sports and event contracts are financial derivatives, specifically, instruments known as swaps, and therefore fall under federal law, not state gambling codes.
If the courts ultimately agree, it would fundamentally reshape the regulatory industry for a $20 billion-per-month industry that has been caught in an increasingly chaotic tug-of-war between state attorneys general and Washington since it went mainstream.
In the filing, DOJ attorney Tiberius Davis argued that allowing states to prosecute federally regulated exchanges would “subvert federal law and the exclusive jurisdiction to regulate event contract swaps conferred on the CFTC by Congress.” The government warned that permitting state-level enforcement would undermine a national market that Congress intended to oversee from a single federal level.
How we got here
Arizona didn’t wait for the federal government to draw its lines. In March, Arizona Attorney General Kris Mayes filed 20 criminal counts against KalshiEx LLC and Kalshi Trading LLC, alleging the company operated an unlicensed gambling business and offered illegal election wagering in the state.
The charges covered contracts tied to sports outcomes, the 2028 presidential race, and the 2026 Arizona gubernatorial election, all of which Kalshi offers as event contracts on its platform.
Arizona’s position is not subtle about what it thinks Kalshi is. “Arizona will not be bullied into letting any company place itself above state law,” Mayes said when the charges were filed.
The state argues Kalshi is simply a gambling operation that has dressed itself up in financial language. Kalshi’s response has been equally blunt, calling the charges “meritless” and accusing Arizona of trying to end-run federal court authority.
Sports betting makes up roughly 90 percent of Kalshi’s trading volume, making the question of whether those contracts are gambling or finance not just a legal technicality but an existential business question. An arraignment is scheduled for April 13.
Arizona isn’t alone. The CFTC has now filed suits challenging the actions of Arizona, Connecticut, and Illinois against Kalshi and other federally regulated operators. Nevada has blocked prediction markets from operating within its borders.
As of last Sunday, sports gambling attorney Daniel Wallach tracked the state-versus-prediction market scorecard at 14 wins for states out of 16 contested preliminary rulings, before a landmark federal ruling shifted the momentum.
The New Jersey ruling and what it changes
On Monday, a divided panel of the US Court of Appeals for the Third Circuit, the first federal appeals court to address the core question, ruled that Kalshi’s sports-related event contracts are swaps under the Commodity Exchange Act, and that the CFTC holds exclusive jurisdiction.
The court reasoned that the outcome of a sports event is plainly “associated with a potential financial, economic, or commercial consequence,” citing the billions of dollars tied up in sponsorships, broadcast deals, franchises, and local economies that move in response to game results.
It was a significant win for Kalshi and the federal position. Circuit Judge David Porter, writing for the majority, concluded that once a contract qualifies as a swap listed on a CFTC-licensed designated contract market, state regulators are locked out. But the decision was not unanimous.
The dissenting judge argued that what Kalshi offers is “virtually indistinguishable from the betting products available on online sportsbooks, such as DraftKings and FanDuel,” a characterization that state attorneys general have been making from the beginning and that hasn’t lost its intuitive appeal just because a majority of judges in one circuit disagreed.
New Jersey’s attorney general called the ruling “deeply flawed” and said it would allow certain companies to offer sports gambling without following the careful gaming rules that everyone else follows, vowing to weigh her next steps including potentially seeking en banc review, meaning a rehearing before the full court.
What hangs on the outcome
The legal question at the heart of all of this is what makes something a bet versus a financial instrument. Under the Commodity Exchange Act, a swap is defined as any agreement “dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
The Third Circuit found that sports outcomes clearly qualify. Nevada’s district court previously ruled the opposite, that sports game outcomes don’t have the required commercial connection. That split between courts makes Supreme Court review increasingly likely.
CFTC Chairman Michael Selig has called Arizona’s criminal prosecution of Kalshi “entirely inappropriate” and has framed the agency’s position as enforcing an exclusive congressional mandate.
Meanwhile, more than ten bills have been introduced in Congress this year proposing new restrictions on prediction market platforms, including a bipartisan measure that would bar CFTC-registered exchanges from listing anything that resembles a casino-style or sports betting product.
The irony is that both sides claim to be protecting consumers and market integrity, they just disagree entirely on which regulatory framework does that better. States argue that their gambling laws carry decades of consumer protections, licensing requirements, and age restrictions that don’t exist in the CFTC’s framework. Federal regulators argue that a patchwork of inconsistent state laws would fracture what should be a unified national financial market.
If federal courts ultimately side with the CFTC, prediction markets could operate coast to coast under a single set of rules. If they don’t, the industry could find itself facing enforcement actions in dozens of jurisdictions with conflicting requirements, or effectively shut out of significant parts of the country altogether.