By Joshua Schall.
With the emergence of online gambling platforms, millions of Americans can now access sportsbooks from the palm of their hand—and the numbers speak for themselves. Sports wagers have exploded from less than $5 billion in 2017 to more than $165 billion last year. This surge followed the U.S. Supreme Court’s decision in Murphy v. NCAA, which struck down federal restrictions on state regulatory authority over sports betting.
But sports wagers aren’t the only way to get in on the action. Prediction markets like Kalshi and Polymarket allow people to put their money on the line speculating about the outcome of a wide range of events—from presidential elections across the globe, armed conflicts, and inflation to music charts, reality TV competitions, and even tomorrow’s weather.
Despite predictions on these markets sharing many characteristics with betting, state and federal regulators dispute whether prediction markets must comply with state gambling laws. The federal government maintains that they have exclusive jurisdiction to regulate prediction market activity, known as event contract trading, because prediction markets are classified as a form of financial derivatives by the Commodity Futures Trading Commission (CFTC). Prediction market operators advocate for federal regulation because it exempts them from state gambling laws. But many state regulators have sought injunctions on the theory that event trading is merely gambling by another name. Arizona recently took this view and escalated the dispute, becoming the first state to file criminal charges against a prediction market operator for violating state gambling laws.
More of these disputes are bound to arise unless Congress meaningfully intervenes. Until then, courts must decipher whether federal law preempts state regulation, or if they can coexist, and whether event contract trading can also qualify as gambling.
The Legal Arguments
Each side relies on different language in the Commodity Exchange Act (CEA) to support their authority to regulate prediction markets. The CEA grants the CFTC exclusive jurisdiction for “transactions involving swaps or contracts of sale of a commodity for future delivery,” subject to various statutory exceptions. The CFTC argues that the statute supports an expansive definition of “swap” that includes contracts tied to sporting events or elections. Courts in New Jersey and Tennessee have found this argument persuasive and ruled for the prediction market operators.
States have countered that the statute prohibits listing or trading swaps that are unlawful under state law or involve gaming. Under this argument, federal preemption is defeated if the court agrees that event contract trades are illegal wagers or gaming rather than legitimate derivatives.
A court in Nevada was the first to order a prediction market to cease active operations across the state based on that argument. Nevada law defines “wager” as risking a sum of money “on an occurrence for which the outcome is uncertain.” The court found event contract trading met this definition—meaning the prediction market was illegally operating without a license—and that Congress did not intend for the CEA to override state gambling regulation. A temporary restraining order was issued with this decision, blocking the prediction market defendant from offering sports, politics, and entertainment contracts in Nevada. Whether this decision can offer valuable guidance to Arizona courts or other states remains unclear, as an appeal is pending before the 9th Circuit.
Implications for Arizona
The current litigation over prediction markets in Arizona follows a similar pattern. In the press release announcing the criminal charges against Kalshi, the Arizona Attorney General characterized the term “prediction market” as a misnomer for an unlawful gambling operation. In anticipation of litigation, Kalshi proactively filed an injunction against state enforcement, arguing that they are exempt from state law under the CEA.
But Arizona’s gambling statute could help Kalshi fare better here than it did in Nevada. Arizona law’s definition of “wager” begins similarly to Nevada’s—“risking . . . something of value for the opportunity to obtain a benefit from a . . . future contingent event”—but with the addition of a relevant exception. A wager “does not include bona fide business transactions that are valid under the law of contracts including contracts for the purchase or sale at a future date of securities or commodities.”
That seems like clear legislative intent to exempt contract trading from state gambling regulation. Kalshi cited this carve-out in its civil complaint and will likely raise it again in defense of the criminal charges. Considering this, the Arizona Attorney General’s Office will need to come up with a novel argument to convince a court that event contract trading qualifies as gambling under state law. In this rapidly evolving industry, the outcome could radically impact the treatment of prediction markets. With mixed results nationwide, the Arizona litigation will make a lasting impact on the treatment of prediction markets.
Conclusion
Prediction markets are a nascent industry that exist at the intersection of finance and gambling—exposing statutory gaps in definitions and regulations. How courts resolve disputes of statutory interpretation will shape the regulatory landscape. In doing so, they will determine whether prediction markets are regulated as financial instruments or wagers and who has the authority to decide.
