The U.S. Department of Justice (DOJ) and the Commodity Futures Trading Commission (CFTC) have formally requested a federal court to prevent Arizona from pursuing criminal charges against Kalshi, a prediction market operator. The federal agencies assert that Kalshi’s event-based contracts, which include contingencies related to sports and elections, are classified as “swaps” under the Commodity Exchange Act (CEA) and thus fall under the exclusive jurisdiction of the CFTC.
Key Takeaways
- The DOJ and CFTC are seeking to halt Arizona’s criminal prosecution of Kalshi, arguing federal law preempts state action.
- They contend that Kalshi’s event contracts are “swaps” as defined by the CEA, placing them under CFTC oversight.
- The federal intervention highlights a growing conflict between state regulatory approaches and federal derivatives law.
- This legal action could establish a significant precedent for the regulation of prediction markets and similar financial instruments.
Arizona initially issued a cease-and-desist order to KalshiEx LLC and Kalshi Trading LLC in May 2025, alleging the company facilitated illegal wagers contrary to state law. Subsequently, the state initiated criminal proceedings against the Kalshi entities, accusing them of engaging in “betting and wagering” under various state statutes, with an arraignment slated for April 13.
This latest filing by the DOJ and CFTC builds upon previous legal actions taken by the CFTC against several states, signaling an escalation in the federal government’s efforts to assert its authority over prediction markets against state-level enforcement. The agencies argue that Arizona’s regulatory campaign directly conflicts with federal statutes that grant the CFTC “exclusive jurisdiction” over commodity futures, options, and swaps traded on federally regulated exchanges.
The DOJ and CFTC contend that the plain language of the CEA classifies event contracts, including those tied to sports, weather events, or political outcomes, as “swaps.” These contracts, they argue, are linked to contingencies with “potential financial, economic, or commercial consequences,” thereby positioning them firmly within the federal regulatory framework rather than under state gaming definitions. The agencies further emphasized that subjecting these markets to “a patchwork of 50 state regulations” would undermine Congress’s objective of fostering uniform, liquid, and financially stable trading environments.
Consequently, the federal agencies have petitioned the court for a temporary restraining order and a preliminary injunction to prohibit Arizona from applying its betting and wagering laws to Kalshi’s contracts. They maintain that failure to grant this relief would result in “sovereign injury” to the federal government by undermining the supremacy of federal laws.
Analyzing the Regulatory Precedent
The legal dispute in Arizona represents a critical juncture in the broader contest over the classification of prediction market contracts. This case scrutinizes whether these instruments should be treated as financial derivatives subject to federal oversight or as gambling products regulated by individual states.
This development follows a recent ruling by the U.S. Court of Appeals for the Third Circuit on April 6. In a 2-1 decision, the appellate court determined that New Jersey gaming regulators could not prevent Kalshi from offering sports-related event contracts within the state. The panel affirmed that Congress had vested the CFTC with “exclusive jurisdiction over trades on DCMs,” asserting that state gambling laws do not supersede this federal authority. However, a dissenting judge in that case characterized Kalshi’s legal stance as a “performative sleight meant to obscure the reality that Kalshi’s products are sports gambling.”
Judicial interpretations have varied across different states. Earlier, on April 4, a Nevada state judge upheld a ban on Kalshi, ruling that trading a contract on a baseball game through the platform was fundamentally the same as placing a bet on a state-licensed gaming site. Similar rulings against Kalshi have been made by judges in Ohio and Maryland, although a federal judge in Tennessee ruled in favor of the platform in February.
Polymarket, a primary competitor to Kalshi, is also facing comparable legal challenges. A class-action lawsuit filed in New York in February alleges that Polymarket operates as an unlicensed sports-betting platform. Nevada regulators are pursuing civil enforcement actions against Polymarket’s parent company, and authorities in Ohio, Utah, and Iowa have also initiated investigations.
Despite these regulatory pressures, the prediction market sector has experienced substantial growth. Data from TRM Labs indicates that monthly trading volumes across all platforms have recently exceeded $20 billion, a significant increase from $1.2 billion at the start of 2025.
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