The U.S. Commodity Futures Trading Commission (CFTC) has taken urgent legal action to shield prediction market platform Kalshi from Arizona's aggressive regulatory push, filing for a temporary restraining order and preliminary injunction in federal court. The move signals a major escalation in the battle over whether states can apply gambling laws to federally regulated derivatives markets, with the CFTC arguing Arizona's actions represent an unconstitutional intrusion into its exclusive jurisdiction—a position previously upheld in cases like New Jersey's failed attempt.

CFTC argues that Kalshi’s event contracts are swaps

According to the CFTC, event contracts offered by Kalshi and other CFTC-regulated DCMs, such as Polymarket, are swaps under the plain meaning of the CEA. The CEA designates the CFTC as the federal agency with exclusive jurisdiction over the regulation of commodity futures, options, and swaps traded on federally regulated exchanges.

Meanwhile, a court document filed on April 8 further highlights that because Kalshi’s sports-related event contracts are traded on a CFTC-licensed DCM and depend on event outcomes associated with economic consequences, they fit within the CEA’s definition of swaps subject to the agency’s jurisdiction. The New Jersey case on April 6 also reached the same conclusion, with a three-judge panel ruling 2-1 in favor of Kalshi.

“Kalshi’s sports-related event contracts are swaps traded on a CFTC-licensed DCM, so the CFTC has exclusive jurisdiction.” 

–Judge David Porter, Philadelphia-based 3rd U.S. Circuit Court of Appeals

The ruling marked the first time a federal appeals court has weighed in on the escalating battle over state regulators’ ability to oversee prediction market operations. Tarek Mansour, CEO of Kalshi, called it a big win for the industry and for millions of users. The move highlights the high‑stakes battle over the future of prediction market platforms.

CEA and CFTC establish protections for prediction markets

The Congress-enacted CEA grants the CFTC exclusive jurisdiction over prediction markets and establishes a federal regulatory framework that expressly preempts state laws that attempt to regulate CFTC-regulated exchanges. In the Arizona case, the CFTC asserts that the state’s description of event contracts as wagers or bets explains much of the confusion and limited review of fundamentally different products.

Meanwhile, event contracts often also qualify as binary options under the CEA, which are options whose payoff is either a fixed amount or zero. Binary options are swaps under 7 U.S.C. § 1a(47)(A)(i), which defines swaps as any agreement that is an option for the sale or purchase based on pre-defined values. 

On the other hand, CFTC Rule 40.11 prohibits the listing of contracts that involve, relate to, or reference terrorism, assassination, war, gaming, or any activity unlawful under any state or federal law. Lawmakers recently pressed the CFTC to crack down on prediction markets amid incidents of people using the platforms to bet on events tied to the Iran war and other government actions.

Specifically, seven House Democrats demanded in a letter dated April 6 to CFTC chair Michael Selig that the agency tighten its oversight of prediction markets after Polymarket offered a wager on the fate of two U.S. airmen shot down over Iran last week. Rep. Seth Moulton of Massachusetts believes that it is morally corrupt and completely unacceptable for these platforms to offer bets on the lives or deaths of American service members. The House group expects a response from the CFTC about its oversight of prediction markets by April 15. 

However, Polymarket took down the contract almost immediately after the issue was raised, acknowledging that that “unfortunate” wager had slipped through its internal safeguards. The company also said that it is strengthening its controls to prevent such unprecedented events, including insider trading. 

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