A federal appeals court has reinforced state power over sports prediction markets, but Arizona’s separate legal battle with Kalshi over election contracts remains unresolved, leaving the future of event wagering regulation in flux
Arizona’s campaign to assert control over online prediction markets hit a legal wall this week, as a federal appeals court confirmed states can regulate sports-related contracts—but left the fate of election wagering in limbo. The ruling, delivered by the U.S. Ninth Circuit Court of Appeals, directly impacts Arizona’s ongoing standoff with Kalshi, a New York-based prediction market operator, but stops short of granting the state a clear path to police election-based contracts.
Federal Court Draws a Line
The Ninth Circuit’s decision in a Nevada case clarified that the federal Commodity Exchange Act does not shield prediction market operators from state gambling laws when it comes to sports events. Nevada regulators can enforce their own sports betting statutes against Kalshi, despite the company’s argument that its contracts are federally regulated swaps under the Commodity Futures Trading Commission (CFTC). The appellate court rejected Kalshi’s position, reinforcing state authority over sports prediction markets within the Ninth Circuit’s jurisdiction—which includes Arizona.
However, the court declined to resolve whether states can regulate election-related contracts, sending that question back to the district court. This leaves a critical gap for Arizona, where Attorney General Kris Mayes has aggressively pursued Kalshi for allegedly running illegal election wagering operations. The unresolved status of election contracts means the legal landscape remains unsettled for both operators and regulators.
Arizona’s Enforcement Efforts and Federal Pushback
Earlier this year, Kris Mayes filed a 20-count criminal case against Kalshi in Maricopa County Superior Court, accusing the platform of violating Arizona’s gambling laws and specifically targeting its election-related offerings. Kalshi countered that its business model differs fundamentally from traditional sportsbooks and should not be subject to a patchwork of state regulations. The company’s defense relied on its status as a CFTC-designated contract market, arguing for exclusive federal oversight.
Arizona’s prosecution was quickly halted. In May, U.S. District Judge Michael Liburdi ruled that federal law preempted state enforcement, blocking Mayes and the Arizona Department of Gaming from pursuing criminal charges against Kalshi. The federal government escalated the conflict in April by suing Arizona, Connecticut, and Illinois, contending that only the CFTC has jurisdiction over event contracts. This direct intervention underscores the high stakes for both state regulators and prediction market operators.
Implications for State and Federal Authority
The Ninth Circuit’s ruling is a double-edged sword for Arizona. On one hand, it affirms the state’s right to regulate sports prediction markets, a win for Mayes and other state officials seeking to protect consumers from unregulated gambling. Mayes argued that Kalshi’s legal theory would have erased decades of state and tribal oversight, exposing players to greater risk. On the other hand, the court’s refusal to settle the election contract issue leaves Arizona’s most contentious regulatory battle unresolved.
This legal ambiguity is not unique to Arizona. Other states within the Ninth Circuit, as well as those facing similar disputes, now have a precedent for sports-related contracts but must wait for further judicial clarification on election wagering. The ongoing federal lawsuit against Arizona and its peers signals that the CFTC is not backing down from its claim of exclusive authority, setting up a prolonged jurisdictional fight.
Broader Regulatory Context
State-level efforts to regulate gambling products often collide with federal oversight, especially when new technologies or market models emerge. The tension between state and federal authority is not limited to prediction markets; similar jurisdictional disputes have surfaced in areas like self-exclusion enforcement, as reported earlier in the context of operator compliance failures. For Arizona, the current legal standoff with Kalshi is a test case for how far states can go in asserting control over rapidly evolving gambling products.
Prediction markets operate by allowing users to buy and sell contracts based on the outcome of future events, such as sports games or elections. These contracts are distinct from traditional sportsbook bets, as they are often structured as event contracts regulated by the CFTC when offered on designated contract markets. The legal distinction between a sportsbook wager and a prediction-market contract is central to ongoing disputes, with state regulators and federal agencies vying for control over who sets the rules and enforces consumer protections.
