The U.S. Department of Justice and the Commodity Futures Trading Commission have asked a federal court to halt Arizona’s criminal prosecution of prediction market operator Kalshi, arguing the platform’s event-based contracts fall within federal derivatives law.

Arizona first issued a cease-and-desist letter to KalshiEx LLC and Kalshi Trading LLC in May 2025, accusing the operators of accepting illegal wagers in violation of state law, according to the court document. The state later filed criminal charges against the two Kalshi entities for "betting and wagering" under various state statutes, with an arraignment scheduled for April 13.

The Wednesday filing builds on the CFTC’s earlier lawsuits against multiple states, including Arizona, as the federal government steps up its challenge to state oversight of prediction markets.

The agencies argue the state’s enforcement campaign conflicts with federal law governing derivatives markets, with the Commodity Exchange Act designating the CFTC has "exclusive jurisdiction" over commodity futures, options, and swaps traded on federally regulated exchanges. 

According to the filing, event contracts, including those contingent upon sports, weather, and political outcomes, are "swaps" under the plain meaning of the CEA. The DOJ and CFTC argue that because these contracts are tied to contingencies "associated with a potential financial, economic, or commercial consequence," they fall under federal oversight rather than state gaming definitions. 

Subjecting these markets to "a patchwork of 50 state regulations" would, according to the federal agencies, directly conflict with Congressional intent to maintain uniform, liquid, and financially secure trading facilities.

The agencies asked the court to enter a temporary restraining order and preliminary injunction to stop Arizona from applying its betting and wagering laws to these contracts. They argue that without such relief, the federal government will suffer "sovereign injury" through the undermining of valid federal laws. 

A widening legal patchwork

The Arizona case is one of several fronts in a growing legal battle over whether prediction market contracts are financial instruments under federal oversight or gambling products subject to state regulation.

On April 6, the U.S. Court of Appeals for the Third Circuit ruled 2-1 that New Jersey gaming regulators cannot block Kalshi from offering sports-related event contracts in that state. The panel held that Congress gave the CFTC "exclusive jurisdiction over trades on DCMs" and that state gambling laws do not override federal authority.

A dissenting judge, however, called Kalshi's position a "performative sleight meant to obscure the reality that Kalshi's products are sports gambling."

Other state courts have reached different conclusions. On April 4, a Nevada state judge extended a ban on Kalshi, ruling that buying a contract on a baseball game through the platform was "indistinguishable" from placing a bet on a state-licensed gaming platform. Judges in Ohio and Maryland have also ruled against Kalshi, while a Tennessee federal judge sided with the platform in February.

Polymarket, Kalshi's closest competitor, is also facing parallel legal pressure. A class action lawsuit filed in New York in February accuses Polymarket of operating as an unlicensed sports-betting platform. Nevada regulators are pursuing civil enforcement against Polymarket's parent company, and authorities in Ohio, Utah, and Iowa have also opened scrutiny. 

Despite the regulatory headwinds, prediction markets have posted sharp growth. Monthly trading volume across all platforms recently surpassed $20 billion, up from $1.2 billion in early 2025, according to TRM Labs.

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