The fight over Kalshi has moved well beyond a state gambling dispute and into a direct test of federal supremacy in prediction-market regulation. Washington is now trying to stop Arizona from criminalizing activity that federal regulators say falls inside the Commodity Exchange Act, setting up a consequential clash over whether event contracts will be governed nationally as derivatives or fractured across state gambling regimes.
The latest escalation came after the Commodity Futures Trading Commission said that it had asked a federal court in Arizona for a temporary restraining order and preliminary injunction to halt the state’s criminal and gambling-law enforcement against CFTC-regulated prediction markets. The agency said that motion built on the federal government’s April 2 lawsuit, filed with the Department of Justice, challenging Arizona’s actions as preempted by federal law. The federal position is no longer defensive; it is an active attempt to shut state enforcement down.
Arizona is treating Kalshi as gambling, not finance
Arizona Attorney General Kris Mayes opened this front on March 17, when her office filed criminal charges against KalshiEx LLC and Kalshi Trading LLC for allegedly operating an illegal gambling business in Arizona without a license and for election wagering. The state’s filing accused Kalshi of taking bets on sports and elections in violation of Arizona law, and Mayes said, “No company gets to decide for itself which laws to follow.” Arizona’s theory is that Kalshi’s platform is functionally an unlicensed sportsbook, regardless of how it describes itself.
Kalshi has been trying to move the fight into federal court, but it has not had a clean run in Arizona. AP reported that U.S. District Judge Michael Liburdi denied Kalshi’s request for a temporary block and ordered the company to show why the dispute belongs in federal court in light of the state charges. That left Arizona’s prosecution intact while the jurisdictional arguments kept developing. In the near term, the company has been forced to litigate under pressure rather than from a protected federal safe harbor.
The state is hardly alone in pressing that view. Reuters reported on April 2 that Arizona, Connecticut and Illinois had all taken action against prediction-market operators, prompting the first CFTC lawsuits aimed at blocking state gaming regulators from policing these markets. What makes Arizona different is not simply hostility to Kalshi, but the use of criminal law to test the outer edge of state authority.
Federal regulators are building a preemption case around swaps
The federal government’s argument rests on classification. The CFTC and DOJ say Kalshi’s event contracts are swaps traded on a CFTC-licensed designated contract market and therefore fall within the agency’s exclusive jurisdiction under the Commodity Exchange Act. In the CFTC’s April 9 statement, Chairman Michael Selig said Arizona was trying to “weaponize preempted state criminal law” against companies operating under a comprehensive federal regime. That language makes clear that the case is being framed as a supremacy fight, not merely a disagreement over licensing.
That argument picked up real momentum on April 6, when the Third Circuit ruled 2-1 that New Jersey could not stop Kalshi from offering sports-related event contracts to residents there. Reuters reported that the appellate court held those contracts are swaps and that the CFTC has exclusive jurisdiction over them, making the decision the first federal appeals ruling on the central state-versus-federal question now driving prediction-market litigation. The ruling did not end the legal war, but it gave federal regulators their strongest appellate foothold yet.
That does not mean the outcome is settled nationwide. Other courts have gone the other way in different contexts, and the Arizona case now sits at the intersection of criminal enforcement, administrative authority and federal preemption. If the federal government prevails, prediction markets would move closer to a single derivatives framework with lower state-by-state compliance friction. If Arizona and similarly situated states hold their ground, operators could face criminal exposure and fragmented licensing demands across the country. The Kalshi fight is rapidly becoming the case that may decide whether prediction markets are regulated like financial instruments or prosecuted like wagers.