Coinbase Sues Three States Over Prediction Market Regulations

“Some states think prediction markets fall outside the CFTC’s jurisdiction when they relate to sports,” Coinbase chief legal officer Paul Grewal wrote in a thread on X. “But Congress deliberately chose to exclude only a handful of specific underliers—including ‘onions’ and ‘motion picture box office receipts’—from the definition of ‘commodity.’ This makes clear that all other subjects (including sporting events) fall within the CFTC’s scope.”

Coinbase is a CFTC-registered futures commission merchant. Kalshi is a registered designated contract market. Coinbase plans to serve as an intermediary, providing its customers access to Kalshi’s exchange through its platform, starting in January. The platform will allow customers to trade event contracts on sports, politics, climate, and other future events.

With this week’s legal actions, Coinbase joins Kalshi in bringing litigation against state efforts to assert authority over prediction markets.

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In April, the Illinois Game Board sent cease-and-desist letters to Kalshi, Robinhood and Crypto.com, claiming they were engaging in sports gambling without a license. The Connecticut Department of Consumer Protection sent similar demands to the same three prediction platforms in early December. Both actions triggered lawsuits from Kalshi, and on December 10 a federal judge granted it a temporary injunction barring the state from enforcing its gambling laws while proceedings continue.

Related: CFTC Launches Pilot Program For Use of Digital Assets as Collateral in Derivatives Markets

Kalshi won a similar preliminary injunction in New Jersey and April, but failed in its bid for relief in Nevada. Both states also claimed Kalshi was operating a sports betting operation without the proper license.

Coinbase rejected the comparison with sports betting in the lawsuits filed Thursday. “Prediction markets are fundamentally different from sportsbooks,” Grewal wrote in his thread on X. “Casinos win only if you lose and set odds to maximize their profits. Prediction markets are neutral exchanges, indifferent to price, that match buyers and sellers.”

While not getting involved directly in the litigation or directly addressing the gambling question, the CFTC has been active lately in its capacity as the regulatory authority for prediction markets. Last week, it issued no-action letters to Polymarket, Gemini, PredictIt and LedgerX, allowing them to operate in all 50 states provided the comply with various regulations regarding record keeping and transaction clearing.

The disputes highlight how prediction markets are becoming as the latest flashpoint between state and federal authorities over the regulation of emerging technologies and platforms. States have moved aggressively to erect guardrails around AI, also largely on consumer protection grounds, in the face of efforts by Congress and the White House to prohibit states from regulating the technology.

The disputes are different in at least one important respect, however. Congress so far has failed to create a uniform federal regulatory framework for AI, leaving the federal government’s legal standing to impose limits on state action unclear. In the case of prediction markets, the CFTC has clear statutory authority to oversee futures contracts and swap markets, putting federal preemption on firmer legal grounds.