Coinbase Challenges US States Over Regulatory Restrictions on Prediction Markets

Coinbase Global, the largest cryptocurrency exchange in the United States, has filed lawsuits against three US States, including Michigan, Illinois, and Connecticut. With this move, the platform is challenging these states’ attempt to regulate prediction markets.

Notably, the move comes hot on the heels of Coinbase’s launch of prediction markets, in collaboration with Kalshi, as part of its efforts to establish itself as an ‘Everything Exchange.’ The latest legal battle highlights the growing tension between state and federal regulators over the classification and oversight of prediction markets.

Coinbase Fights for Prediction Market Freedom

Crypto exchange Coinbase has sued Michigan, Illinois, and Connecticut over their scrutiny of prediction markets. According to a Bloomberg report published earlier today, the company argues that the US States are overstepping their bounds by overseeing prediction markets, while the CFTC has exclusive jurisdiction over them.

In an X post, Coinbase CLO Paul Grewal outlined the key arguments of the lawsuit. He noted,

“Today Coinbase filed lawsuits in CT, MI, and IL to confirm what is clear: prediction markets fall squarely under the jurisdiction of the CFTC, not any individual state gaming regulator (let alone 50). State efforts to control or outright block these markets stifle innovation and violate the law.”

The key argument is that prediction markets are under the CFTC jurisdiction. Coinbase posited that the US states consider sports-related prediction markets as lying outside the CFTC jurisdiction. However, the company claims that Congress intentionally excluded only specific underliers, such as onions and motion picture box office receipts, from the definition of “commodity”. Grewal added,

“Prediction markets are fundamentally different from sportsbooks. 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.”

Prediction Market Regulatory War: States vs CFTC

Significantly, the tension between state and federal regulators is based on their differing interpretations of how prediction markets should be classified. Coinbase argues that prediction markets are similar to financial derivatives and are to be controlled by the CFTC. According to the Commodities Exchange Act, CFTC has the exclusive right to regulate them.  Commenting on the matter, Coinbase CEO Brian Armstrong noted,

“Prediction markets fall under the CFTC. Any state saying otherwise is keeping Americans from accessing tools that help them get ahead.”

At the same time, state regulators argue that prediction markets are akin to gambling and thus fall under their regulation. This confusion has sparked intense debates and concerns, with the US states already suing prediction market operators

Coinbase’s Big Push into Prediction Markets

In a bid to evolve into an Everything Exchange, Coinbase is repositioning itself as a mainstream trading and financial platform. In a recent development, as CoinGape reported, Coinbase returned to India after facing regulatory hurdles in 2023. 

The platform has launched its own prediction markets, partnering with Kalshi. This move is part of the exchange’s vision to expand beyond crypto. The platform announced the introduction of new products, including stocks and prediction markets, as well as new trading features and tools.