Coinbase Challenges States' Gambling Claims Over Prediction Markets

Coinbase has filed lawsuits against the U.S. states of Michigan, Illinois, and Connecticut, challenging their attempts to regulate prediction markets under state gambling laws. The legal action comes as the crypto exchange prepares to enter the rapidly growing prediction market space through a partnership with Kalshi, a CFTC-regulated platform.

Coinbase argues that prediction markets fall under the exclusive jurisdiction of the Commodity Futures Trading Commission and that state intervention violates federal law according to legal filings.

The lawsuits, filed on December 19, 2025, seek court orders to prevent the states from blocking or regulating Coinbase's prediction market products. The company claims that states have overstepped their authority by treating these markets as gambling activities rather than financial derivatives. Coinbase Chief Legal Officer Paul Grewal emphasized that prediction markets are neutral exchanges, distinct from traditional gambling, and that state efforts to control them stifle innovation according to company statements.

The legal battle highlights a broader regulatory conflict over who has authority to oversee prediction markets. While Coinbase and Kalshi argue for federal jurisdiction, state regulators maintain that these markets operate similarly to sportsbooks and should be subject to state gambling laws. This clash is not unique to Coinbase-Kalshi, and Robinhood, and Crypto.com have all faced similar enforcement actions in various states according to industry reports.

Why the Standoff Happened

Prediction markets allow users to trade contracts based on the outcomes of events such as sports games, elections, and economic data. These platforms have gained popularity in 2025, with Kalshi and Polymarket reporting billions in trading volume. However, the rapid growth has drawn scrutiny from state authorities, who argue that such contracts constitute illegal gambling unless licensed under state law according to regulatory analysis.

Connecticut regulators recently issued cease-and-desist orders against Kalshi, Robinhood, and Crypto.com, accusing them of offering unlicensed sports betting products. Kalshi responded with its own lawsuit and secured a temporary reprieve after a federal judge ordered the state to pause enforcement actions. The conflict in Connecticut mirrors similar tensions in other states, with regulators asserting that prediction markets should be treated as gambling, not financial instruments according to legal observers.

Coinbase contends that the Commodity Exchange Act grants the CFTC exclusive authority over futures contracts and similar instruments. The company argues that prediction markets meet the definition of a commodity and should therefore fall under federal oversight. Paul Grewal has criticized states for misinterpreting the law, pointing out that Congress excluded only a narrow set of subjects-such as "onions" and "motion picture box office receipts"-from the CFTC's jurisdiction according to legal analysis.

Risks to the Outlook

The legal dispute has significant implications for the future of prediction markets in the U.S. If state regulators prevail, platforms may be forced to navigate a patchwork of licensing requirements, limiting access to a handful of jurisdictions. Conversely, a favorable court ruling for Coinbase would establish that CFTC oversight takes precedence, enabling nationwide access to prediction markets according to industry experts.

For Coinbase, the stakes extend beyond prediction markets. The company is positioning itself as a "universal exchange," offering a wide range of financial products including spot crypto trading, derivatives, tokenized assets, and now prediction markets. This strategy depends on the ability to launch new products at the federal level without negotiating with state regulators. A loss in court could hinder its broader ambitions and force the company to retreat from the prediction market space according to company strategy documents.

The regulatory landscape is also shifting with the recent confirmation of Michael Selig as the new CFTC Chairman. Selig, known for his pro-innovation stance, has signaled a potential shift in federal oversight toward clarity rather than fragmentation. However, state regulators continue to frame prediction markets as gambling, creating a legal tug-of-war that could eventually reach the Supreme Court according to regulatory updates.

What This Means for Investors

The legal battle is not only about regulatory jurisdiction but also has financial implications for investors. Prediction markets could serve as a durable, regulated niche that complements existing trading activity, increasing user engagement and revenue for platforms like Coinbase. However, adverse regulatory developments, such as increased compliance costs or restrictions on contract types, could limit the economic upside and complicate Coinbase's "everything exchange" strategy according to market analysts.

Investor sentiment in crypto has already cooled in 2025, with traders shifting toward safer assets like gold. Coinbase's expansion into prediction markets aims to attract new users and retain existing ones by offering a broader range of financial products. The success of this strategy depends on the outcome of the ongoing legal disputes and the eventual regulatory clarity that may emerge according to market observers.

As the legal battle plays out, investors and market participants will be watching closely. A court ruling in favor of Coinbase could set a precedent that reshapes the regulatory environment for prediction markets, potentially accelerating their adoption. However, if states are allowed to enforce gambling laws, the growth of this sector could be significantly curtailed, affecting not just Coinbase but the entire emerging prediction market industry according to industry forecasts.