Coinbase Sues Michigan, Illinois, Connecticut Over Prediction Market Jurisdiction Clash

Coinbase Global Inc., the largest cryptocurrency exchange in the United States, has filed lawsuits against Michigan, Illinois, and Connecticut over their attempts to regulate prediction markets. The company argues that these states lack the legal authority to interfere with the jurisdiction of the Commodity Futures Trading Commission (CFTC), which it claims has exclusive oversight over prediction markets according to Bloomberg. The legal action follows Coinbase's announcement that it is entering the prediction market space through a partnership with Kalshi Inc. according to Bloomberg.

The move is part of Coinbase's broader strategy to diversify beyond cryptocurrency trading and expand into new financial products according to Finance Feeds.

Prediction markets, which allow individuals to bet on the outcomes of events ranging from sports matches to political elections, have grown rapidly in popularity. These markets operate at the intersection of gambling and financial instruments, attracting regulatory scrutiny. Several companies, including Kalshi, Robinhood, and Crypto.com, have already faced legal challenges in various states over their prediction market offerings according to Bloomberg. Coinbase has joined forces with Kalshi, which is federally regulated by the CFTC, to offer its own prediction market products according to Finance Feeds. However, state regulators continue to push back, arguing that these markets fall under their gambling laws according to Bloomberg.

The legal battle highlights a growing conflict between federal and state regulators over who has the authority to govern prediction markets. Coinbase's Chief Legal Officer, Paul Grewal, stated that the lawsuits aim to affirm the CFTC's exclusive jurisdiction and prevent state interference according to Bloomberg. Meanwhile, state agencies and casinos contend that prediction markets should be treated like traditional gambling and regulated under existing state laws according to Bloomberg. The uncertainty is compounded by mixed court rulings, with some judges supporting federal oversight while others have ruled in favor of state regulation. This conflicting legal landscape has led to speculation that the U.S. Supreme Court may eventually step in to resolve the issue according to Bloomberg.

Why the Standoff Happened

The tension between state and federal regulators stems from differing interpretations of how prediction markets should be classified. Companies like Coinbase and Kalshi argue that these markets are akin to financial derivatives and should be regulated by the CFTC. They point to the Commodities Exchange Act, which they claim grants the CFTC exclusive authority over such contracts according to Bloomberg. On the other hand, state regulators and some tribal gaming authorities argue that prediction markets are a form of gambling and therefore fall under their jurisdiction according to The Bulldog Law. This legal ambiguity has led to a patchwork of regulations, with nearly two dozen states and tribal authorities already suing prediction market operators according to The Bulldog Law.

The stakes for Coinbase and its partners are high. Prediction markets represent a rapidly growing segment of the financial industry, with trading volumes reaching $27.9 billion from January to October 2025 according to The Bulldog Law. Coinbase sees these markets as a way to diversify its offerings and attract a broader user base. However, the company faces the risk of regulatory friction if states continue to push for local control. The recent legal action is part of a broader effort by Coinbase and its partners to unify the industry voice in favor of federal oversight according to The Bulldog Law. The Coalition for Prediction Markets, formed by Kalshi, Crypto.com, Robinhood, and others, aims to advocate for a consistent regulatory framework according to The Bulldog Law.

Risks to the Outlook

Despite the strategic move into prediction markets, Coinbase faces significant regulatory and market risks. The legal uncertainty has already forced other operators, such as Kalshi and Crypto.com, to suspend their services in certain states according to The Bulldog Law. If states continue to assert their authority, Coinbase may be forced to limit its prediction market offerings or face costly legal battles. Additionally, regulatory challenges could raise compliance costs and limit the economic upside of the product according to State Affairs. Investors are watching closely to see how quickly user adoption grows and whether Coinbase can successfully integrate prediction markets into its broader platform according to State Affairs.

The situation also highlights the broader challenge of defining the boundaries between financial markets and gambling. While Coinbase and its partners argue that prediction markets are a form of information-based trading, critics warn that these platforms risk normalizing high-risk behavior according to The Bulldog Law. Some industry voices have raised concerns that the lack of safeguards in prediction markets could exacerbate problem gambling according to The Bulldog Law. As the legal and regulatory landscape continues to evolve, Coinbase and other market players will need to navigate these challenges carefully to ensure long-term success.