Coinbase sues three states over prediction market regulation
Cryptocurrency exchange Coinbase has filed lawsuits against Michigan, Illinois, and Connecticut over their attempts to regulate prediction markets.
The lawsuits, filed Thursday, argue that the states lack legal authority to impose their own rules on prediction market platforms, which allow users to trade on the outcomes of events such as sports, elections, and economic events.
In a statement regarding the suit, Coinbase said, “These states have taken or threatened action against other prediction market players in an attempt to gain jurisdiction over something they have no legal right to regulate, and are likely to do the same against Coinbase as we enter the prediction market space.”
With this legal challenge, Coinbase has joined other prediction market platforms like Kalshi and Robinhood in challenging state-level regulatory actions.
The lawsuit follows several states issuing cease -and-desist orders against these prediction market platforms, which they allege are essentially offering sports gambling services without the required license.
In September, for example, Massachusetts Attorney General Andrea Joy Campbell filed a lawsuit against Kalshi for unlawfully promoting and accepting sports wagers.
The outcome of this case, along with similar cases happening across the country, may influence how prediction markets are regulated in the US in the future.
Charlotte Capewell brings her passion for storytelling and expertise in writing, researching, and the gambling industry to every article she writes. Her specialties include the US gambling industry, regulator legislation, igaming, and more.
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The Backstory
Why the legal fight emerged now
Coinbase’s move into prediction markets has been building for months, setting the stage for its confrontation with state regulators. In August, executives framed the push as part of a broader strategy to become an “everything app” for trading, spanning crypto, equities and event contracts. The company telegraphed a U.S. rollout in “the next few months,” then abroad, contingent on approvals, describing a one-stop, on-chain model for stocks and wagers on future outcomes. Those plans were detailed in an August preview of Coinbase’s U.S. prediction platform, signaling new lines of business that overlap with sports and political markets historically policed at the state level.
Momentum intensified as Coinbase began gearing up for a product unveil. Bloomberg reported a Dec. 17 showcase, with a dual launch of prediction markets and tokenized equities, and social media hints of a working app. The pivot fits Coinbase’s ambition to knit together multiple markets under one interface. It also puts the company in direct competition with incumbents and new entrants including Kalshi, Polymarket and Gemini, which recently secured a designated contract market license. Those competitive dynamics were captured in a preview of the showcase and rival positioning, highlighting how fast the segment is formalizing within regulated finance.
A fast-filling marketplace with different bets
The prediction market field is widening beyond crypto natives. Retail brokerages are testing demand, and sportsbook operators are sizing up acquisitions to blend speculative and recreational flows. Robinhood integrated Kalshi’s markets this year and may enjoy a structural edge, according to a Mizuho survey, because its users say they plan to fund event contracts mostly with new deposits rather than selling existing holdings. That dynamic could boost net inflows and diversify revenue. Coinbase users, by contrast, were more likely to tap crypto balances, creating a higher risk of cannibalizing trading activity if interest shifts from tokens to event contracts. This split was laid out in Mizuho’s analysis of Robinhood’s potential advantage.
Meanwhile, consolidation and licensing moves show operators racing to establish compliant pathways into the U.S. market. Polymarket struck a $112 million deal for QCEX to rebuild access stateside, while Gemini’s long-running application landed a green light to compete with Kalshi and Polymarket. DraftKings has explored buying Railbird Exchange as traditional sportsbooks assess whether event contracts can complement their core wagering businesses. Coinbase’s entrance sits at the center of this convergence, where crypto, retail brokerage and sports betting intersect and regulators are seeking clear lines of authority.
Testing the rules and the referees
Regulatory friction is not confined to states. At the federal level, the Commodity Futures Trading Commission has wrestled with how to police event contracts without stifling innovation or enabling gambling by another name. A recent lawsuit by Sleeper Markets alleges the CFTC and its acting chair interfered with its bid for a futures commission merchant license, despite a favorable review from the National Futures Association. The company says the pause allowed a rival to gain a first-mover advantage and undercut fairness in the nascent U.S. sports markets sector. The complaint, summarized in Sleeper Markets’ legal filing against the CFTC, underscores industry frustration with opaque approval timelines.
Policymakers are also debating the appropriate framework for digital market infrastructure. Supporters argue centralized federal oversight can promote uniform standards for novel instruments, while critics warn of regulatory overreach. The tension is apparent in speeches like a July 31 SEC address on the “digital finance revolution,” which weighed modernization against investor protection and market integrity. That broader backdrop, captured in an SEC commissioner’s remarks on digital finance, informs how agencies divide jurisdictional lines and how much latitude states retain when products blur the boundary between derivatives and gambling.
Product design meets real-world manipulation risk
Even as operators lobby for clarity, the markets themselves are stress-testing the rules. Coinbase drew fresh attention to manipulation risk when CEO Brian Armstrong turned an earnings call into a live demonstration. By uttering keywords that matched contracts listed elsewhere, he triggered payouts, highlighting how easily event markets can be influenced by participants with outsized control over outcomes. The incident, covered in a report on Armstrong’s on-air experiment, cut to a core regulatory concern: contracts cannot be “readily susceptible to manipulation” under CFTC standards.
Platforms counter that well-designed rules and listing standards can ringfence problem contracts, and that most trading centers on topics with diffuse, verifiable outcomes such as macroeconomic releases. Still, the episode sharpened questions for regulators and courts, including whether existing derivatives law can accommodate event contracts without creating perverse incentives or leaving loopholes for targeted tampering. For Coinbase, which is pitching an all-in-one exchange that spans tokens, tokenized stocks and predictions, the design choices will feed directly into legal risk assessments and licensing paths.
The stakes for Coinbase, rivals and users
Coinbase’s legal stance seeks to limit state-by-state interpretations that treat prediction markets as unlicensed gambling, clearing a route for a nationally scalable product. A favorable outcome could accelerate its December showcase roadmap and encourage rivals to seek federal channels rather than navigate a patchwork of state rules. It could also validate strategies noted in previews of Coinbase’s product slate, where tokenized equities and event contracts anchor a broader push to bring “all assets onchain.”
If courts side with state authorities or let enforcement actions proceed, companies may face narrower listings, geofencing and slower rollouts, reinforcing advantages for players with existing licensed venues. That scenario could bolster firms like Gemini, which secured a designated contract market license referenced in coverage of the coming launch event, and it could reward retail brokers that funnel fresh capital into compliant event products, as suggested by Mizuho’s user survey.
For users, the outcome will shape where and how they trade, what topics are available and the protections in place. The broader question, reflected across these developments, is whether prediction markets will mature into a regulated asset class alongside equities and futures or remain a contested feature at the boundary of finance and gaming. Coinbase’s challenge arrives at that inflection point, with business models and market structure hanging in the balance.
