Why Did Coinbase Shift the Case to Federal Court?
Coinbase has moved a lawsuit filed by New York Attorney General Letitia James from state court to federal court, escalating a legal dispute over how prediction markets should be regulated in the United States. The company argues that the case hinges on federal law, particularly the classification and oversight of event-based contracts.
Chief Legal Officer Paul Grewal said the claims raise “disputed and substantial questions of federal law” and fall under “complete preemption,” a legal doctrine that allows federal law to override state-level claims in certain areas. The move seeks to reposition the case within a framework where federal commodities regulation, rather than state gambling law, would take precedence.
The outcome could influence how courts interpret jurisdiction over prediction markets, especially as activity expands across platforms offering contracts tied to sports, elections, and other real-world outcomes.
What Is New York Alleging Against Coinbase and Gemini?
The lawsuit, filed Tuesday, targets Coinbase Financial Markets and Gemini Titan, alleging that their prediction market offerings violate New York gambling laws. Regulators claim the platforms allow users to place bets on sports, entertainment, and political outcomes without holding a state gaming license.
The complaint also raises concerns about user access, including individuals between 18 and 20 years old, and seeks financial penalties, forfeiture of profits, and restitution for affected customers. In addition, the state is asking the court to block the companies from offering similar products in New York unless they comply with local regulations.
The case reflects a broader push by state authorities to apply existing gambling frameworks to emerging financial products that resemble wagering but operate within trading platforms.
Investor Takeaway
Who Controls Prediction Markets: States or Federal Regulators?
The dispute centers on whether prediction markets fall under the authority of the Commodity Futures Trading Commission or state-level gaming regulators. Coinbase maintains that these products qualify as federally regulated exchanges under commodities law.
Grewal stated that prediction markets are “federally regulated national exchanges” under the CFTC and indicated that the company will continue to defend federal oversight as intended by Congress.
Federal regulators have reinforced this position in recent legal filings. The CFTC has taken action against state authorities in multiple jurisdictions, arguing that states cannot impose gambling laws on event contracts listed on federally regulated platforms.
In early April, the agency filed lawsuits against regulators in Illinois, Connecticut, and Arizona. Shortly after, the CFTC and the Department of Justice asked a federal court to block Arizona from enforcing its gambling laws against Kalshi’s contracts, asserting exclusive federal authority.
Investor Takeaway
What Are the Broader Implications for the Market?
Prediction markets have expanded rapidly, with platforms offering contracts tied to a wide range of real-world outcomes. Coinbase itself launched prediction markets across all 50 US states earlier this year, highlighting the pace of product rollout ahead of regulatory clarity.
At the same time, state regulators have intensified enforcement. More than 10 states have pursued legal action against prediction market platforms in recent months, seeking to assert jurisdiction and apply local gaming laws.
The outcome of this case could define the regulatory structure for the sector. A federal ruling in favor of Coinbase would strengthen the role of the CFTC and provide a clearer path for institutional participation. A state-level victory could lead to a patchwork of rules, complicating nationwide access and limiting scalability.
