Introduction
In a high-stakes legal confrontation, cryptocurrency exchange Coinbase has filed federal lawsuits against the states of Connecticut, Michigan, and Illinois. The core of the dispute centers on who holds regulatory authority over prediction markets—state gaming boards or the federal Commodity Futures Trading Commission (CFTC). With Coinbase preparing to launch its own CFTC-regulated prediction market platform in January 2026, this legal battle seeks to preemptively block state intervention, which the company argues would stifle innovation and violate federal law by creating a patchwork of conflicting regulations.
Key Points
- Coinbase argues Congress deliberately excluded only specific commodities (like onions and movie box office receipts) from CFTC jurisdiction, meaning sporting events and other prediction market subjects fall under federal—not state—regulatory scope.
- If forced to obtain Illinois gambling licenses, Coinbase would be restricted to serving only physically located Illinois residents, directly conflicting with federal requirements that designated contract markets provide 'impartial access' to all traders nationwide.
- The prediction market industry has seen billions in trading volume in 2025, with Kalshi's valuation jumping to $11 billion after a $1 billion funding round, and 2026 is viewed as a 'make-or-break year' for the sector's expansion.
The Legal Battle: Federal vs. State Jurisdiction
Coinbase’s lawsuits, filed in federal courts, seek declaratory and injunctive relief against state gaming regulators. The exchange’s central legal argument is that prediction markets, where users trade event contracts on outcomes in sports, politics, and climate, fall squarely under the exclusive jurisdiction of the Commodity Futures Trading Commission. Paul Grewal, Coinbase’s Chief Legal Officer, stated on social media that “State efforts to control or outright block these markets stifle innovation and violate the law.” The complaint meticulously notes that Congress deliberately chose to exclude only specific commodities—explicitly naming “onions” and “motion picture box office receipts”—from the CFTC’s purview. This, Coinbase contends, makes clear that all other subjects, including sporting events, are within the federal regulatory scope.
The legal action is not merely theoretical; it addresses an imminent business risk. Coinbase is preparing for a January 2026 launch of prediction markets through a partnership with Kalshi, a platform registered with the CFTC as a designated contract market since November 2020. As a CFTC-registered futures commission merchant itself, Coinbase will act as an intermediary, funneling its customer base to Kalshi’s exchange. State-level enforcement actions, therefore, pose a direct threat to this planned venture. The lawsuits aim to secure a legal precedent that shields the upcoming launch from being disrupted by individual state agencies asserting authority under local gambling statutes.
Illinois as the Epicenter of Enforcement
The lawsuit against Illinois highlights the most advanced state-level challenge. According to Coinbase’s filing, the Illinois Gaming Board issued cease-and-desist letters in April to Kalshi, Robinhood, and Crypto.com. The Board alleged these platforms were engaged in sports wagering without proper licensing under the Illinois Sports Wagering Act and Criminal Code. Furthermore, the Board wrote to the CFTC in April, claiming that offering sports event contracts violates state law, and in October, it warned all licensees that facilitating prediction markets without a state license constitutes illegal gambling.
Coinbase’s complaint outlines severe operational and reputational consequences should Illinois prevail. The company warns that enforcement threats “would immediately undermine Coinbase’s reputation as a compliance-focused platform.” This reputation is built on facilitating nearly $1 trillion in annual trading volume and custodizing over $500 billion in digital assets. More concretely, the lawsuit argues that being forced to obtain an Illinois gambling license would cripple its business model. Such a license would restrict Coinbase to serving only physically located Illinois residents. This directly conflicts with federal requirements that CFTC-regulated designated contract markets, like Kalshi, must provide “impartial access” to all traders nationwide, creating an irreconcilable regulatory clash.
Industry Stakes and a Pivotal Year Ahead
The legal fight is unfolding against a backdrop of explosive growth and heightened anticipation for the prediction market sector. The industry has seen billions of dollars in trading volume throughout 2025. Kalshi’s valuation alone jumped to $11 billion after closing a $1 billion funding round in November. Farokh Sarmad, President of prediction market Myriad, called Coinbase’s entry a “powerful validation of our efforts,” praising the exchange for “fighting the good fight for this growing asset class in the courts.”
Industry observers see 2026 as a critical inflection point. Marcin Kazmierczak, co-founder of oracle provider Redstone, told Decrypt that the coming year will be a “make-or-break year” for prediction markets. He noted that the entry of major platforms like Coinbase, Robinhood, and Gemini—which are embedding prediction markets as features—could fundamentally reshape the landscape. The market may shift from a duopoly to a “multipolar market where distribution eats specialization.” Coinbase’s lawsuits are thus a strategic move to clear regulatory hurdles ahead of this pivotal expansion, seeking to ensure that federal oversight, not a fragmented state regime, governs the future of this burgeoning financial innovation.
📎 Related coverage from: decrypt.co
