According to PYMNTS.com, on December 10, a federal judge granted prediction market Kalshi a temporary injunction against Connecticut, barring the state from enforcing its gambling laws. This came after both the Illinois Gaming Board in April and the Connecticut Department of Consumer Protection in early December sent cease-and-desist letters to Kalshi, Robinhood, and Crypto.com, claiming they were running unlicensed sports betting operations. Coinbase, a CFTC-registered futures commission merchant, filed its own lawsuits against those two states on December 12, joining Kalshi’s legal fight. Coinbase plans to serve as an intermediary, giving its customers access to Kalshi’s exchange starting in January 2025 to trade event contracts on sports, politics, and climate. The company’s chief legal officer, Paul Grewal, argues these are federally regulated futures contracts, not gambling, because Congress only excluded specific items like “onions” from the CFTC’s commodity definition.
The Real Battle: Federal vs. State Power
Here’s the thing: this isn’t really about sports betting. It’s a classic turf war. The CFTC has been pretty clear it sees these prediction markets as falling under its jurisdiction as event contracts. Last week, it even issued no-action letters to platforms like Polymarket and Gemini, basically giving them a green light to operate nationwide if they follow certain rules. So you have a federal agency saying “this is ours to regulate,” and states like Illinois, Connecticut, New Jersey, and Nevada saying, “No, it looks like gambling, and that’s our domain.”
But the legal ground is different here than in other tech regulatory fights, like with AI. Congress has failed to create a federal AI framework, leaving that mess unclear. For prediction markets, the CFTC’s authority over futures and swaps is written into federal law. That gives Coinbase and Kalshi a much stronger “federal preemption” argument. They’re basically saying, “The feds already have a system for this, so states, back off.”
Why Coinbase Is All-In On This Fight
So why is Coinbase jumping into lawsuits? It’s not just being a good partner to Kalshi. This is a strategic expansion. Coinbase wants to be more than a crypto spot exchange. By acting as a futures commission merchant for prediction markets, it’s moving deeper into the broader world of derivatives and speculative contracts. If they can win this and offer political and climate contracts alongside crypto futures, it significantly broadens their product suite. It’s a new revenue stream waiting to happen, but only if they can knock down these state-level barriers.
Their argument that prediction markets are “neutral exchanges” and not sportsbooks is crucial. They’re trying to frame it as a financial market for hedging opinions, not a casino game. Whether a court buys that distinction, especially for sports-related contracts, is the multi-million dollar question. The early injunctions for Kalshi suggest the argument has some merit, but it’s far from settled law.
The Broader Implications for Fintech
Look, this is a flashpoint for any fintech company trying to innovate in a gray area between finance and gaming. Robinhood and Crypto.com got those cease-and-desist letters too, but they’re letting Kalshi and now Coinbase lead the legal charge. If Coinbase wins, it paves the way for everyone. If they lose, it could confine prediction markets to a much narrower path or kill them in key states.
It also puts the CFTC in a interesting spot. The agency is being proactive with its no-action letters, which is a signal to the industry. But now it has its registered entities (Coinbase, Kalshi) fighting states in court, essentially testing the limits of the CFTC’s own claimed authority. The agency isn’t a party to the suits, but its regulatory stance is the entire foundation for them. This whole saga is basically a live stress test of how new financial products get born in the US’s messy, overlapping regulatory system. And everyone in crypto and fintech is watching.
