Coinbase is also suing Michigan, Illinois, and Connecticut over being attacked by those states to establish regulatory jurisdiction in prediction markets as the cryptocurrency exchange gets ready to venture into that industry.

The firm complained that the states are, or are threatening to exercise, enforcement measures against the prediction market operators in the absence of jurisdiction. It had been threatened that the same action might be applied to Coinbase when it introduces its own product.

Coinbase, which implicates the attorneys general of the states in the suits, indicated that it will seek judicial rulings to confirm that state regulators have no power to interfere with what it says is the exclusive right of the Commodity Futures Trading Commission (CFTC) and prediction markets.

The company says that such markets are already under federal supervision by Congress and that the intervention of the states cannot be done in accordance with the existing law.

The suits come after Coinbase announced its intentions to venture into the prediction market segment in its recent announcement, as part of its diversification strategy that aims to add more revenue than trading in the more common cryptocurrency.

Forecast markets enable participants to trade a contract that is based on the future results of a real-life event, such as an election, economic variables, and sporting events.

The industry has expanded at an alarming rate in the last year, bringing an increase in state and federal oversight.

Coinbase has been attempting to roll out its prediction market product in a non-exclusive reliance on Kalshi, which is a federally authorised prediction market operator.

Kalshi is the subject of various regulatory controversies with state regulators who attempt to make prediction markets a gambling-oriented orientation.

The company and other players in the industry claim that their products are financial derivatives and that they are under the federal commodities law and not under state gambling laws.

Operators of Prediction Markets Are on Thin Ice

Kalshi, Robinhood, and Crypto.com have all been in conflict with the state regulators over whether their offerings were a breach of the local gambling laws.

Nevada gambling regulators were given the green light by a federal judge in Las Vegas to seek enforcement of Kalshi sports-related contracts in November after the court found the company had to adhere to state laws.

That ruling brought out the legal ambiguity of the regulatory paradigm of prediction markets.

The agencies of the states and the interests of casinos have continuously argued that prediction markets should be compared to gambling activities and thus should be under the jurisdiction and regulation of the state.

In contrast, the operators of prediction markets have urged the CFTC to supervise the operation of such markets under the provisions of the existing commodities law, and by affirming the prior sanction of some event contracts.

The Coinbase lawsuits bring out an intensifying dichotomy between state and federal understandings of regulatory jurisdiction on this topic.

As mixed court decisions begin to emerge in various jurisdictions, the legal observers have mentioned that the Supreme Court would eventually be requested to adjudicate on the contention within the upcoming years, as early as next year.

The Chairperson of CFTC May Steer in a New Direction

Michael Selig has officially been made the chairman of CFTC, which is simultaneous to the projected exit of Commissioner Caroline Pham.

Pham was, however, considered more open to the argument that prediction markets are subject to federal commodities regulation and not state gambling regulations during her tenure, following the arguments of companies like Kalshi and now Coinbase.

Her words and regulatory actions were indicative of a lean toward CFTC regulation, especially when the disagreement between state regulators and predictive market operators continued to rise.

Selig is less explicit about his approach towards prediction markets. He did not promise to take a particular path in terms of regulation in his nomination hearing and provided an indeterminate evaluation of how the CFTC ought to project event-based contracts.

His confirmation brings confusion when prediction markets are growing fast and encountering legal issues in various states, with no clear answers as to whether federal or state governments ultimately will have jurisdiction.