Coinbase has initiated legal proceedings against the states of Illinois, Michigan, and Connecticut, challenging their attempts to regulate prediction markets while seeking federal court clarification on federal oversight.

In the filings, Coinbase seeks both declaratory and injunctive relief, asserting that prediction markets should be governed by the Commodity Futures Trading Commission (CFTC) rather than state gaming regulators.

Who Controls Prediction Markets?

The firm argues that existing federal law assigns supervisory rights for prediction markets to the CFTC, thereby limiting state influence. This legal action coincides with Coinbase’s plans to enter the prediction market arena through a partnership with Kalshi, a CFTC-regulated platform, and it intends to launch event-based contract trading nationwide by January 2026.

Coinbase claims that state regulations could result in immediate and “irreparable harm” by denying access to federally regulated offerings. Several states have recently interpreted event contracts related to sports outcomes as illegal unless operators secure state-issued betting licenses.

According to the crypto exchange, this interpretation is in conflict with federal commodities law. Coinbase emphasized that Congress has granted the CFTC extensive authority over derivatives and commodities, with few exceptions that do not encompass sporting events. Thus, it maintains that sports-related event contracts are subject to federal control.

The exchange has differentiated prediction markets from conventional sportsbooks, which engage in creating odds and profiting from customer losses. In contrast, prediction markets serve as neutral platforms that connect buyers and sellers without assuming directional risk.

Coinbase’s Chief Legal Officer, Paul Grewal, stated, > “We’re right on the law and the facts. And we will prove it.”

These lawsuits arise as scrutiny from state regulators intensifies with the soaring popularity of prediction markets, as platforms like Kalshi and Polymarket have handled billions in trading volume recently, prompting heightened regulatory focus.

Earlier this month, regulators in Connecticut issued cease-and-desist orders against companies offering event-based contracts, spurring legal disputes and temporary halts in enforcement.

Prediction Markets Boom

Amid regulatory challenges, the sector is experiencing a resurgence in 2025 due to new product introductions, which enhances expectations for wider acceptance. Robinhood’s CEO, Vlad Tenev, has forecasted substantial long-term expansion for crypto-based prediction markets. He characterized the sector as entering the preliminary phase of a “prediction market supercycle,” suggesting both adoption and trading activity may increase significantly as platforms utilize blockchain technologies to price real-world events.