Coinbase Sues States, Fight for Federal Control of Markets

Coinbase has filed lawsuits against three U.S. states in a direct challenge to state-level regulation of prediction markets. The crypto exchange is targeting Connecticut, Illinois, and Michigan, arguing these states are overstepping their authority by treating prediction markets as gambling.

Chief Legal Officer Paul Grewal announced the legal action on Friday. He stated the lawsuits aim to confirm that prediction markets fall under the exclusive jurisdiction of the U.S. Commodity Futures Trading Commission.

Today @coinbase filed lawsuits in CT, MI, and IL to confirm what is clear: prediction markets fall squarely under the jurisdiction of the @CFTC, not any individual state gaming regulator (let alone 50). State efforts to control or outright block these markets stifle innovation…

— paulgrewal.eth (@iampaulgrewal) December 19, 2025

The filing comes days after Coinbase announced plans to integrate prediction markets through a partnership with Kalshi. State gaming regulators have moved to block such services, classifying them as gambling operations.

Grewal pushed back against this characterization in his public statement. He emphasized that prediction markets function as neutral exchanges matching buyers and sellers, unlike casinos that profit when customers lose.

Coinbase Legal Battle Over Market Classification

The lawsuits center on whether prediction markets qualify as derivatives or gambling products. Coinbase argues Congress deliberately excluded certain underliers from its commodity definition, leaving everything else under CFTC oversight.

Prediction markets allow users to speculate on future events by purchasing contracts tied to specific outcomes. These range from boxing match winners to central bank interest rate decisions.

Grewal contends that state efforts to control or block these markets stifle innovation and violate federal law. The company’s Illinois filing specifically challenges the application of state gambling laws to federally regulated transactions.

The CFTC has historically overseen derivatives markets, including futures and options contracts. Prediction markets share structural similarities with these financial instruments.

Their value depends entirely on the outcome of future events, meeting the technical definition of a derivative product. This distinction forms the core of Coinbase’s legal argument.

Platform Expansion Sparks Regulatory Clash

The lawsuits follow Coinbase’s December announcement of a major platform expansion. CEO Brian Armstrong unveiled plans to offer stock trading, advanced derivatives, and event contracts.

Armstrong positioned the rollout as part of a broader strategy to transform Coinbase into a comprehensive financial platform. The company also launched Coinbase Tokenize, an institutional stack supporting real-world asset tokenization.

Stock trading.

Rolling out on Coinbase in the U.S. pic.twitter.com/tTcjpvVyXc

— Coinbase 🛡️ (@coinbase) December 17, 2025

The CEO told CNBC that approximately one percent of users trade prediction markets as an asset class. The remaining 99 percent use them to gauge sentiment on elections, economic indicators, and other events.

Armstrong called stock trading a first step toward tokenized equities. He suggested the move could democratize access for people worldwide while unlocking new market structures domestically.

Institutional Outlook Shapes Strategy

Coinbase Institutional released a 70-page report outlining expectations for 2026. The firm described digital assets as evolving from a niche market to an emerging pillar of global market infrastructure.

The report expressed cautious optimism for the coming year. Clearer global regulatory frameworks are expected to provide stronger policy guardrails supporting innovation and market maturation.

In the United States, Coinbase Institutional highlighted landmark policy developments. Progress on stablecoin legislation like the GENIUS Act and momentum toward a broader crypto market structure bill were cited as key adoption factors.

The institutional arm framed 2026 as a year of institutional integration and regulatory maturity. Clearer rules could enable deeper participation from traditional financial players.

These regulatory developments are expected to influence risk management, compliance standards, and institutional portfolio strategies. Meanwhile, the current lawsuits represent Coinbase’s effort to shape the regulatory landscape directly through litigation.

The outcome of these state-level battles could determine how prediction markets operate across the United States. Federal jurisdiction would create uniform rules, while state oversight could fragment the market.