By Emma Kinery
Gongwer Nes Service
A federal judge in Michigan denied Coinbase’s request to bar state regulators from enforcing state gambling regulations against the company’s prediction market platform.
The ruling comes just over a month after a different judge granted the state a temporary restraining order against fellow prediction market operator Kalshi, blocking the company’s sports event contracts.
U.S. District Court Judge Shalina Kumar, Eastern District of Michigan, ruled last week that Coinbase Financial Markets was unlikely to succeed on the merits of the case and called the company’s arguments “applesauce.” The ruling opens the door for state regulators to ban Coinbase from operating its prediction market platform in the state.
Coinbase Financial Markets relies on Kalshi, which is registered with the Commodity Futures Trading Commission as a designated contract market, to power its prediction market offerings. Coinbase Financial Markets itself is not a registered designated contract market.
The platform initially sued the Michigan Gaming Control Board and Michigan Attorney General Dana Nessel in December, arguing that because prediction markets are regulated by the federal CFTC under the Commodity Exchange Act, they are not beholden to state laws like state’s Lawful Sports Betting Act of 2019.
The judge disagreed, siding with state regulators who say prediction markets still have to play by the same rules as other operators. Kumar ruled that “sports event contracts are not ‘swaps,’” noting that the CEA does not clearly define the phrase.
“Coinbase’s interpretation of and its attendant phrase would frustrate the manifest purpose of the CEA,” Kumar wrote, calling the plaintiff’s reading “absurd.”
The judge wrote that the CEA is “specifically focused on securing commodity-related derivative markets through deterring and preventing price manipulation,” protect market participants from fraud, promote competition and ensure financial integrity.
“Commodities are the key component here, meaning that these specific goals are best served when “a ‘swap’ is understood as a transaction involving financial instruments and measures that traditionally and directly affect commodity prices,’” Kumar wrote, quoting an Ohio judge’s ruling from March. Chief U.S. District Judge Sarah Morrison of the Southern District of Ohio ruled Kalshi was beholden to Ohio state gaming laws and denied Kalshi’s request for a preliminary injunction.
“By contrast, the overall goal of securing and stabilizing commodity-related derivative markets is not as well served when a sports event contract, something with zero direct affect on commodity prices, is considered a ‘swap,” Kumar wrote. “The statutory canon against absurdity buttresses this conclusion.”
Kumar also addressed Coinbase’s allegations that Congress through the CEA gave the CFTC-regulated designated contract markets federal preemption over state gambling laws, ruling the text of the provision Coinbase’s lawyers faceted their argument on “failed to refute the presumption that the CEA does not supersede state gambling laws.”
“Coinbase's averments are, in a word, applesauce,” Kumar wrote. “[It] is not impossible for Coinbase to comply with the LSBA simply because it is costly and challenging.”
A spokesperson for Coinbase said the company appreciates the opportunity to be heard but the decision adds to “an increasingly tangled state-by-state regulatory thicket.”
"The Third Circuit remains the only appellate court in the country to reach the merits, reaffirming Congress's intent for one federal regulator to oversee derivatives markets,” the spokesperson said, referring to the March ruling in favor of Kalshi over New Jersey regulators.
States on the whole, however, have had the upper hand: Of the 36 court rulings handed down between prediction markets and state regulators, the states have won 30 and prediction market operators have won six.
Update: This story has been updated to include a comment from Coinbase.
Gongwer Nes Service
A federal judge in Michigan denied Coinbase’s request to bar state regulators from enforcing state gambling regulations against the company’s prediction market platform.
The ruling comes just over a month after a different judge granted the state a temporary restraining order against fellow prediction market operator Kalshi, blocking the company’s sports event contracts.
U.S. District Court Judge Shalina Kumar, Eastern District of Michigan, ruled last week that Coinbase Financial Markets was unlikely to succeed on the merits of the case and called the company’s arguments “applesauce.” The ruling opens the door for state regulators to ban Coinbase from operating its prediction market platform in the state.
Coinbase Financial Markets relies on Kalshi, which is registered with the Commodity Futures Trading Commission as a designated contract market, to power its prediction market offerings. Coinbase Financial Markets itself is not a registered designated contract market.
The platform initially sued the Michigan Gaming Control Board and Michigan Attorney General Dana Nessel in December, arguing that because prediction markets are regulated by the federal CFTC under the Commodity Exchange Act, they are not beholden to state laws like state’s Lawful Sports Betting Act of 2019.
The judge disagreed, siding with state regulators who say prediction markets still have to play by the same rules as other operators. Kumar ruled that “sports event contracts are not ‘swaps,’” noting that the CEA does not clearly define the phrase.
“Coinbase’s interpretation of and its attendant phrase would frustrate the manifest purpose of the CEA,” Kumar wrote, calling the plaintiff’s reading “absurd.”
The judge wrote that the CEA is “specifically focused on securing commodity-related derivative markets through deterring and preventing price manipulation,” protect market participants from fraud, promote competition and ensure financial integrity.
“Commodities are the key component here, meaning that these specific goals are best served when “a ‘swap’ is understood as a transaction involving financial instruments and measures that traditionally and directly affect commodity prices,’” Kumar wrote, quoting an Ohio judge’s ruling from March. Chief U.S. District Judge Sarah Morrison of the Southern District of Ohio ruled Kalshi was beholden to Ohio state gaming laws and denied Kalshi’s request for a preliminary injunction.
“By contrast, the overall goal of securing and stabilizing commodity-related derivative markets is not as well served when a sports event contract, something with zero direct affect on commodity prices, is considered a ‘swap,” Kumar wrote. “The statutory canon against absurdity buttresses this conclusion.”
Kumar also addressed Coinbase’s allegations that Congress through the CEA gave the CFTC-regulated designated contract markets federal preemption over state gambling laws, ruling the text of the provision Coinbase’s lawyers faceted their argument on “failed to refute the presumption that the CEA does not supersede state gambling laws.”
“Coinbase's averments are, in a word, applesauce,” Kumar wrote. “[It] is not impossible for Coinbase to comply with the LSBA simply because it is costly and challenging.”
A spokesperson for Coinbase said the company appreciates the opportunity to be heard but the decision adds to “an increasingly tangled state-by-state regulatory thicket.”
"The Third Circuit remains the only appellate court in the country to reach the merits, reaffirming Congress's intent for one federal regulator to oversee derivatives markets,” the spokesperson said, referring to the March ruling in favor of Kalshi over New Jersey regulators.
States on the whole, however, have had the upper hand: Of the 36 court rulings handed down between prediction markets and state regulators, the states have won 30 and prediction market operators have won six.
Update: This story has been updated to include a comment from Coinbase.
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