New York judge weighs whether federal law shields prediction markets from state gambling rules

A federal judge in Manhattan heard arguments Sept. 14 over whether New York can apply its gambling laws to prediction-market products offered by Coinbase and Gemini, or whether the Commodity Futures Trading Commission has exclusive authority over them.

U.S. District Judge Lorna G. Schofield did not rule from the bench after the Southern District of New York hearing. The dispute could determine whether state gaming regulators may act against federally registered event-contract markets, or whether the Commodity Exchange Act preempts such enforcement.

The CFTC filed suit against New York on April 24, seeking a declaration that it has exclusive authority over event contracts and a permanent injunction barring the state from enforcing laws the agency considers preempted. The agency has also sought dismissal of New York's claims against CFTC-licensed prediction markets.

The federal regulator argues that event contracts are swaps and derivative instruments governed by the Commodity Exchange Act. CFTC-registered markets operate under the agency's Designated Contract Market licences, and the agency maintains that the federal framework displaces state rules governing the exchanges' operations and transactions.

New York takes the opposite view. Attorney General Letitia James sued Coinbase and Gemini in April, alleging that their prediction-market offerings constitute illegal gambling platforms. The state has sought $3.4 billion in alleged illegal profits, civil penalties and treble restitution for customers.

State lawyers told Schofield that many of the contracts are not financial derivatives, but unapproved gambling products. They argued that contracts based on sporting events are wagers within the jurisdiction of the New York State Gaming Commission.

Schofield pressed CFTC counsel on why an injunction was justified when other federal courts had denied comparable requests. Law.com reported that the judge also questioned federal officials and a prediction-market operator about their ability to meet the standard for an injunction, against a backdrop of differing circuit-court views on who may regulate the markets.

The American Gaming Association was permitted to file an amicus memorandum opposing the CFTC's injunction request. As we reported Sept. 7, the trade group has argued that sports-event contracts are gambling products in substance; it told the court that users experience them as sports bets rather than novel derivatives.

The CFTC has framed the New York litigation as part of a wider campaign to preserve federal jurisdiction. Chairman Michael S. Selig said the agency had brought similar lawsuits against Arizona, Connecticut and Illinois, and that a temporary restraining order had been obtained in Arizona against state regulation of CFTC-regulated prediction markets.

Separately, the agency filed an amicus brief in the Massachusetts Supreme Judicial Court in a case involving KalshiEx, asserting exclusive federal jurisdiction over commodity-derivatives markets, including prediction markets.