CFTC sues nine states to protect prediction markets
- The CFTC is suing nine states to assert sole federal authority over prediction markets.
- Conflicting court rulings are driving the regulatory battle over event contracts toward the Supreme Court.
- Coinbase and Robinhood are pushing into prediction trading despite ongoing state enforcement actions.
The fight over prediction markets is heading to the Supreme Court.
In late September, David Yaffe-Bellany reported on The Daily that the Commodity Futures Trading Commission took the aggressive step of suing nine states to block them from banning platforms like Kalshi and Polymarket. In Michigan, after a state judge ordered Kalshi to halt operations, the CFTC invoked emergency powers to order the company to ignore the court order.
Forty-four state attorneys general signed a joint letter condemning prediction markets as unlicensed online casinos that evade local sports betting taxes and allow 18-year-olds to trade. State regulators pointed to market manipulation and insider trading scandals - including a teleprompter operator betting on presidential speeches - to argue local gambling laws must apply.
Donald Trump Jr. actively intervened in the dispute by urging state officials at a New Orleans meeting to defer to federal regulators, according to Yaffe-Bellany. The intervention highlighted the overlap between political influence and personal financial interests, as Trump Jr. holds equity stakes in both Kalshi and Polymarket.
By early October, the legal deadlock worsened across multiple jurisdictions. On Bankless, Ryan Sean Adams detailed how the Third Circuit granted oversight powers to the CFTC while the Ninth Circuit upheld state regulatory rights, alongside recent court victories for state regulators in Ohio and Tennessee. Adams noted this mounting circuit split virtually guarantees Supreme Court intervention.
Corporate expansion is accelerating regardless of the legal crossfire. Coinbase secured CFTC approval for a clearinghouse subsidiary, giving the company exchange, broker, and clearinghouse licenses to launch proprietary prediction markets. Robinhood simultaneously unveiled corporate earnings prediction markets designed for active retail traders.
The Supreme Court will ultimately decide whether prediction markets operate as federally regulated financial exchanges or state-controlled sportsbooks.
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ROLLUP: Uptober Green Light? | Robinhood Goes All-In | $400M Bitget Hack | Prediction Markets to SCOTUS • Oct 2
- At Robinhood's Hood Summit, the company unveiled 24/7 stock trading, corporate earnings prediction markets, and perpetual futures for select U.S. users. David Hoffman explains that Robinhood is aggressively targeting active day traders and speculators rather than passive retail investors.
- Polymarket faces a New York state lawsuit for operating an unlicensed gambling business, while Kalshi lost an appeals court ruling allowing Ohio and Tennessee to regulate its contracts. Ryan Sean Adams expects these conflicting rulings to force a Supreme Court showdown.
- Coinbase secured CFTC approval for its clearinghouse subsidiary, granting the company all three major regulatory licenses. This allows Coinbase to act as an exchange, broker, and clearinghouse for fully collateralized derivatives, positioning it to launch proprietary prediction markets.
Also discussed on this episode: (11)
BTC Markets (2)
- Ryan Sean Adams cites analyst Michael Nadeau, who claims the crypto market has entered an early bull phase. This shift is confirmed by Bitcoin securing a second consecutive weekly close above its 50-week moving average.
- Over the 30 days prior to October, 96 percent of the top 50 crypto assets outperformed Bitcoin. Ryan Sean Adams notes that recent double-digit percentage drops in major altcoins represent a standard mean reversion rather than structural weakness.
Macro (2)
- Ryan Sean Adams highlights a macro paradox where bond yields are rising rapidly despite cooler-than-expected inflation data. Analyst Ben Hunt warns that the unprecedented velocity of this upward yield movement will inevitably break something in the global financial system.
- Ryan Sean Adams cites researcher Kobayashi's claim that a sudden government change in inflation methodology knocked approximately 20 basis points off the CPI print. This accounting shift suggests bond markets are rejecting official inflation numbers.
Regulation (1)
- Robinhood routes perpetual futures orders through its newly acquired Bitstamp exchange to leverage its CFTC license. David Hoffman notes that the protocol Lyra suffered a steep sell-off because it currently lacks the regulatory license required for main-app integration.
Agents (2)
- Robinhood launched a social trading feature alongside automated agentic trading. David Hoffman reports encountering retail investors who are already delegating thousands of dollars to these AI agents to execute automated trading strategies.
- Apollo's chief economist warned that financial AI assistants could trigger systemic bank runs by automatically moving retail deposits out of low-yield bank accounts. Ryan Sean Adams notes that these automated agents threaten traditional banking margins by shifting capital to high-yield stablecoins.
Custody (1)
- Offshore exchange Bitget suffered a hot-wallet exploit totaling roughly 387 million dollars, marking the largest crypto hack of the year. The platform used its internal protection fund to fully cover user losses and avoid customer harm.
Censorship (1)
- A portion of the stolen Bitget funds was routed through Near Intents, sparking a debate over permissionless neutrality. Near founder Ilya Polosukhin defended the application's automated transaction-blocking firewall, arguing that crypto protocols must prevent money laundering to survive regulatory scrutiny.
ETFs (1)
- Bitwise launched a Near ETF, capturing over half a percent of the total Near supply on its first trading day. Ryan Sean Adams notes that Bitwise is marketing the asset to traditional investors as the key intersection of crypto and artificial intelligence.
Protocol (1)
- Vitalik Buterin rebranded Ethereum's future as a cryptographic world computer powered by zero-knowledge proofs that verify, rather than reprocess, transactions. However, Barnaby from ETH Labs warns that Ethereum must retain valuable state on Layer 1 to prevent settlement centralization.
Are Prediction Markets Gambling? A Lot Rides on the Answer. • Sep 29
- David Yaffe-Belany reports on The Daily that trading volume on the largest prediction market rose from 38 billion dollars in August to 42 billion dollars in September. This rapid growth has fueled widespread consumer adoption.
- Prediction markets face growing scrutiny over insider trading scandals. High-profile cases include former Congressman George Santos, who was fined after betting on his own State of the Union attendance, and a prompter operator who bet on presidential speeches.
- Forty-four state attorneys general signed a letter condemning prediction markets as online casinos preying on youth. About twenty states are actively litigating against these platforms, arguing they constitute gambling under state jurisdiction rather than federal financial markets.
- Prediction market operators argue they function like financial exchanges rather than sports books because users trade against each other rather than the house. Platforms profit from flat transaction fees rather than user losses, which aligns incentives differently than traditional bookmakers.
- Kalshi promotes hedging to differentiate its platform from standard gambling. For example, a California ice cream shop placed weather bets on the platform, securing a financial payout if rain reduced customer turnout and subsequent retail sales.
- Federal appellate courts have split over which entity holds regulatory authority. The Third Circuit ruled that the Commodity Futures Trading Commission should oversee the markets, while the Ninth Circuit ruled that states have the right to regulate them.
- Donald Trump Jr. holds financial stakes in Kalshi and Polymarket. At a private meeting in New Orleans, he urged state attorneys general to defer regulation to federal authorities, aligning his family's personal financial interests with federal regulatory policy.
- The Commodity Futures Trading Commission has launched unprecedented lawsuits against nine states to block them from regulating prediction markets. Under a pro-tech appointee, the commission also used emergency powers to tell Kalshi to ignore a Michigan court order.
- States are motivated to regulate prediction markets to enforce local gambling bans, maintain strict age limits, and capture tax revenue. While sports betting platforms require users to be 21, Kalshi allows 18-year-olds to trade under financial market rules.
Also discussed on this episode: (2)
Regulation (1)
- The Trump administration finalized a plan to weaken passenger vehicle fuel efficiency standards. Carmakers now have five years to reach an average of 34.9 miles per gallon, a significant reduction from the 50.4 miles per gallon target set under Biden.
Europe (1)
- British counterterrorism officials released five men on bail after arresting them near an Air Force base used by American forces. The release raised questions about why they drove three vans close to American bombers without the military finding actionable evidence.