Coinbase Takes Prediction Markets Fight to Federal Court as January Launch Approaches

Coinbase isn’t waiting for regulators to decide the fate of prediction markets in America. The crypto exchange giant has launched a preemptive legal strike against three states while simultaneously preparing to roll out prediction market trading to millions of users in January 2026.

The company’s aggressive “sue first, launch second” strategy signals a pivotal moment for the prediction markets industry. With litigation now spanning 10 states and major players forming an unprecedented coalition, the battle over whether these platforms are financial instruments or gambling operations has reached a critical inflection point. This legal uncertainty mirrors the ongoing controversy surrounding crypto gambling platforms like Stake.us.

The Federal Preemption Argument

At the heart of Coinbase’s legal strategy is a constitutional showdown between federal and state authority. The company argues that Congress has already designated the Commodity Futures Trading Commission (CFTC) as the exclusive regulator for prediction markets through the Commodity Exchange Act.

The lawsuits, filed on December 19, 2025, target regulators in Michigan, Illinois, and Connecticut. Coinbase’s Chief Legal Officer Paul Grewal framed the litigation as a test of federal preemption, stating that “prediction markets fall squarely under the jurisdiction of the Commodity Futures Trading Commission, not any individual state gaming regulator.”

The exchange contends that prediction markets fundamentally differ from traditional gambling operations. Unlike casinos that set odds and profit from player losses, prediction market platforms match buyers and sellers without taking positions themselves. This distinction, Coinbase argues, places them firmly within the realm of financial derivatives rather than gambling—a classification that would exempt them from federal gambling tax regulations that apply to traditional betting.

The Kalshi Partnership and January Launch

Coinbase’s prediction markets offering will be powered by Kalshi, the largest CFTC-designated prediction market in the United States. Kalshi has been expanding its mainstream reach through media partnerships, and now gains access to Coinbase’s massive user base. The partnership, announced at Coinbase’s “System Upgrade” event on December 17, 2025, will allow users to trade event contracts within the main Coinbase app starting as early as January 2026.

Under this arrangement, Kalshi provides all prediction market contracts and liquidity, while Coinbase serves as a distribution platform. Users will be able to trade on outcomes ranging from elections and interest rate decisions to sports events and economic indicators—all with as little as $1 in USD or USDC.

“Coinbase is now the best place to trade every asset, not just crypto.”
— Brian Armstrong, CEO, Coinbase

The move is part of Armstrong’s broader vision to transform Coinbase into an “Everything Exchange”—a unified platform combining crypto, equities, prediction markets, and commodities. The company also announced traditional stock trading with 24-hour access five days a week and zero commissions at the same event.

A Timeline of Coinbase’s Prediction Markets Push

The Acquisition of The Clearing Company

Coinbase’s commitment to prediction markets deepened further on December 22, 2025, when the company announced its acquisition of The Clearing Company. Coinbase isn’t the only major crypto exchange making moves—Gemini has also entered the prediction markets space. The Clearing Company startup, founded by Toni Gemayel—a former head of growth at both Polymarket and Kalshi—had raised a $15 million seed round backed by Coinbase Ventures earlier in the year.

The deal brings nearly the entire 10-person team to Coinbase, adding specialized expertise in building event-based trading systems. The acquisition marks Coinbase’s tenth deal announced in 2025, following major transactions including the $2.9 billion acquisition of derivatives exchange Deribit and the $375 million purchase of investment platform Echo.

The Coalition for Prediction Markets

Coinbase’s legal strategy aligns with a broader industry effort to establish federal regulatory dominance over prediction markets. On December 11, 2025, the company joined Kalshi, Robinhood, Crypto.com, and Underdog to launch the Coalition for Prediction Markets (CPM).

The coalition’s early priorities include reinforcing the federal framework governing prediction markets, establishing nationwide integrity standards to prevent insider trading, and defending against state-level regulatory actions.

“At Coinbase, our mission is to deliver financial freedom to the world – and prediction markets by nature democratize fact finding and the seeking of truth.”
— Faryar Shirzad, Chief Policy Officer, Coinbase

The formation comes as state-federal tensions reach a boiling point. Nearly half of Americans under 45 have already used an online financial or prediction market, according to industry data, making the regulatory outcome increasingly consequential for mainstream adoption.

The Broader Regulatory Landscape

Coinbase’s lawsuits bring the total number of states involved in prediction market litigation to 10. Beyond Michigan, Illinois, and Connecticut, legal battles are ongoing in Maryland, New Jersey, Ohio, Nevada, Massachusetts, New York, and other jurisdictions.

The regulatory landscape remains fractured. A federal judge in Connecticut temporarily blocked state enforcement against Kalshi on December 10, 2025, ordering regulators to halt action pending a preliminary injunction decision scheduled for February 12, 2026. However, Kalshi recently lost its preliminary injunction protection in Nevada, demonstrating the uncertain legal terrain.

What This Means for Crypto Prediction Platforms

Coinbase’s entry into prediction markets carries significant implications for the broader ecosystem, including crypto-native platforms like Polymarket, which recently gained CFTC approval for U.S. re-entry. The company’s aggressive legal strategy could establish precedents that benefit all federally-regulated prediction market operators.

If Coinbase prevails in its federal preemption argument, it would effectively clear a nationwide path for prediction market access, removing the patchwork of state gaming regulations that currently threatens to fragment the industry. Conversely, if state regulators win, platforms would face complex licensing requirements across jurisdictions—potentially limiting prediction markets to a handful of states. The crypto gambling industry is already facing similar multi-state legal challenges, as seen in the recent federal lawsuits targeting Drake and Adin Ross over Stake.us.

Coinbase’s distribution power adds another dimension. With millions of existing users and seamless integration into its main trading app, the company could dramatically accelerate mainstream adoption of prediction markets. The minimum $1 entry point removes barriers that have historically limited participation to more sophisticated traders.

The February 2026 Showdown

The most significant near-term event will be the February 12, 2026 preliminary injunction hearing in Connecticut. Under the court’s briefing schedule, Connecticut must file its response to Kalshi’s motion by January 9, 2026, with Kalshi’s reply due January 30, 2026.

The outcome could set the tone for prediction market regulation nationwide. A ruling favoring federal preemption would strengthen Coinbase’s position across its three lawsuits and potentially discourage other states from pursuing enforcement actions. A ruling favoring state authority could embolden regulators in the remaining states to take more aggressive action.

Armstrong’s Vision for the “Everything Exchange”

Coinbase CEO Brian Armstrong has positioned prediction markets as part of a broader thesis that crypto technology will eventually upgrade all financial services. “Crypto is updating all financial services,” he stated at the System Upgrade event, suggesting every major asset class—from equities to commodities to real estate—will eventually move on-chain.

The prediction markets push intensifies Coinbase’s rivalry with fintech competitors like Robinhood, which has also partnered with Kalshi for prediction market distribution. Both platforms are now racing to capture the growing demand for event-based trading among younger users.

With total trading volumes exceeding $28 billion globally in 2025 and weekly peaks reaching $2 billion, the stakes for regulatory clarity have never been higher. Coinbase’s willingness to litigate before launching signals confidence in its federal preemption argument—and a determination to shape the regulatory landscape rather than wait for it to be defined by state-level enforcement actions.

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Sources

• Kalshi Prediction Markets Announcement — Coinbase Blog
• The Clearing Company Acquisition — Coinbase Blog
• Coalition for Prediction Markets Launch — Kalshi News