New York State rages at Kalshi! The “prediction market” is essentially illegal gambling. Will Coinbase (COIN.US) become the next target of regulation?

The Zhitong Finance App learned that the New York State Attorney General sued Kalshi on Friday, claiming that its prediction market platform violated the state's laws prohibiting illegal gambling.

In a lawsuit filed in the Manhattan state court, Attorney General Lititia James said that Kalshi failed to obtain a license from the New York State Gaming Commission to operate its platform, and that users made transactions on the platform based on predictions of the results of sporting events, elections, and other events.

The Attorney General said such platforms may promote problem gambling, including participation by people under 21, and endanger people's financial, emotional, and physical health.

She filed a similar lawsuit against two other prediction market operators — Coinbase Financial Markets and Gemini Titan — in April, claiming that the three companies' so-called “event contracts” were essentially gambling.

James said in a statement, “New York State's gambling laws protect children from underage betting and help fight gambling addiction.” “No matter what they call themselves, prediction markets like Kalshi are gambling platforms, which are as simple as that.”

CFTC challenges New York State

Predictive markets such as Kalshi and Polymarket have soared in popularity since the 2024 US presidential election, when they outperformed polling agencies in predicting the victory of Republican candidate Trump over Democratic candidate Harris.

Their growth has sparked a wave of lawsuits and counterclaims, focusing on the ownership of the industry by US states rather than the federal government.

The US Commodity Futures Trading Commission (CFTC) claims exclusive regulatory powers and has challenged the regulatory actions of at least nine states, including New York State — it sued New York State in April.

New York-based Kalshi said in a statement, “It's unfortunate to see our state leadership make this kind of political drama,” and “states can't just shut down a federally licensed exchange.”

Less than an hour before Kalshi was sued in New York State, the CFTC filed an “urgent” motion in Manhattan federal court to block the state's enforcement action, calling it “overstepping its powers” and would cause irreparable damage to the CFTC and the markets it regulates.

The CFTC's filing comes after the Manhattan Federal Court of Appeals rejected Kalshi's request on Wednesday — Kalshi's previous request to avoid being subject to New York State gambling laws, and it appealed the July 8 ruling by US District Judge Annalisa Torres refusing to issue an injunction to the state.

Kalshi pre-emptively sued New York State in October last year to block its enforcement.

Betting on Super Bowl, “Big Brother”

According to the New York State lawsuit, Kalshi's prediction market is gambling because people can bet on events where they can't control the outcome, such as who will win the Super Bowl or the reality show Big Brother.

New York State also objected to Kalshi allowing 18 to 20 year olds to use its platform, although the state's law stipulates that the minimum age for mobile sports betting is 21.

New York Governor Kathy Hochul said in a statement, “Kalshi chose to ignore New York State's gaming laws, which exist to protect consumers, prevent problem gambling, fund critical public services, and ensure that every company follows the same set of rules.” “This choice has consequences.”

At least four states — Massachusetts, Michigan, Nevada, and Washington — have obtained court orders restricting Kalshi's activities.

In refusing to block potential enforcement actions in New York State, Torres determined that the state's interests in preventing gambling addiction, maintaining the integrity of sporting events, and avoiding the proliferation of unregulated contracts “seriously” outweigh Kalshi's interests in ensuring the priority of federal law and avoiding “difficult” technical issues for customers.

The lawsuit in New York State called for the cessation of Kalshi's alleged illegal actions, confiscation of illegal proceeds, a civil fine equal to three times the illegal proceeds, and compensation to the customer.

Coinbase's new growth point blocked

Against the backdrop of overall fluctuations in the cryptocurrency market and a slowdown in spot trading volume, the prediction market has become one of the fastest-growing business segments of Coinbase (COIN.US) and receiving the most attention in the capital market.

However, as local regulators such as New York State point the finger at “incident contracts” and accuse them of constituting “illegal gambling,” Coinbase, the engine of rapid growth, is facing severe compliance tests.

According to the financial report for the second quarter of fiscal year 2026 released by Coinbase, its forecasting business showed an extremely strong growth momentum: contract trading volume and business revenue in the forecast market increased by 106% month-on-month, doubling growth. The business's annualized revenue has officially surpassed $100 million, becoming a core growth point in the company's strategy to build an “all-purpose exchange.” Furthermore, thanks to the new crypto binary options experience launched at the end of the second quarter, the number of daily active traders increased by 3 times, and the average daily revenue increased 4 times compared to the May average.

The 106% month-on-month growth rate and over $100 million in annualized revenue showed that event contracts were an important tool for Coinbase to drive trading volume during the market downturn. If core markets such as New York State (currently Massachusetts, Nevada, Michigan and other states have limited sanctions) ban this business, it will directly lead to a sharp decline in trading volume and revenue in this sector.

Coinbase has always focused on the image of a “compliance platform” and operates under the CFTC's federal framework. If each state's gaming laws take precedence over CFTC regulations, Coinbase will have to apply for a separate gaming license for each state, which will incur huge time and legal costs. Different states need to be strictly “geo-fenced”, leading to severe fragmentation of mobility.

If forced to comply with state-level gambling regulations, Coinbase must raise the entry threshold for the prediction market from 18 to 21, which would directly cut off its rapid expansion among young people and Gen Z. At the same time, gaming regulation is often accompanied by strict fund access and tax reporting requirements, which will greatly reduce the smooth experience of crypto derivatives.

One of the core logics of Coinbase's ability to maintain a high valuation is that it is successfully transforming from a simple “cryptocurrency exchange” to a “full asset derivatives and predictive financial ecosystem (Everything Exchange)”. If it is predicted that the business stalls due to regulatory policies, Wall Street may revert back to a traditional cyclical crypto broker, thereby discounting its valuation premium.