About the author:
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Outset Legal Lens is led by Alice Frei, Outset PR’s head of security & compliance. In this series, she draws on years of experience in legal, compliance, and due diligence work across Web3 projects to show where teams most often get it wrong, and how to build communication that supports growth without quietly creating liabilities.

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In April 2026, New York Attorney General Letitia James sued Coinbase Financial Markets and Gemini Titan, alleging that their platforms amounted to illegal gambling in the state. 

At the center of the case is a dispute between regulators. Crypto companies and the CFTC (Commodity Futures Trading Commission) understand prediction market products as event contracts – a form of derivatives trading that belongs under federal oversight. For New York, the same structure looks like betting on what the user doesn’t influence.

In this article, we’re trying to break down how the same offering can be treated as a regulated financial instrument by one authority and unlawful gambling by another.

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Why prediction markets are so hard to classify

At the user level, prediction market platforms look deceptively simple. A person chooses an event, buys a position on one possible outcome, and either makes or loses money depending on what happens next. In that sense, the product feels very close to a bet. 

The CFTC argument is that the user isn’t merely wagering for entertainment, but trading contracts whose prices reflect the market's view of future events. If enough people participate, those prices can signal collective expectations in real time.

Different regulators focus on different aspects of the same product: one looks primarily at the legal structure of the contract, while the other starts from how the activity appears to consumers.

From the perspective of operators and the CFTC, prediction markets resemble:

• event contracts;
• derivatives;
• price discovery mechanisms;
• information aggregation markets;
• risk management instruments.

For state gambling authorities, the activity is similar to gambling because it involves:

• putting money on an uncertain outcome;
• participating in an event the user can’t control;
• betting on sports, elections, or other public events.

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In practice, authorities don't classify prediction markets based solely on the technical structure of the contract. They also consider the event category, the platform's oversight, the presence of clearing and other trading controls, the target audience, user protections, interface design, and promotional messaging.

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Not every prediction market carries the same legal risk

The event category matters just as much as the structure of the product itself. Event contracts tied to economic indicators or financial variables are generally easier to frame as legitimate financial instruments. These include:

• inflation;
• interest rates;
• commodity prices;
• macroeconomic data;
• certain corporate events.

Other categories tend to attract much more scrutiny because they have traditionally been associated with gambling or broader public interest topics. These include:

• sports;
• elections;
• celebrity outcomes;
• award shows;
• other entertainment-driven events.

U.S. law also gives regulators additional authority to restrict contracts that raise concerns related to gaming, war, terrorism, or other sensitive topics.

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The real fight is over who gets to regulate prediction markets

That question has grown so important that the CFTC filed its own lawsuit against New York, arguing that the state is interfering with the federal framework Congress established for commodity derivatives, including event contracts.

The outcome could shape much more than the future of Coinbase or Gemini. It may determine whether prediction markets develop under one nationwide regime or a patchwork of state gambling laws.

If these contracts become the CFTC's responsibility, operators can treat them as derivatives products subject to a single federal framework. That creates a clearer path to offering them across the US.

If states are allowed to apply their own regulations, the picture changes significantly. Platforms will need to obtain separate gaming licenses, block users from certain jurisdictions, restrict specific markets, or comply with different rules depending on where their customers are located.

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Compliance starts long before regulators call

Ideally, compliance should be part of the product design. Operators should think early about:

• How will contracts be settled, and who determines the final outcome?
• Which jurisdictions should have access to the platform?
• What risks should users understand before trading?
• How will age verification and KYC be handled?
• Are certain users or markets prohibited?
• What safeguards exist against trading on material non-public information?

None of these controls guarantee that a company will avoid scrutiny. They do, however, demonstrate that the operator has considered the risks associated with the offering rather than leaving them to be addressed after launch.

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Prediction markets aren't going away

The current dispute may help determine not whether prediction markets themselves have a future, but what that future will look like. Rather than disappearing, they are likely to evolve into a more segmented product category. 

Contracts tied to financial indicators, macroeconomic data, or other risk management use cases may have firmer ground within existing derivatives frameworks. At the same time, contracts linked to sports, elections, politics, or other highly visible events will probably receive much closer scrutiny under gambling laws and public interest rules.

The popularity of prediction markets has grown significantly since the 2024 U.S. presidential election, when real-time probabilities were widely discussed as an alternative to traditional polling. As adoption increases, so does the pressure to establish clearer legal boundaries.

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This article is part of Outset Legal Lens. In this series, we’ll keep unpacking the legal side of Web3 communication, with a focus on helping teams speak clearly, responsibly, and in a way that supports the long-term growth of the industry.