The office of New York Attorney General Letitia James has filed a lawsuit against prominent cryptocurrency exchanges Coinbase and Gemini for operating prediction markets, which the complaint alleges constitute illegal gambling under state law. (Will Waldron/Times Union)
Will Waldron/Times Union
ALBANY — The office of New York Attorney General Letitia James has filed a lawsuit against prominent cryptocurrency exchanges Coinbase and Gemini for operating prediction markets, which the complaint alleges constitute illegal gambling under state law.
It’s the latest push by the attorney general’s office to bring legal action against prediction markets, which have exploded in popularity over the last year and allow users to buy “event contracts” on anything ranging from sports to political elections. Prediction market companies like Kalshi and Polymarket have faced increasing scrutiny, as many state regulators and attorneys general have come to view event contracts as indistinguishable from betting.
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In October, the New York State Gaming Commission sent Kalshi a cease-and-desist letter alleging violations of New York’s gambling laws, with the prediction market company responding by suing the gaming commission in federal court in Manhattan. Several other states, such as Arizona, have brought their own lawsuits against Kalshi.
Coinbase and Gemini, both founded as cryptocurrency exchanges, have also begun incorporating prediction markets into their respective platforms. That’s now put them in the crosshairs of the state attorney general’s office, which in two separate lawsuits accuses the companies of circumventing New York gambling laws.
“Respondent (s) seek to avoid the legal and financial consequences of New York’s close regulation of gambling by offering what is quintessentially wagering under the guise of offering ‘event contracts’ on a ‘prediction market,’” the lawsuits state.
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Prediction market companies claim their event contracts are authorized by the federal Commodity Futures Trading Commission, the regulatory agency for futures contracts and derivative markets. The commission under current Chairman Michael Selig has remained steadfast in its support for prediction markets despite lawsuits filed by various states.
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The lawsuits filed against Coinbase and Gemini this week are significant in the ongoing battle between various states and prediction markets, as New York law contains elements that could spell trouble for companies offering event contracts should the courts agree with the state’s arguments.
Companies based in New York can be required to pay restitution of illegal profits to its customers across the country, not just in this state, if found to be in violation by a court. Both Coinbase and Gemini have New York City offices. Precedent would also allow company executives, such as Coinbase CEO Brian Armstrong and Gemini founders Cameron and Tyler Winklevoss, to be held personally liable for any violations committed by their companies.
Beyond the billions of dollars the two companies could be on the hook for as a result, the repercussions of a lawsuit could be more damaging for Coinbase and Gemini which, unlike Kalshi and Polymarket, are public companies traded on the Nasdaq.
“When you’re dealing with a public company, the reputational harm from being accused of engaging in illegal conduct is swift and immediate,” said Daniel Wallach, an attorney who specializes in sports betting. “They’ve got to deal with not just their status as a regulated entity and the prospect of steep civil penalties, but there’s the simultaneous reputational harm which could directly impact their stock price.”
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Coinbase has responded by moving the attorney general’s lawsuit to federal court. The case with Gemini remains in state Supreme Court in Manhattan.
The attorney general’s office has held off filing a lawsuit against Kalshi, as they await the ruling on a preliminary injunction in the company’s federal case against the state’s gaming commission. Wallach said he expects a ruling from the judge in the case soon.
“I think we’re well within the red zone of an expectation of a ruling,” he said. “I’m checking multiple times a day. It could be today, tomorrow or next week.”
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In addition to the attorney general, Gov. Kathy Hochul has also taken steps to address prediction markets in the state. On Wednesday, the governor announced she signed an executive order that will ban state employees from using knowledge gleaned from their government work to make transactions in prediction markets.
“Public servants should work for you, not get rich off confidential information,” Hochul said in a video posted on social media as she signed the order. “It may be okay in Washington, but it’s not happening here in New York.”