The state of New York is currently missing out on a tax revenue stream levied at approximately 51% of gross revenues—a rate applied to licensed casinos and mobile sportsbooks—because firms like Coinbase and Gemini have bypassed the state’s regulatory apparatus to launch prediction markets. By filing a lawsuit on Tuesday in a Manhattan state court, Attorney General Letitia James is attempting to force these exchanges to either secure licenses from the state Gaming Commission or cease their operations entirely.
The Regulatory Arbitrage of Event Contracts
Follow the money and the structural tension becomes clear: these platforms are leveraging the classification of "event contracts" to circumvent statutes designed for traditional gambling. The lawsuit alleges that Coinbase and Gemini are intentionally dodging the legal and financial consequences of state oversight by reframing wagers as financial derivatives. This strategy allows these platforms to bypass the state’s age restrictions, which strictly prohibit wagering for anyone under 21, while these platforms permit users as young as 18.
The shift into prediction markets represents a pivot from the companies' origins as cryptocurrency trading platforms. Gemini, founded by Cameron Winklevoss and Tyler Winklevoss, initiated Gemini Predictions in December, while Coinbase introduced its own service in January. The offerings span a wide range of volatile outcomes, from the winner of a Chelsea-Brighton Premier League match to the specific timing of Kevin Warsh’s confirmation as chairman of the Federal Reserve, and even the fluctuating price of oil.
Federal Preemption vs. State Oversight
The legal battle in New York is part of a broader, national friction between state regulators and federally regulated entities. Kalshi, another player in the space, is currently involved in an ongoing lawsuit against the state Gaming Commission after the regulator attempted to bar its business from the state. Kalshi’s defense centers on its status as a federally designated derivatives exchange, claiming it falls under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC).
Coinbase has mirrored this legal strategy, having sued Connecticut, Michigan, and Illinois in December to block those states from policing its prediction services. The federal government appears to be siding with the platforms on the question of jurisdiction. Earlier this month, the CFTC sued Arizona, Connecticut, and Illinois to prevent them from enforcing state-level restrictions on prediction markets. A federal judge reinforced this position last week by halting Arizona’s regulatory efforts—which had escalated to criminal charges against Kalshi—citing a reasonable chance that federal law preempts state authority.
The Cost of Compliance
For investors and consumers, the current landscape is defined by this jurisdictional limbo. The state’s argument rests on the principle that "gambling by another name is still gambling," yet the momentum in federal courts suggests that the classification of these markets as derivatives could override state-level bans.
If federal courts continue to rule that the CFTC’s authority preempts state law, the requirement for these platforms to pay the state’s 51% tax rate may become unenforceable. Investors should monitor the ongoing litigation between Kalshi and the New York Gaming Commission; the resolution of that case will serve as a primary indicator of whether prediction platforms can continue to operate in the state without the burden of local gaming licenses or the accompanying tax liabilities.
