A federal judge on Monday (Sept. 14) listened to arguments from the Commodity Futures Trading Commission (CFTC) regarding why the prediction markets it oversees should not be subjected to New York state gaming laws.
Last April, New York Attorney General Letitia James filed a lawsuit against Coinbase and Gemini, alleging that the prediction markets operated illegal gambling platforms. James is seeking to recover $3.4 billion in alleged illegal profits, civil penalties, and customer restitution.
The CFTC submitted a motion to dismiss the state’s claims against its licensed prediction markets.
New York’s efforts to shut down federally regulated markets infringe on the exclusive federal system Congress established to oversee national swaps markets. In response to the development of national financial markets and conflicts with state laws, Congress enacted the Commodity Exchange Act (CEA), giving the CFTC sole authority to regulate those markets and establishing a comprehensive federal regulatory framework that supersedes state laws attempting to regulate the operation or transactions on CFTC-regulated exchanges,” said the CFTC’s request for injunctive and declaratory relief.
Coinbase and Gemini are prediction markets that enable users to trade shares of future outcomes. They hold Designated Contract Market licenses from the CFTC.
Monday Debate
During the oral arguments on Monday, Judge Lorna Schofield of the Southern District Court of New York questioned CFTC counsel on why an injunction is necessary when other courts have ruled against similar CFTC petitions. CFTC lawyers argued that event contracts are derivative instruments structured as swaps and futures, and the CEA grants the CFTC exclusive jurisdiction over their regulation.
State attorneys argued that many swaps offered on Coinbase and Gemini are not derivatives but gambling. They claim that event contracts related to sports are wagers, not swaps, and can only be offered by sportsbooks licensed by the New York State Gaming Commission.
The CFTC counsel informed Schofield that without court intervention, the state is likely to continue its efforts to circumvent federal law and the CFTC’s exclusive authority to regulate event contract swaps as granted by Congress.
Schofield did not make a ruling on the petition during the Monday hearing.
AGA Memorandum
Schofield permitted the American Gaming Association (AGA) to submit a memo opposing the CFTC’s request for an injunction. The organization opposes sports prediction markets, claiming they constitute unregulated sports betting.
“According to the CFTC, sports event contracts in prediction markets are derivatives contracts governed only by the CEA. However, as evident to ‘everyone’ visiting a prediction market, these contracts are essentially sports bets,” the AGA stated in its filing on Sept. 7.