In a sharp critique of the Commodities Futures Trading Commission (CFTC), Coinbase, the prominent Nasdaq-listed cryptocurrency exchange, has urged the withdrawal of the proposed rules surrounding prediction markets. Coinbase contends that these rules exceed the commission’s statutory limits and disregard the potential economic benefits of prediction markets.

In a letter addressed to the CFTC Commissioners on Thursday, Paul Grewal, Chief Legal Officer of Coinbase, emphasized the company’s concerns. “We assert that this all-or-nothing approach to regulating event contracts contradicts the principles of fostering responsible innovation and market growth in a regulated, transparent environment with necessary safeguards to maintain market integrity and protect consumers,” Grewal articulated.

The controversy began in May when the CFTC unveiled a proposal categorizing certain event contracts—such as those related to political outcomes, awards, or sports events—as “gaming.” This proposal, supported by three Democratic commissioners, aimed to protect market integrity and affirm the agency’s regulatory role.

However, Coinbase’s response highlights the flaws in the CFTC’s expansive definition of “gaming.” The exchange argues that such a sweeping classification unfairly restricts valuable event contracts by banning them outright, without weighing their potential public interest benefits. “If this rule is enacted, it would label contracts as ‘gaming’ that, by any reasonable definition, are not,” the letter stated, further noting the inconsistency with legislative history related to gaming, which traditionally focuses on sporting events.

To illustrate, Coinbase provided an example where prediction markets could be beneficial: a vendor hedging costs by taking a position in favor of a sports team’s loss to offset the expenses of printing championship t-shirts. The exchange criticized the CFTC’s failure to distinguish between market speculation and actual gambling, pointing out that events like elections or awards should not be conflated with games of chance. “Few would argue that elections or prestigious awards like the Nobel Prize or Academy Awards fall under what should be considered ‘gaming,’ yet these are precisely the examples the proposal targets,” Coinbase noted.

The CFTC’s proposal also includes a prohibition on contracts related to war, terrorism, and assassination—an area where platforms like Polymarket operate, offering contracts on geopolitical outcomes, such as potential military actions by Iran in response to Israel’s activities. Coinbase contends that these markets have a critical role in forecasting global events, with research indicating that prediction markets often outperform traditional forecasting methods by effectively aggregating information.

In its closing arguments, Coinbase called for the CFTC to retract the sweeping ban on event contracts and instead adopt a more nuanced, case-by-case evaluation approach that considers the public interest merit of each contract. “We strongly urge the CFTC to withdraw this proposal and collaborate with academic, industry, and policy stakeholders to craft a more balanced regulatory framework that promotes innovation while safeguarding the public interest,” Grewal reiterated on X.