A New York Judge Asks the CFTC Why She Should Grant What Other Courts Refused

Judge Lorna Schofield heard the commission argue that the Commodity Exchange Act pre-empts New York's $3.4 billion gambling case against Coinbase and Gemini, and pressed its lawyers on why she should enjoin the state when other federal courts have declined to. She did not rule from the bench.

• Judge Lorna G. Schofield of the Southern District of New York heard oral argument on Monday, 14 September, on the Commodity Futures Trading Commission's request for an injunction against New York's enforcement action, Casino.org reports
• Attorney General Letitia James sued Coinbase and Gemini in April, alleging their CFTC-licensed prediction markets run illegal gambling, and seeks $3.4 billion in alleged illegal profits, civil penalties and treble restitution
• The CFTC's petition says the Commodity Exchange Act gives it "exclusive jurisdiction" over swaps markets and pre-empts state laws that "attempt to regulate the operation of, or transactions on, CFTC-regulated exchanges"
• Schofield pressed CFTC counsel on why an injunction is warranted "when other federal courts have denied similar petitions"; the state argued that sports contracts are wagers within the sole jurisdiction of the New York State Gaming Commission
• The judge admitted an amicus memorandum from the American Gaming Association, filed on 7 September, arguing that sports event contracts "are hardly novel financial instruments, they are sports bets"

The Commission Asks a Federal Court to Stop a State

The Commodity Futures Trading Commission (CFTC) went before Judge Lorna G. Schofield in the United States District Court for the Southern District of New York on Monday to argue that the prediction markets it regulates should not be subject to New York's gambling laws, according to Casino.org's report of the hearing. The commission is seeking an injunction and declaratory relief against the state's action against Coinbase and Gemini, both of which operate designated contract markets under CFTC licences.

New York Attorney General Letitia James sued the two companies in April, alleging that their event-contract platforms constitute illegal gambling, and is seeking the recovery of $3.4 billion in alleged illegal profits together with civil penalties and treble restitution for customers. The commission moved to dismiss the state's claims and filed its own petition, which argues that "New York's attempt to shut down federally regulated markets intrudes on the exclusive federal scheme Congress designed to oversee national swaps markets". Congress, the petition says, enacted the Commodity Exchange Act "granting the CFTC exclusive jurisdiction to regulate those markets and enacting a comprehensive federal regulatory framework that preempts state laws that attempt to regulate the operation of, or transactions on, CFTC-regulated exchanges".

At the hearing, CFTC attorneys argued that event contracts are derivative instruments structured as swaps, giving the agency exclusive authority under the Act, and that without federal intervention New York would continue its "attempts to subvert federal law" and undermine the "exclusive jurisdiction to regulate event contract swaps conferred on the CFTC by Congress". Counsel for the state countered that many of the contracts on Coinbase and Gemini are not financial derivatives but unapproved gambling, and that contracts tied to sporting events are wagers falling under the sole jurisdiction of the New York State Gaming Commission.

Schofield pressed the commission's lawyers on why an injunction is warranted when other federal courts have denied similar petitions, Casino.org reports. She did not rule from the bench.

The Casino Lobby Gets a Seat

The judge permitted the American Gaming Association to file an amicus memorandum opposing the commission's request. "According to the CFTC, sports event contracts on prediction markets are derivatives contracts governed exclusively by the CEA," the association wrote in its 7 September filing. "But as is obvious to everyone who visits a prediction market, these contracts are hardly novel financial instruments, they are sports bets."

The Southern District case sits alongside the CFTC's separate action against New York filed in April, the state's $36 billion suit against Kalshi in state court, and the commission's emergency order in August directing Kalshi to keep trading in the state. The preemption question the CFTC is asking Schofield to decide is the same one the Supreme Court can take up at its 28 September conference on petitions from New Jersey, Robinhood and Crypto.com, and the one the Senate declined to legislate on Tuesday.

The Judge's Question Is the Whole Case

Why should this court grant what others have refused? It is the question every federal judge now asked to enjoin a state will put to the commission, because the record has turned. The Ninth Circuit ruled for Nevada, a Connecticut judge rejected Kalshi's theory outright, and the Tenth Circuit refused an emergency injunction in Utah. The commission's answer, that its exclusive jurisdiction is a matter of statute regardless of what other courts have found, is legally coherent and practically weak in front of a district judge who does not want to be reversed. Schofield's decision not to rule from the bench, and her willingness to hear the casino industry, are the behaviour of a court that intends to be careful rather than fast.

$3.4 Billion Is the Number That Makes This Different From Kalshi

The Kalshi cases are about whether an exchange can operate in a state. This one is about whether two companies owe New York $3.4 billion for having done so. The CFTC's intervention on behalf of Coinbase and Gemini therefore does something the agency has not quite done before: it asks a federal court to extinguish a state's monetary claim, not just its regulatory reach. If Schofield declines, the companies face the state's case on its merits with the disgorgement exposure intact; if she grants the injunction, every state suit seeking restitution from an exchange becomes vulnerable to the same motion. That is why the AGA turned up, and why the state's lawyers framed the products as wagers rather than arguing the statute.

Three Forums, One Question, and Only One of Them Can End It

A district court in Manhattan, an appeals court in San Francisco and the Supreme Court in Washington are now all holding the same question in different postures, and the Senate has just declined to answer it for them. Whatever Schofield decides will be appealed to the Second Circuit, which would make a fourth circuit with a view. The practical effect of Monday's hearing is that the commission's exclusive-jurisdiction theory is being tested in the one district where the state's claim is largest, and the judge's first instinct was to ask why she should be the outlier.

The CFTC asked a New York court to say the state cannot touch its exchanges. The court's first question was why it should be the first to say so.