Legal Concepts: Crypto-Exchange Vs. Prediction Market
In the last blog posting in this series, we saw that cryptocurrency is a collective assertion of economic value which - - having been once accepted via a crypto-exchange from a world of traditional economics and not yet remitted via a crypto-exchange back into that traditional world - - might be said to exist only on decentralized, ID-encrypted spreadsheets. In cryptocurrency, the veracity of the spreadsheets is maintained by computers incessantly calculating validation codes, while a decentralized ledger (blockchain) supposedly eliminates the need for banks.
World economics have moved, like an economic Zeitgeist, beyond the use of gold or other commodities as the bases for monetary systems. This Zeitgeist holds some commodities in especially low regard: For example, natural diamonds require complex valuation, possess low liquidity, and are subject to various kinds of technological or political manipulation. The economic Zeitgeist also recoils in horror from other monetary-system problems. For example, traditional monetary systems are menaced by the effective confiscation of wealth via thievery, unlimited taxation, and inflation. Cryptocurrencies might suffer from lapses in computer programming.
Bitcoin (BTC) was the first decentralized, digital currency (cryptocurrency). BTC operates without a central bank. Apparently, there are now many millions of cryptocurrencies, many of which are scams. (How would anyone know if a given cryptocurrency is a scam? Digital currencies are not regulated!) Apparently, there are hundreds of companies providing crypto-exchange services. Coinbase is a company that provides crypto-exchange services.
As bids for, as well as redemptions from a cryptocurrency fluctuate over time, the value of that cryptocurrency fluctuates. It would seem that cryptocurrency is like a commodity, except that there is no underlying stream of economic value providing revenue and justifying a traditional stock price as the net present value of all future expected cash flows from the operations of that traditional company. Hence, on one level, it seems that a cryptocurrency is a commodity that maintains a value varying continuously over time. After all, one cryptocurrency is called bitcoin, invoking the spirit of coins and commodities past. In contrast, there would be no pork bellies, silver bullion, or idled Studebaker factories left over if a cryptocurrency vanishes.
Cryptocurrency proprietors would like to recruit investors who think that there are big cryptocurrency profits to be gained while the government learns how to regulate and to tax cryptocurrency just as completely as it does all other forms of economic life. As of April 2026, the Wall Street capitalization of cryptocurrency firms was $300 billion. As of December 2025, the total of all Wall Street capitalization was $72 trillion. Thus, on this metric, cryptocurrency is approximately 0.4% of the total market capitalization on Wall Street. Some investors seem to be expecting big profits, but is that a rational expectation?
The New York Attorney General (NYAG) is doing her part to lay the legal groundwork for regulating and taxing cryptocurrencies. Kevin T. Dugan has recently reported that the NYAG has sued the crypto-exchanges Coinbase and Gemini, accusing them of “operating prediction markets that violate state gambling laws.” In other words, the NYAG alleges that these crypto-exchanges, which facilitate money passing into and out of digital accounts (cryptocurrency), are like “prediction markets,” which facilitate “yes/no” contracts allowing people to bet on future events (e.g., stock-market levels, election results, or sporting outcomes).
Two prominent prediction-market firms, Polymarket and Kalshi, are shocked - - shocked! - - to learn that gambling may be going on in their environs. These firms advertise themselves as “life-changing tools for regular people” - - like the injured and unemployed restaurant cook who started with nothing, gained $41,000.00 by betting on snowfall totals in Detroit and on various sports events, and then quickly lost it all. The Wall Street Journal found that, in the case of Polymarket, 67% of the “profits” (which might indeed seem to the uninitiated to be gambling proceeds) flow to just 0.1% of the accounts. Polymarket and Kalshi maintain that they are only facilitating the monetization of what a customer already knows. In traditional gambling, bookmakers set odds, collect bets, pay off winners, and are referred to as “the house.” In prediction markets, there is no “house,” and customers make trades directly among one another “on a computer platform.” These “platforms” make money on fees levied on users.
How exactly are crypto-exchanges “like” prediction markets? Evidently, no one knows, and this entire legal exercise by the NYAG is a trial balloon meant to entice activist judges across the land to strike heroic poses until the case ends up at the U.S. Supreme Court. Perhaps SCOTUS will rule that the common lack of underlying revenue streams justifies regulating and taxing cryptocurrencies just like prediction markets, treating both as species of gambling. Perhaps SCOTUS will rule that the continuously varying valuation of cryptocurrency justifies differentiating cryptocurrencies from prediction markets, where each “contract” evaluates as either zero dollars or one dollar after each contract-event.
Dugan suggests that prediction-market operators have been caught in a no-man’s land between state and federal regulators. Prediction markets have been buoyed by sports betting, yet the federal Commodities Futures Trading Commission says that it can regulate this activity, short-circuiting state gambling regulators. The most recent lawsuit by the NYAG is an escalation of this fight over the prerogative of state gambling commissions to regulate crypto-exchanges. The suit alleges that Coinbase and Gemini are allowing people under 21 to gamble and to bet on New York sports teams. Furthermore, the suit alleges that these two firms are side-stepping their obligations to pay taxes like sports casinos and sports apps do. The state seeks mega-financial penalties against Coinbase and Gemini (e.g., three times their profits), which would of course destroy those firms.
New York state is one of the nation’s largest gambling markets. The owner of the Mets recently won a lucrative license to run a gambling casino near the Mets’ home field - - and to pay some serious taxes on the proceeds. Why shouldn’t crypto-exchanges likewise pay tax? Similar legal fights have occurred in Nevada and New Jersey. One hesitates to predict how this legal battle will unfold!