Edited by Omkar Godbole.

Coinbase argues the definition is vague, and urges the CFTC to make determinations on a contract-by-contract basis rather than broad categorization

Proposed rules by the Commodities Futures Trading Commission (CFTC) regarding prediction markets should be withdrawn because they exceed the commission's statutory authority and ignore the positive impact of prediction markets on the economy, Nasdaq-listed crypto exchange Coinbase wrote Thursday in a letter to Commissioners.

"We firmly believe that this all-or-nothing approach to the treatment of event contracts is not consistent with the promotion of responsible innovation and growth in regulated, transparent markets with appropriate safeguards to protect market integrity and protect customers," Coinbase's Chief Legal Officer, Paul Grewal, wrote in the letter.

In May, the CFTC published a proposal on event contracts (prediction markets) that defined "gaming" as betting on outcomes of political contests, awards, or athletic events. This proposal had the support of three Democratic commissioners, CoinDesk reported at the time, who cited concerns over market integrity and the agency's role.

In Thursday's letter, Coinbase wrote that it objects to the CFTC's broad definition of "gaming," arguing that it unfairly restricts valuable event contracts by categorically banning them without considering their individual public interest merits.

"If adopted, the rule would capture contracts as "gaming" that by any common understanding are not, in fact, gaming," Coinbase wrote, arguing that this is inconsistent with "legislative history related to gaming, neither of which suggest that gaming should extend beyond sporting events".

Coinbase gave one use case for prediction markets for sporting events: a vendor hedging the costs of printing t-shirts in anticipation of a team winning a championship by taking a position in favor of that team's loss.

The exchange complained in the letter that the Commission equates speculation with gaming but fails to distinguish between market speculation and actual gambling in its proposal.

"Few would agree that elections or professional awards such as Nobel Prizes or Academy Awards are granted through a process that should generally qualify as games, yet these are the examples presented as constituting such a definition," Coinbase continued.

The proposal would also ban contracts on war, terrorism, and assassination.

Polymarket offers several contracts about geopolitical outcomes that would fit into this category, such as one that asks bettors if Iran will launch military action against Israel by next week in response to Israel's assassination of Hamas' leader in Tehran.

These may be useful for forecasting world events, and Coinbase argued that the CFTC is overlooking what it calls the significant benefits of prediction markets. Coinbase cites research showing that prediction markets can efficiently aggregate information and outperform traditional forecasting methods.

Instead, Coinbase proposes that the CFTC withdraw the broad, categorical ban on event contracts and continue evaluating them on a contract-by-contract basis, considering the public interest merit of each prediction market category.

"We urge the CFTC to withdraw this proposal and work alongside academic, industry, and policy stakeholders to develop a more balanced approach that promotes innovation while protecting the public interest," Coinbase's Chief Legal Officer Paul Grewal posted on X.