Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market sector has consistently maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its skepticism, filing a complaint against several prominent operators, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their marketing materials as evidence of unlicensed gambling activities. According to Wisconsin Attorney General Josh Kaul, 'merely disguising illicit behavior does not render it lawful.' The core issue at hand is whether these contracts should be considered financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or if they constitute bets, subject to state gambling laws. This question has significant implications, as it will determine whether the rapidly growing market will be governed by a single federal regulatory framework or fragmented across 50 states, falling under the jurisdiction of local gaming regulators. The case is likely to eventually reach the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems, naming Crypto.com and its derivatives arm, Polymarket and affiliated entities, as well as Kalshi and its distribution partners Robinhood and Coinbase. The legal theory underlying these complaints is that 'event contracts' are, in fact, wagers, where users pay to take a position on a real-world outcome, receiving a fixed payout if they are correct. The state's filings cite examples, such as traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Wisconsin also points to the defendants' own marketing materials, including Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which refer to the platform as a place where people can 'bet on the outcome of future events.' The state argues that the structure of prediction markets aligns with its statutory definition of a bet, regardless of the labeling or the counterparty. Furthermore, the complaints emphasize that these platforms generate revenue by charging transaction fees on each contract, drawing parallels with a casino taking a cut of wagers placed on its floor. The industry's defense relies on federal preemption, with Kalshi arguing that its contracts are swaps listed on a regulated exchange, thus falling under the CFTC's exclusive jurisdiction. This position was recently bolstered by a Third Circuit ruling, which treated the regulator's decision not to block the contracts as effectively settling the jurisdictional question. Nevertheless, state courts across the U.S. have consistently taken a different stance, with Nevada deeming the contracts 'indistinguishable' from gambling and New York's Attorney General, Letitia James, stating that 'each contract is a bet.' For now, Wisconsin's lawsuits contribute to a growing list of state challenges, each building a record that could ultimately prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to preclude it from being treated as a bet.