Wisconsin Takes on Prediction Markets with Lawsuits Against Kalshi, Coinbase, and Other Major Players

The prediction market industry has long maintained that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin is challenging this notion, and in a recent complaint filed against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state argues that these companies are essentially operating as unlicensed gambling venues. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise unlawful activities does not make them 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 that fall under state gambling laws. This question has significant implications, as it will determine whether the rapidly growing prediction market will be subject to a single federal regulatory framework or will be fragmented across 50 states, with each state's gaming regulators having jurisdiction. The matter is likely to end up before the Supreme Court. Wisconsin's complaints, which were filed in Dane County, target three distinct ecosystems. One complaint names Crypto.com and its derivatives arm, while another targets Polymarket and affiliated entities. The third complaint involves Kalshi, as well as distribution partners Robinhood and Coinbase, and alleges that these platforms collectively facilitate sports betting for Wisconsin residents. The legal theory underlying these complaints is that so-called 'event contracts' are, in fact, wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. For instance, traders can buy contracts tied to NCAA tournament games, with prices reflecting implied probabilities, and receive a payout of $1 if they win, while losing positions result in no payout. State prosecutors also point to 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 clearly falls within its statutory definition of a bet, regardless of how the products are labeled or who takes the opposing side of the trade. Furthermore, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, similar to a casino taking a cut of wagers placed on its premises. The prediction market industry's defense relies on federal preemption, with Kalshi arguing that its contracts are swaps listed on a regulated exchange and thus fall under the CFTC's exclusive jurisdiction. This position received support earlier this month when the Third Circuit ruled in favor of the company, treating the regulator's decision not to block the contracts as effectively settling the jurisdictional question. However, state courts across the US have consistently taken a different stance, with Nevada deeming the contracts 'indistinguishable' from gambling and New York AG 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 prevent it from being treated as a bet.