Wisconsin Takes on Prediction Market Operators, Alleging Unlicensed Gambling

Prediction market operators have long maintained that their products are legitimate financial instruments, rather than bets. However, Wisconsin has taken a different stance, filing a complaint against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are operating unlicensed gambling venues. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise unlawful activities as lawful ones does not make them so.' The lawsuit centers on the question of whether prediction market contracts are financial instruments regulated by the Commodity Futures Trading Commission (CFTC) or bets subject to state gambling laws. This distinction is crucial, as it will determine whether the rapidly growing prediction market is governed by a single federal rulebook or fragmented across 50 states, with each state's gaming regulators having jurisdiction. The case is likely to ultimately be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three separate ecosystems, including Crypto.com and its derivatives arm, Polymarket and affiliated entities, and Kalshi, alongside distribution partners Robinhood and Coinbase. The state argues that the 'event contracts' offered by these platforms 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. The complaints cite examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also point to the platforms' own marketing materials, such as Kalshi's Instagram ads, which claim the platform is 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's, which describes itself as 'a platform where people can bet on the outcome of future events.' The state contends that the structure of prediction markets falls within its statutory definition of a bet, regardless of how the products are labeled or who takes the other side of the trade. The complaints also highlight that the platforms generate revenue by charging transaction fees on each contract, similar to 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 and therefore fall under the CFTC's exclusive jurisdiction. However, state courts have consistently taken a different position, with Nevada and New York characterizing the contracts as 'indistinguishable' from gambling and 'bets,' respectively. Wisconsin's lawsuits add to the growing list of state challenges, building a record that may ultimately force the Supreme Court to decide whether labeling something a financial contract is sufficient to exempt it from being treated as a bet.