Wisconsin Takes on Prediction Market Operators, Alleging Unlicensed Gambling

The prediction market industry has consistently argued that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has rejected this claim, filing a lawsuit against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's Attorney General, Josh Kaul, argued that 'disguising unlawful conduct does not make it lawful.' The lawsuit centers on the question of whether these platforms' contracts constitute financial instruments under federal law or bets under state gambling law. This distinction will determine whether the industry is subject to a single federal regulatory framework or will be carved up across 50 states, with each state having its own jurisdiction. The issue is likely to end up in the Supreme Court. Wisconsin's lawsuit targets three main platforms, alleging that they facilitate sports betting for state residents. The state claims that the so-called 'event contracts' offered by these platforms are, in fact, wagers, where users pay money to take a position on a real-world outcome and receive a fixed payout if they are correct. The lawsuit cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also points to the platforms' own marketing language, including Kalshi's claim to be 'The First Nationwide Legal Sports Betting Platform' and Polymarket's description of itself as 'a platform where people can bet on the outcome of future events.' The lawsuit argues that the structure of prediction markets falls within the state's definition of a bet, regardless of how the products are labeled. The platforms generate revenue by charging transaction fees on each contract, which the state likened to a casino taking a cut of wagers. 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 exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). However, state courts have consistently taken a different position, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. The Wisconsin lawsuit adds to a growing list of state challenges, which could ultimately force the Supreme Court to decide whether the prediction market industry's products constitute legitimate financial contracts or unlicensed bets.