Wisconsin Takes on Prediction Market Platforms in Lawsuit Against Kalshi, Coinbase, and Others

The prediction market industry has consistently claimed that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its skepticism, filing a complaint against several key players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their own marketing materials as evidence of unlicensed gambling operations. According to Attorney General Josh Kaul, 'merely disguising illicit activities does not render them lawful.' The core issue at hand is whether these contracts should be classified as financial instruments under the Commodity Futures Trading Commission (CFTC) or as bets under state gambling laws. This distinction will determine whether the rapidly expanding market will be subject to a single federal regulatory framework or fragmented across 50 states, falling under the jurisdiction of local gaming regulators. It is likely that this matter will eventually be decided by the Supreme Court. Wisconsin's complaints target three distinct ecosystems, naming Crypto.com, Polymarket, and Kalshi, alongside its distribution partners Robinhood and Coinbase, alleging that these platforms collectively facilitate sports betting for state residents. The legal argument posits that 'event contracts' are, in essence, wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. Examples cited in the filings include traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. State prosecutors point to Kalshi's Instagram ads, which claim the platform is 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which describe itself as 'a platform where people can bet on the outcome of future events.' The state contends that the structure of prediction markets aligns with its statutory definition of a bet, regardless of labeling or counterparty. The complaints also highlight that platforms generate revenue by charging transaction fees on each contract, drawing parallels with 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, thereby falling under the CFTC's exclusive jurisdiction. This stance received support from the Third Circuit, 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 AG Letitia James stating that 'each contract is a bet.' Wisconsin's suits contribute to a growing list of state challenges, building a record that may ultimately compel the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.