Wisconsin Takes on Prediction Markets with Lawsuits Against Key Players

The prediction market sector is facing a significant challenge as Wisconsin launches a lawsuit against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. At the heart of the issue is the question of whether the contracts offered by these platforms constitute financial instruments or bets. The state's complaint alleges that the language used by these platforms is more akin to gambling than investing, and that they are operating as unlicensed gambling venues. According to Attorney General Josh Kaul, 'attempting to disguise unlawful activities does not make them lawful.' The lawsuit has sparked a debate about the nature of these contracts and whether they fall under federal or state jurisdiction. The Commodity Futures Trading Commission (CFTC) has previously considered these contracts to be financial instruments, but Wisconsin and other states argue that they are, in fact, bets that are subject to local gaming regulations. The case is likely to have far-reaching implications for the prediction market industry and may ultimately be decided by the Supreme Court. The lawsuit targets three main ecosystems, including Crypto.com and its derivatives arm, Polymarket and its affiliated entities, and Kalshi, which partners with Robinhood and Coinbase to offer sports betting to state residents. The legal theory behind the lawsuit is that the 'event contracts' offered by these platforms are essentially wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. The state cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The lawsuit also highlights the platforms' own marketing materials, which describe themselves as 'sports betting' platforms. The state argues that the structure of these prediction markets falls squarely within its definition of a bet, regardless of how the products are labeled. 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. The Wisconsin lawsuit is the latest in a growing list of state challenges, which may ultimately force the Supreme Court to decide the issue.