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

The prediction market industry has consistently maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has taken a stance against this claim, filing a complaint against several prominent platforms, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's Attorney General, Josh Kaul, emphasized that disguising unlawful activities does not make them lawful. The central issue at hand is whether these contracts fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) as financial instruments or are considered bets under state gambling laws. This distinction will determine whether the industry operates under a unified federal framework or is subject to individual state regulations. The case is likely to be appealed to the Supreme Court. Wisconsin's complaints target three main ecosystems, including Crypto.com, Polymarket, and Kalshi, along with its distribution partners Robinhood and Coinbase. The legal argument is that the so-called '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 state 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 materials, such as Kalshi's Instagram ads claiming to be the 'First Nationwide Legal Sports Betting Platform' and Polymarket's description of itself as a platform for betting on future events. The complaints argue that the structure of prediction markets falls within the state's definition of a bet, regardless of how the products are labeled. The platforms' revenue model, which involves charging transaction fees on each contract, is 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 CFTC's exclusive jurisdiction. However, state courts have consistently taken a different stance, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. The Wisconsin lawsuit adds to the growing list of state challenges, which may ultimately force the Supreme Court to decide whether labeling something a financial contract is enough to exempt it from being treated as a bet.