Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market sector has long maintained that its offerings constitute financial instruments rather than bets, but Wisconsin is challenging this stance. In a recent complaint filed against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state argues that the marketing language used by these platforms reveals their true nature as gambling venues. According to Attorney General Josh Kaul, 'disguising unlawful conduct does not make it lawful.' The core issue revolves around whether these contracts should be classified as financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or as bets subject to state gambling laws. This distinction determines whether the rapidly growing market will operate under a unified federal regulatory framework or be subject to the jurisdiction of local gaming regulators across 50 states. The case is likely to be appealed to the Supreme Court. Wisconsin's complaints target three distinct ecosystems: one involving Crypto.com and its derivatives arm, another focusing on Polymarket and affiliated entities, and a third naming Kalshi and its distribution partners Robinhood and Coinbase. The legal argument posits that 'event contracts' are, in essence, wagers where users pay to take a position on a real-world outcome, receiving a fixed payout if they are correct. Examples cited include traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also references Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which call it 'a platform where people can bet on the outcome of future events.' Wisconsin argues that the structure of prediction markets aligns with its statutory definition of a bet, regardless of labeling or who takes the other side of the trade. The complaints further emphasize that these platforms generate revenue by charging transaction fees on each contract, likening this model to a casino's practice of 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, thus falling under the CFTC's exclusive jurisdiction. This position recently received support from the Third Circuit, which treated the regulator's decision not to block the contracts as effectively settling the jurisdictional question. However, state courts across the U.S. have consistently taken a different stance, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. Wisconsin's suits contribute to a growing list of state challenges, each building a record that could ultimately prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.