Wisconsin Takes Legal Action Against Prediction Market Operators

The prediction market industry has long maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has taken a different stance, filing a complaint against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their marketing materials as evidence of unlicensed gambling operations. According to Attorney General Josh Kaul, 'disguising unlawful activities as lawful ones does not make them so.' The core issue revolves around 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 market operates under a single federal regulatory framework or is subject to individual state laws. The matter is likely to be decided by the Supreme Court. Wisconsin's complaints target three separate ecosystems, including Crypto.com, Polymarket, and Kalshi, along with its distribution partners Robinhood and Coinbase. The state argues that the so-called 'event contracts' offered by these platforms 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. The state also points to the platforms' own advertising, such as Kalshi's claim of being 'The First Nationwide Legal Sports Betting Platform' and Polymarket's description as 'a platform where people can bet on the outcome of future events.' The complaint asserts that the structure of these prediction markets aligns with the state's definition of a bet, regardless of labeling or the counterparty to the trade. Furthermore, the platforms' revenue model, which involves charging transaction fees on each contract, is likened 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 and thus fall under the CFTC's exclusive jurisdiction. This position received support from the Third Circuit earlier this month. However, state courts across the U.S. have consistently taken a different view, with Nevada and New York characterizing the contracts as indistinguishable from gambling. Wisconsin's suits contribute to a growing list of state challenges, which may ultimately prompt the Supreme Court to decide whether labeling something as a financial contract is sufficient to distinguish it from a bet.