Wisconsin Takes on Prediction Market Operators in Lawsuit

Prediction market operators have long maintained that their offerings are legitimate financial instruments, but Wisconsin is challenging this claim. In a recent lawsuit filed against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state argues that these platforms are, in fact, facilitating unauthorized gambling activities. According to Wisconsin Attorney General Josh Kaul, 'merely disguising illegal conduct does not make it legal.' The lawsuit centers on the question of whether the contracts offered by these platforms are financial instruments subject to federal regulation or bets governed by state gaming laws. This distinction is crucial, as it will determine whether the prediction market industry will be subject to a single federal regulatory framework or will be overseen by individual state gaming authorities. The case is likely to ultimately be decided by the Supreme Court. Wisconsin's lawsuit targets three separate ecosystems, naming Crypto.com, Polymarket, and Kalshi, as well as distribution partners Robinhood and Coinbase. The state's legal theory is that the 'event contracts' offered by these platforms are, in reality, wagers in which users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. The lawsuit cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also point to the platforms' own marketing materials, including Kalshi's Instagram ads claiming to be 'the first nationwide legal sports betting platform' and Polymarket's description of itself as 'a platform where people can bet on the outcome of future events.' The state argues that the structure of prediction markets falls within its statutory definition of a bet, regardless of how the products are labeled or who takes the other side of the trade. The lawsuit also emphasizes that the platforms generate revenue by charging transaction fees on each contract, similar to a casino taking a cut of wagers placed on its floor. 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 exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). 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 that may ultimately force the Supreme Court to decide whether labeling something a financial contract is sufficient to exempt it from being treated as a bet.