Wisconsin Takes on Prediction Markets, Files Lawsuits Against Multiple Companies

The prediction market industry has consistently maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has expressed its skepticism and filed a complaint against several companies, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their own marketing materials as evidence of unlicensed gambling operations. According to Wisconsin Attorney General Josh Kaul, 'disguising unlawful activities does not make them lawful.' The core issue underlying these lawsuits is whether the contracts offered by these platforms constitute financial instruments under the Commodity Futures Trading Commission (CFTC) or bets subject to state gambling laws. This distinction will determine whether the rapidly growing prediction market operates under a unified federal regulatory framework or is subject to the jurisdiction of local gaming regulators in each state. The matter is likely to be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three separate ecosystems. The first complaint names Crypto.com and its derivatives arm, while the second targets Polymarket and its affiliated entities. The third complaint involves Kalshi and its distribution partners, Robinhood and Coinbase, alleging that these platforms facilitate sports betting for state residents. The legal argument presented is that 'event contracts' 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, including traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Additionally, state prosecutors reference Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which describe it 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 labeling or who takes the other side of the trade. The complaints also highlight that platforms generate revenue by charging transaction fees on each contract, similar to a casino taking a cut of wagers. This sets up a federalism fight, with the industry's defense relying on federal preemption. Kalshi, in particular, has argued that its contracts are swaps listed on a regulated exchange, falling under the CFTC's exclusive jurisdiction. This position was recently supported by 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 US have consistently taken a different stance, with Nevada and New York characterizing the contracts as 'indistinguishable' from gambling and 'bets,' respectively. Wisconsin's lawsuits contribute to a growing list of state challenges, building a record that may ultimately force the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.