Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has consistently maintained that its products are legitimate financial instruments, rather than bets. However, Wisconsin has taken a different stance, filing a lawsuit against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are operating as unlicensed gambling venues. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise unlawful activities as lawful ones does not make them so.' The lawsuit centers on the question of whether the contracts offered by these platforms are financial instruments under federal regulation or bets under state law. This distinction is crucial, as it determines whether the industry will be subject to a single federal regulatory framework or be governed by individual state laws. The issue is likely to end up in the Supreme Court. Wisconsin's lawsuit targets three separate ecosystems, naming Crypto.com, Polymarket, and Kalshi, along with its partners Robinhood and Coinbase, as defendants. The state argues that the '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 payout if they are correct. The lawsuit cites examples of contracts tied to NCAA tournament games, where traders could buy contracts at prices reflecting implied probabilities, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also point 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 where people can bet on the outcome of future events.' The state contends that the structure of these prediction markets falls within its definition of a bet, regardless of how the products are labeled or who takes the other side of the trade. The lawsuit also highlights that the platforms generate revenue by charging transaction fees on each contract, similar 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 exclusive jurisdiction of the Commodity Futures Trading Commission. However, state courts have consistently taken a different position, with Nevada and New York characterizing the contracts as 'indistinguishable' from gambling and 'each contract is a bet,' respectively. Wisconsin's lawsuit adds to the growing list of state challenges, building a record that 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.