Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has consistently argued that its products are legitimate financial tools, not bets. However, Wisconsin has filed a complaint against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are, in fact, operating as unlicensed gambling platforms. According to Wisconsin Attorney General Josh Kaul, 'merely disguising unlawful activities does not make them lawful.' The lawsuit centers on the question of whether these platforms offer financial instruments under the Commodity Futures Trading Commission (CFTC) or bets under state law. This distinction is crucial, as it will determine whether the industry operates under federal regulations or is subject to individual state laws. The case is likely to end up in the Supreme Court. Wisconsin's complaints target three main entities: Crypto.com and its derivatives arm, Polymarket and its affiliates, and Kalshi, along with its distribution partners Robinhood and Coinbase. The state argues that the 'event contracts' offered by these platforms 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 complaints cite examples of 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 marketing materials, such as Kalshi's claim 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 prediction markets falls within its definition of a bet, regardless of how the products are labeled. The complaints also highlight 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, arguing that its contracts are swaps listed on a regulated exchange and therefore fall under the CFTC's jurisdiction. However, state courts have consistently taken a different stance, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. Wisconsin's lawsuit adds to the growing list of state challenges, which 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.