Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market sector has long maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its disagreement with this stance, filing a complaint against several key players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's Attorney General, Josh Kaul, emphasized that attempting to disguise unlawful activities does not render them lawful. The core issue at hand is whether these contracts should be classified as financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or as bets subject to state gambling laws. This determination will significantly impact the regulatory landscape for the rapidly growing prediction market, potentially leading to a unified federal framework or a fragmented system with 50 different state regulations. It is likely that this matter will ultimately be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, focus on three distinct ecosystems, targeting Crypto.com, Polymarket, and Kalshi, alongside its distribution partners Robinhood and Coinbase. The state's legal argument posits that 'event contracts' are, in essence, wagers, where users pay to take a position on a real-world outcome, receiving a fixed payout if they are correct. Examples cited in the filings include traders buying contracts tied to NCAA tournament games, with prices reflecting implied probabilities and payouts of $1 for winning positions. The state also points to the platforms' own marketing materials, 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.' Wisconsin argues that the structure of prediction markets aligns with its statutory definition of a bet, regardless of labeling or the counterparty involved. Furthermore, the state highlights that these platforms generate revenue by charging transaction fees, akin to a casino's cut of wagers. The industry's defense relies on federal preemption, with Kalshi arguing that its contracts are swaps listed on a regulated exchange, thus falling under the CFTC's exclusive jurisdiction. This position received support from the Third Circuit, which treated the regulator's decision not to block the contracts as a de facto settlement of the jurisdictional question. Nevertheless, state courts across the US have consistently taken a different stance, with Nevada and New York characterizing the contracts as indistinguishable from gambling. Wisconsin's suits contribute to the growing list of state challenges, building a record that may eventually prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.