Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market sector has consistently maintained that its offerings are financial instruments rather than bets, but Wisconsin is challenging this stance. In a recent complaint filed against several key players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state is leveraging the companies' own marketing materials to argue that they are, in fact, operating unlicensed gambling venues. According to Attorney General Josh Kaul, 'merely disguising illegal activities does not render them lawful.' The core issue at hand is whether these contracts should be classified as financial instruments under the Commodity Futures Trading Commission (CFTC) or as bets under state gambling laws. This distinction will determine whether the rapidly expanding market will be regulated by a single federal rulebook or fragmented across 50 states, falling under the jurisdiction of local gaming regulators. It is likely that this matter will ultimately be decided by the Supreme Court. Wisconsin's complaints, which were filed in Dane County, target three distinct ecosystems. The first 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, with the state arguing that these platforms collectively facilitate sports betting for Wisconsin residents. The legal theory underlying these complaints is that so-called 'event contracts' are, in essence, 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 where traders could purchase contracts tied to NCAA tournament games, with prices reflecting implied probabilities, and notes that winning positions pay out $1, while losing ones return nothing. State prosecutors also point to Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which refer to it as 'a platform where people can bet on the outcome of future events.' The state argues that the structure of prediction markets falls squarely within its statutory definition of a bet, regardless of how the products are labeled or who takes the other side of the trade. Furthermore, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, drawing parallels with a casino taking a cut of wagers placed on its floor. This sets the stage for a federalism fight, with the industry's defense resting on federal preemption. Kalshi, in particular, has argued that its contracts are swaps listed on a regulated exchange, thereby falling under the CFTC's exclusive jurisdiction. However, state courts across the U.S. have consistently taken a different stance, with Nevada describing the contracts as 'indistinguishable' from gambling and New York AG Letitia James stating that 'each contract is a bet.' For now, Wisconsin's lawsuits contribute to a growing list of state challenges, each building a record that could ultimately force the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.