Wisconsin Takes on Prediction Markets with Lawsuits Against Kalshi, Coinbase, and Others

The prediction market industry has long maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has taken a firm stance against this claim, filing complaints against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. According to Wisconsin Attorney General Josh Kaul, 'merely disguising illegal activities does not make them lawful.' The core issue at hand is whether these platforms' 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 distinction will determine whether the industry operates under a unified federal framework or is regulated on a state-by-state basis. The matter is likely to be decided by the Supreme Court. Wisconsin's complaints target three distinct ecosystems: one involving Crypto.com and its derivatives arm, another focusing on Polymarket and its affiliates, and a third targeting Kalshi and its distribution partners, Robinhood and Coinbase. The state's argument hinges on the notion that '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 complaints cite examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Additionally, the state 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.' The state argues that the structure of prediction markets aligns with its statutory definition of a bet, regardless of the labels used or the counterparty to the trade. The complaints also highlight that platforms generate revenue by charging transaction fees on each contract, drawing parallels with a casino's practice of 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 thus fall under the CFTC's exclusive jurisdiction. This position received support from the Third Circuit earlier this month. However, state courts across the U.S. have consistently taken a different stance, with Nevada and New York characterizing the contracts as 'indistinguishable' from gambling and 'bets,' respectively. Wisconsin's suits contribute to a growing list of state challenges, which may ultimately prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to exempt it from being treated as a bet.