Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market industry has long maintained that its products are legitimate financial instruments, not wagers. However, Wisconsin has filed a complaint against several prominent operators, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are, in fact, unlicensed gambling platforms. According to Wisconsin Attorney General Josh Kaul, the companies' own marketing materials reveal their true nature, saying 'disguising unlawful conduct does not make it lawful.' The lawsuit centers on the question of whether these platforms offer financial instruments regulated by the Commodity Futures Trading Commission (CFTC) or if they are essentially betting operations subject to state gambling laws. This distinction is crucial, as it determines whether the industry will be regulated at the federal level or fragmented across 50 states, each with its own gaming regulations. The case is likely to end up in the Supreme Court. Wisconsin's complaints target three separate ecosystems, naming Crypto.com, Polymarket, and Kalshi, along with its distribution partners Robinhood and Coinbase, accusing them of facilitating sports betting for Wisconsin residents. The state argues that the 'event contracts' offered by these platforms are, in essence, wagers, where users pay to take a position on a real-world outcome, receiving a payout if they are correct. Examples cited include contracts tied to NCAA tournament games, where winning positions pay out $1, and losing ones return nothing. The state also points to the platforms' own advertising, such as Kalshi's claim to be '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 lawsuit emphasizes that, regardless of labeling, the structure of these prediction markets fits within Wisconsin's statutory definition of a bet. Furthermore, the platforms' revenue model, which involves charging transaction fees on each contract, is likened to 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 regulated swaps under the CFTC's exclusive jurisdiction. This position was recently bolstered by a Third Circuit ruling. However, state courts have consistently taken a different stance, with Nevada and New York both characterizing these contracts as indistinguishable from gambling. Wisconsin's suits contribute to a growing list of state challenges, which may ultimately compel the Supreme Court to decide whether labeling something a financial contract is sufficient to exempt it from being treated as a bet.