Wisconsin Takes on Prediction Market Giants, Alleging Unlicensed Gambling Operations

The prediction market sector has consistently asserted that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its skepticism and is now taking legal action against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their own marketing materials as evidence of unlicensed gambling activities. According to Attorney General Josh Kaul, 'Merely disguising illegal activities does not make them lawful.' The core issue at stake is whether these contracts should be classified as financial instruments under the Commodity Futures Trading Commission (CFTC) or as bets subject to state gambling laws. This determination will have significant implications, as it will decide whether the rapidly growing market will be governed by a single federal regulatory framework or be subject to the jurisdiction of local gaming regulators across 50 states. The case is likely to ultimately be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems, naming Crypto.com, Polymarket, and Kalshi, along with its distribution partners Robinhood and Coinbase, alleging that these platforms collectively facilitate sports betting for state residents. The legal argument presented 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. Examples cited in the filings include traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning 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 call itself '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 emphasize that these platforms generate revenue by charging transaction fees on each contract, likening this model to a casino taking a cut of wagers placed on its floor. The industry's defense relies on federal preemption, with Kalshi arguing that its contracts are swaps listed on a regulated exchange and therefore fall under the CFTC's exclusive jurisdiction. This position recently received support from the Third Circuit, which treated the regulator's decision not to block the contracts as effectively settling the jurisdictional question. Nevertheless, state courts across the U.S. have consistently taken a different stance, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. The Wisconsin suits 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.