Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market sector has consistently maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed skepticism towards this claim, and in a recent complaint filed against major players such as Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state is leveraging the companies' own marketing materials to argue that they are, in fact, operating as unlicensed gambling venues. According to Attorney General Josh Kaul, "merely disguising unlawful activities does not render them lawful." The core issue at the heart of these lawsuits is whether the contracts offered by these platforms should be classified as financial instruments under the purview of the Commodity Futures Trading Commission (CFTC), or as bets subject to state gaming regulations. This question has significant implications, as it will determine whether the rapidly expanding prediction market is governed by a single set of federal rules or is instead subject to a patchwork of state-level gaming laws. The matter is likely to ultimately be decided by the Supreme Court. Wisconsin's complaints, which were filed in Dane County, target three distinct ecosystems. One complaint names Crypto.com and its derivatives arm, while another targets Polymarket and its affiliated entities. A third complaint implicates Kalshi, as well as its distribution partners Robinhood and Coinbase, arguing that these platforms collectively facilitate sports betting for Wisconsin residents. The legal theory underlying these complaints is that the so-called "event contracts" offered by these platforms constitute wagers, in which users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. For instance, traders could purchase contracts tied to NCAA tournament games at prices that reflect implied probabilities, 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," as well as Polymarket's ads, which characterize the platform as "a venue 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, which is analogous to a casino taking a cut of wagers placed on its floor. The industry's defense relies on the doctrine of 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 received a boost earlier this month when the Third Circuit ruled in favor of the company, effectively settling the jurisdictional question. Nevertheless, state courts across the U.S. have consistently taken a different stance, with Nevada deeming the contracts "indistinguishable" from gambling and New York AG Letitia James stating that "each contract is a bet." For the time being, Wisconsin's lawsuits contribute to a growing list of state-level challenges, each building a record that could ultimately compel the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.