Wisconsin Takes on Prediction Market Platforms, Filing Lawsuits Against Multiple Companies

The prediction market sector has consistently maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its disagreement with this stance, and in a recent lawsuit targeting Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state is utilizing the companies' own promotional materials to classify them as unlicensed gambling operators. According to Attorney General Josh Kaul, 'merely disguising illicit activities does not render them lawful.' The core issue underlying these lawsuits is whether the contracts in question should be regarded as financial instruments under the purview of the Commodity Futures Trading Commission or as wagers subject to state gambling laws. This determination will have significant implications, as it will decide whether this rapidly expanding market is regulated by a single federal framework or by individual state gaming authorities, potentially leading to a Supreme Court decision. Wisconsin's complaints, filed in Dane County, focus on three distinct ecosystems. One targets Crypto.com and its derivatives arm, while another takes aim at Polymarket and affiliated entities. The third complaint involves Kalshi, along with its distribution partners Robinhood and Coinbase, arguing that these platforms collectively facilitate sports betting for Wisconsin residents. The legal argument presented is that 'event contracts' are, in essence, wagers: users pay to assume a position on a real-world outcome and receive a fixed payout if they are correct. State prosecutors have cited specific examples, including traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also references Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which describe it as 'a platform where people can bet on the outcome of future events.' Furthermore, the state argues that the structure of prediction markets aligns with its statutory definition of a bet, regardless of the label assigned to the products or the counterparty involved in the trade. The complaints also 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 premises. The industry's defense relies on federal preemption, with Kalshi arguing that its contracts are swaps listed on a regulated exchange, thereby falling under the CFTC's exclusive jurisdiction. This stance received support earlier this month when the Third Circuit ruled in the company's favor, treating the regulator's decision not to block the contracts as effectively resolving the jurisdictional issue. 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 prompt the Supreme Court of the United States to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.