Wisconsin Takes on Prediction Market Giants, Alleging Unlicensed Gambling Operations

Prediction market operators consistently argue that their offerings are legitimate financial instruments, but Wisconsin is disputing this claim in a lawsuit targeting several major players. The state's complaint, filed against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, contends that these platforms are actually engaging in unlicensed gambling activities. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise unlawful activities does not make them lawful.' The central issue at play is whether these platforms' contracts should be classified as financial instruments under the Commodity Futures Trading Commission (CFTC) or as bets under state gaming laws. This distinction will determine whether the rapidly growing prediction market will be subject to federal regulations or state-by-state oversight. The case is likely to end up in the Supreme Court. Wisconsin's complaints, filed in Dane County, focus on three separate ecosystems involving Crypto.com, Polymarket, and Kalshi, as well as its distribution partners Robinhood and Coinbase. 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 and receive a fixed payout if they are correct. The state cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The lawsuit also references Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which call it 'a platform where people can bet on the outcome of future events.' The state asserts that, regardless of labeling, the structure of these prediction markets falls within its definition of a bet. Additionally, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, similar to a casino 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, thus falling under the CFTC's exclusive jurisdiction. However, state courts have consistently taken a different stance, with Nevada and New York both likening these contracts to gambling. Wisconsin's lawsuit contributes 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 distinguish it from a bet.