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

The prediction market industry has consistently maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has taken a stance against this claim, filing a complaint against several prominent companies, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's lawsuit centers on the argument that these platforms are, in fact, facilitating unlawful gambling activities. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise illegal activities does not make them lawful.' The core issue at hand 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 gambling laws. This distinction will determine whether the prediction market industry operates under a unified federal regulatory framework or is instead subject to the jurisdiction of individual state gaming regulators. The matter is likely to be eventually decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems within the prediction market space. One complaint names Crypto.com and its derivatives arm, while another targets Polymarket and its affiliated entities. A third complaint pulls in Kalshi, along with its distribution partners Robinhood and Coinbase, alleging that these platforms collectively enable sports betting for Wisconsin residents. The legal theory underlying these complaints posits that the so-called 'event contracts' offered by these platforms are, in essence, wagers. Users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. The state's filings cite specific examples, including traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Additionally, the complaints reference marketing materials from Kalshi and Polymarket, which describe their platforms as facilitating sports betting and wagering on future events, respectively. Wisconsin 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. The complaints also 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 prediction market industry's defense relies on the concept 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 support from the Third Circuit earlier this month, 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 characterizing these contracts as indistinguishable from gambling. The lawsuits filed by Wisconsin 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 exempt it from being treated as a bet.