Wisconsin Takes on Prediction Markets, Files Lawsuit Against Multiple Companies

The prediction market industry has consistently maintained that its products are legitimate financial instruments, rather than bets. However, Wisconsin has taken a different stance, filing a lawsuit against several companies, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are operating as unlicensed gambling venues. According to Wisconsin Attorney General Josh Kaul, 'disguising unlawful conduct as something else does not make it lawful.' The lawsuit centers on the question of whether the contracts offered by these companies are financial instruments under the jurisdiction of the Commodity Futures Trading Commission (CFTC), or if they are bets that fall under state gambling laws. This distinction is crucial, as it will determine whether the industry is subject to a single federal regulatory framework or if it will be regulated by individual states. The case is likely to end up in the Supreme Court. Wisconsin's lawsuit targets three separate entities, including Crypto.com and its derivatives arm, Polymarket and its affiliates, and Kalshi, along with its distribution partners Robinhood and Coinbase. The state argues that the 'event contracts' offered by these companies are essentially wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. The lawsuit cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also points to the companies' own marketing materials, including Kalshi's claim to be 'the first nationwide legal sports betting platform' and Polymarket's description of itself as 'a platform where people can bet on the outcome of future events.' The lawsuit argues that the structure of prediction markets falls within the state's definition of a bet, regardless of how the products are labeled. The companies generate revenue by charging transaction fees on each contract, which the state likens to a casino taking a cut of wagers. The industry's defense relies on the argument that federal law preempts state law, and that the contracts are swaps listed on a regulated exchange, falling under the CFTC's exclusive jurisdiction. However, state courts have consistently taken a different position, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. The Wisconsin lawsuit is the latest in a growing list of state challenges, which could ultimately force the Supreme Court to decide whether the label of 'financial contract' is enough to exempt these products from being treated as bets.