Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market sector has consistently maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its skepticism and has now filed a complaint against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their marketing materials as evidence of unlicensed gambling operations. According to Wisconsin Attorney General Josh Kaul, 'merely disguising unlawful activities does not render them lawful.' The core issue at stake is whether these contracts 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 rapidly expanding market will be governed by a unified federal framework or fragmented across 50 states, with each state's gaming regulators exerting jurisdiction. The matter is likely to be escalated to the Supreme Court for a definitive ruling. Wisconsin's complaints, 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. The third complaint involves Kalshi and its distribution partners, Robinhood and Coinbase, alleging that these platforms collectively facilitate sports betting for Wisconsin residents. The legal argument presented is that the so-called 'event contracts' 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's filings cite examples, including traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Additionally, state prosecutors reference Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which describe itself as 'a platform where people can bet on the outcome of future events.' The state contends that the structure of prediction markets falls squarely within its definition of a bet, regardless of labeling or the counterparty involved. 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 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 deeming the contracts '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 to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.