Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has consistently maintained that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its skepticism, filing a lawsuit against major players such as Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's complaint centers around the language used by these platforms, which it argues is more akin to gambling than investing. According to Wisconsin Attorney General Josh Kaul, 'merely disguising unlawful activities does not make them lawful.' The lawsuit raises a fundamental question: do these contracts constitute financial instruments under the Commodity Futures Trading Commission's purview, or are they simply bets subject to state gaming laws? This question has significant implications, as it will determine whether the prediction market operates under a unified federal framework or is instead governed by a patchwork of state regulations. The issue is likely to be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems. The first names Crypto.com and its derivatives arm, while the second targets Polymarket and its affiliated entities. The third complaint involves Kalshi, as well as its distribution partners Robinhood and Coinbase, alleging that these platforms collectively facilitate sports betting for Wisconsin residents. The legal theory underlying these complaints is that so-called 'event contracts' are, in essence, wagers. Users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. For instance, traders could purchase contracts tied to NCAA tournament games, with prices reflecting implied probabilities, and receive a payout of $1 if they win. State prosecutors point to Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which refer to it as 'a platform where people can bet on the outcome of future events.' The state 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 opposing side of the trade. The complaints also highlight that these platforms generate revenue by charging transaction fees on each contract, similar to a casino taking a cut of wagers placed on its floor. The industry's defense relies on 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 a boost when the Third Circuit sided with the company, treating the regulator's decision not to block the contracts as effectively settling the jurisdictional question. Nevertheless, state courts across the US have consistently taken a different stance, with Nevada deeming the contracts 'indistinguishable' from gambling and New York's Attorney General 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 force the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.