Wisconsin Takes on Prediction Market Platforms, Sues Multiple Companies

The prediction market sector has consistently maintained that its products are investment tools, not wagering opportunities. However, Wisconsin has expressed skepticism and is now taking legal action against several companies, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their marketing materials as evidence of unlicensed gambling operations. According to Attorney General Josh Kaul, 'merely disguising illicit activities does not render them legitimate.' The core issue at hand 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 is regulated at the federal level or fragmented across 50 states, with each state having its own set of rules. It is likely that this matter will eventually be decided by the Supreme Court. Wisconsin's lawsuits, filed in Dane County, target three distinct ecosystems. One lawsuit names Crypto.com and its derivatives arm, while another targets Polymarket and its affiliated entities. The third lawsuit involves Kalshi and its distribution partners, Robinhood and Coinbase, with the claim being that these platforms collectively facilitate sports betting for Wisconsin residents. The legal argument presented is that 'event contracts' are, in essence, wagers where users pay to take a position on a real-world outcome, receiving a fixed payout if they are correct. An example cited in the filings involves traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also reference Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which describe it as 'a platform where people can bet on the outcome of future events.' The state contends that the structure of prediction markets aligns with its statutory definition of a bet, regardless of labeling or who is on the other side of the trade. Furthermore, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, similar to a casino taking a cut of wagers. This sets the stage for a federalism dispute, with the industry's defense relying on federal preemption. Kalshi, in particular, has argued that its contracts are swaps listed on a regulated exchange, thus falling under the CFTC's exclusive jurisdiction. This position received support when the Third Circuit ruled in the company's favor, treating the regulator's decision not to block the contracts as effectively settling the jurisdictional question. In contrast, state courts across the U.S. have been consistent in their opposition, with Nevada describing the contracts as 'indistinguishable' from gambling and New York's Attorney General stating that 'each contract is a bet.' For now, Wisconsin's lawsuits contribute to a growing list of state challenges, each contributing to a record that may ultimately prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.