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 skepticism towards this claim, and in a recent lawsuit against major players such as Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state is using the companies' own marketing materials to brand them as unlicensed gambling operators. According to Attorney General Josh Kaul, 'merely disguising unlawful activities does not render them lawful.' The core issue at the heart of these lawsuits is whether the contracts offered by these platforms constitute financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or if they are, in fact, bets subject to state gambling laws. This determination will have significant implications, as it will decide whether the rapidly growing prediction market operates under a unified federal regulatory framework or is instead subject to a patchwork of state-specific gaming regulations. It is likely that this matter will ultimately be resolved 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 affiliated entities. The third complaint pulls in Kalshi alongside distribution partners Robinhood and Coinbase, arguing that these platforms collectively facilitate sports betting for Wisconsin residents. Across all three complaints, the legal argument is that 'event contracts' are essentially wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. One example cited in the filings involves traders buying contracts tied to NCAA tournament games at prices reflecting implied probabilities, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also 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 contends that the structure of prediction markets clearly falls 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 further emphasize that these platforms generate revenue by charging transaction fees on each contract, a model likened to a casino taking a cut of wagers placed on its floor. This sets the stage for a federalism fight, with the industry's defense resting on the argument of federal preemption. Kalshi, in particular, has argued that its contracts are swaps listed on a regulated exchange and thus fall under the CFTC's exclusive jurisdiction. This position received support earlier this month when the Third Circuit ruled in favor of the company, treating the regulator's decision not to block the contracts as effectively settling the jurisdictional question. However, across the U.S., state courts have consistently taken a different stance. For instance, Nevada has described the contracts as 'indistinguishable' from gambling, while New York AG Letitia James has stated 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 of the United States to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.