Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has consistently maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has expressed its skepticism, filing a lawsuit against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing the companies' marketing language as evidence of unlawful gambling activities. According to Attorney General Josh Kaul, 'attempting to disguise illegal conduct with thin veneers of legitimacy does not make it lawful.' The core issue at stake is whether these contracts should be classified as financial instruments under the Commodity Futures Trading Commission (CFTC) or as bets under state gambling laws. This distinction will determine whether the rapidly growing prediction market will be subject to a unified federal regulatory framework or fragmented across 50 states, falling under the jurisdiction of local gaming regulators. Ultimately, this matter is likely to be resolved by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems, including Crypto.com and its derivatives arm, Polymarket and affiliated entities, as well as Kalshi, Robinhood, and Coinbase, which collectively facilitate sports betting for state residents. The legal argument is that '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 cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Additionally, the state references Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which label 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 labeling or the counterparty to the trade. The complaints also highlight that 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, thus falling under the CFTC's exclusive jurisdiction. This position recently received support from the Third Circuit, 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 and New York characterizing the contracts as indistinguishable from gambling. Wisconsin's suits 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.