Wisconsin Takes on Prediction Markets, Files Lawsuits Against Multiple Companies

The prediction market industry has consistently maintained that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has taken a firm stance against this claim, filing a complaint against several major companies, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are operating as unlicensed gambling platforms. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise unlawful activities as lawful ones does not make them so.' The core issue at hand is whether these platforms offer financial instruments regulated by the Commodity Futures Trading Commission (CFTC) or if they are essentially bets that fall under state gambling laws. This distinction is crucial, as it determines whether these platforms will operate under a unified federal framework or be subject to the regulatory oversight of individual states. The matter is likely to be resolved by the Supreme Court. Wisconsin's complaints target three separate entities: Crypto.com and its derivatives arm, Polymarket and its affiliated companies, and Kalshi, along with its distribution partners Robinhood and Coinbase. The state argues that the 'event contracts' offered by these platforms 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. For instance, traders could purchase contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also cites the companies' own marketing materials, such as Kalshi's claim of being 'The First Nationwide Legal Sports Betting Platform' and Polymarket's description of itself as 'a platform where people can bet on the outcome of future events.' Wisconsin's argument is that the structure of these prediction markets aligns with the state's definition of a bet, regardless of how the products are labeled or who takes the opposing side of the trade. Furthermore, the state notes that these platforms generate revenue by charging transaction fees on each contract, similar to how a casino takes a cut of wagers placed on its floor. The industry's defense relies on the concept of federal preemption, with Kalshi arguing that its contracts are swaps listed on a regulated exchange and thus fall 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 and New York both characterizing these contracts as indistinguishable from gambling. The lawsuits filed by Wisconsin contribute to a growing list of state challenges, each helping to build a record that may ultimately compel the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.