Wisconsin Takes on Prediction Market Operators in Lawsuit

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 assertion, filing a complaint against several prominent operators, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. 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' contracts constitute financial instruments under the Commodity Futures Trading Commission (CFTC) or are instead considered bets under state gambling laws. This distinction is crucial, as it will determine whether the prediction market operates under a unified federal framework or is subject to individual state regulations. The matter is likely to be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems: one involving Crypto.com and its derivatives arm, another focusing on Polymarket and affiliated entities, and a third targeting Kalshi, alongside distribution partners Robinhood and Coinbase. The state's argument is that the so-called 'event contracts' offered by these platforms are, in fact, wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if they are correct. The complaints cite examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also references the platforms' own marketing materials, such as Kalshi's Instagram ads, which claim to be 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's, which describes itself as 'a platform where people can bet on the outcome of future events.' Wisconsin 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 other side of 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 and therefore fall under the CFTC's exclusive jurisdiction. This position received support from the Third Circuit earlier this month. However, state courts across the US have consistently taken a different stance, with Nevada and New York both characterizing the contracts as indistinguishable from gambling. The Wisconsin suits 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 exempt it from being treated as a bet.