Wisconsin Takes on Prediction Market Platforms, Suing Multiple Companies

The prediction market sector maintains that its offerings are legitimate financial tools, not mere bets. However, Wisconsin has expressed its disagreement with this stance, filing a complaint against several key players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their marketing materials as evidence of unlicensed gambling operations. As stated by Attorney General Josh Kaul, 'Merely disguising illegal activities does not render them legal.' 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 will be regulated by a single federal rulebook or fragmented across 50 states, falling under the jurisdiction of local gaming regulators. It is likely that this matter will eventually 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 its affiliated entities, and a third targeting Kalshi, along with its distribution partners Robinhood and Coinbase, alleging that these platforms collectively facilitate sports betting for state 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 prices reflecting implied probabilities, and winning positions paying out $1, while losing ones return 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 label 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 the labeling or the counterparty involved in the trade. Furthermore, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, drawing parallels with a casino taking a cut of wagers placed on its premises. This sets the stage for a federalism dispute, as 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. However, state courts across the U.S. have consistently taken a different stance, with Nevada deeming the contracts 'indistinguishable' from gambling and New York AG Letitia James stating that 'each contract is a bet.' For now, Wisconsin's suits contribute to a growing list of state challenges, each building a record that could ultimately prompt the Supreme Court of the United States to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.