Wisconsin Takes on Prediction Market Platforms in Lawsuit Against Kalshi, Coinbase, and Others

The prediction market sector has consistently maintained that its offerings are legitimate financial instruments, not wagers. However, Wisconsin has expressed its disagreement with this stance, filing a complaint against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing the companies' marketing materials as evidence of their platforms being unlicensed gambling venues. According to Wisconsin 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 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 determination will decide whether the rapidly growing prediction market operates under a unified federal regulatory framework or is instead governed by a patchwork of state laws, with the outcome 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 its affiliated entities, and a third targeting Kalshi and its distribution partners, Robinhood and Coinbase, alleging that these platforms collectively facilitate sports betting for Wisconsin residents. The state's legal argument is that the so-called '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. The complaints cite specific examples, including traders buying contracts tied to NCAA tournament games, where winning positions pay out $1 and losing ones return nothing. State prosecutors also point to the platforms' own advertising, such as Kalshi's claim to be '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 argues that the structure of prediction markets aligns with 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, likening this model 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, thereby falling under the CFTC's exclusive jurisdiction. This position received support from the Third Circuit, which treated the regulator's decision not to block the contracts as effectively settling the jurisdictional question. Nonetheless, state courts across the U.S. have consistently taken a different stance, with Nevada deeming the contracts 'indistinguishable' from gambling and New York Attorney General Letitia James stating 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 prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.