Wisconsin Takes on Prediction Market Operators, Alleging Unlicensed Gambling

The prediction market industry has long maintained that its products are legitimate financial tools, rather than bets. However, Wisconsin has taken a different stance, filing a lawsuit against several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's complaint centers on the language used by these platforms, which Wisconsin argues is more akin to gambling than investing. According to Wisconsin Attorney General Josh Kaul, 'merely disguising unlawful conduct does not make it lawful.' The lawsuit raises fundamental questions about the nature of these platforms and whether they operate under federal or state jurisdiction. At its core, the issue revolves around whether the contracts offered by these platforms are financial instruments, as regulated by the Commodity Futures Trading Commission (CFTC), or bets, which would fall under state gambling laws. This distinction is crucial, as it determines whether these platforms operate under a unified federal framework or are subject to a patchwork of state regulations. The complaint filed by Wisconsin targets three distinct ecosystems, naming Crypto.com, Polymarket, and Kalshi, along with its partners Robinhood and Coinbase, for allegedly facilitating unlicensed sports betting for state residents. The state's legal argument is built around the notion that 'event contracts' offered by these platforms are, in essence, wagers. Users pay to take a position on the outcome of real-world events, receiving a fixed payout if they are correct. The lawsuit cites examples of such contracts, including those tied to NCAA tournament games, where traders could buy contracts at prices reflecting implied probabilities, with winning positions paying out a fixed amount and losing ones returning nothing. The state also points to the marketing materials of these platforms, 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 these prediction markets fits squarely within its definition of a bet, regardless of how the products are labeled or who takes the opposing side of the trade. Furthermore, the complaint highlights that these platforms generate revenue by charging transaction fees on each contract, a model akin to a casino taking a cut of wagers placed on its premises. The industry's defense relies heavily on the argument of federal preemption, with Kalshi, in particular, asserting 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. However, state courts across the U.S. have consistently taken a different stance, with Nevada and New York both likening these contracts to gambling. The lawsuit filed by Wisconsin adds to the growing list of state challenges, building a record that may ultimately compel the Supreme Court of the United States to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.