Wisconsin Takes On Prediction Markets, Sues Multiple Companies Over Alleged Unlicensed Gambling

The prediction market sector is under fire as Wisconsin files a complaint against several notable companies, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they operate as unlicensed gambling venues. According to Wisconsin, the marketing language used by these platforms is deceptive, as it thinly veils unlawful conduct as lawful. Attorney General Josh Kaul emphasized that disguising illegal activities does not make them legal. The core issue revolves around whether the contracts offered by these platforms are financial instruments, as they claim, or simply bets, which would fall under state gambling laws. This distinction is crucial, as it determines whether these markets are regulated at the federal level or by individual states. The complaints filed by Wisconsin target three main ecosystems: one involving Crypto.com and its derivatives arm, another targeting Polymarket and its affiliates, and the last focusing on Kalshi and its distribution partners, Robinhood and Coinbase. The legal argument is that the 'event contracts' offered by these platforms are, in essence, wagers where users pay to take a position on a real-world outcome, receiving a payout if they are correct. Examples from the filings include traders buying contracts tied to NCAA tournament games, with payouts reflecting implied probabilities. The state also points to the platforms' own advertising, such as Kalshi's claim to be 'The First Nationwide Legal Sports Betting Platform' and Polymarket's description as 'a platform where people can bet on the outcome of future events.' Wisconsin argues that the structure of these prediction markets aligns with the state's definition of a bet, regardless of the labeling or the counterparty to the trade. Furthermore, the state notes that these platforms generate revenue through transaction fees on each contract, similar to a casino's model. The industry's defense hinges on federal preemption, with companies like Kalshi arguing that their contracts are swaps on a regulated exchange, thus falling under the exclusive jurisdiction of the Commodity Futures Trading Commission (CFTC). However, state courts have consistently taken a different stance, with Nevada and New York both likening these contracts to gambling. Wisconsin's suits contribute to a growing list of state challenges that may eventually force the Supreme Court to decide whether labeling something as a financial contract is sufficient to distinguish it from a bet.