Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has long maintained that its products are legitimate financial instruments, but Wisconsin is challenging this claim. In a recent lawsuit, the state is targeting Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are operating unlicensed gambling venues. According to Wisconsin Attorney General Josh Kaul, 'disguising unlawful conduct does not make it lawful.' The lawsuit centers on the question of whether these platforms offer financial instruments or bets, which will determine whether they are regulated by federal or state authorities. The case is likely to end up in the Supreme Court. Wisconsin's complaints focus on three main areas, including Crypto.com's derivatives arm, Polymarket, and Kalshi, which partners with Robinhood and Coinbase to facilitate sports betting for state residents. The state argues that the 'event contracts' offered by these platforms are essentially wagers, where users pay to take a position on a real-world outcome and receive a payout if they are correct. The lawsuit cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also point to the platforms' own marketing materials, including Kalshi's Instagram ads claiming 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.' The state contends that the structure of these prediction markets falls within its statutory definition of a bet, regardless of how the products are labeled. The complaints also highlight that the platforms generate revenue by charging transaction fees on each contract, similar to a casino taking a cut of wagers. 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 Commodity Futures Trading Commission's exclusive jurisdiction. However, state courts have consistently taken a different position, with Nevada and New York characterizing the contracts as 'indistinguishable' from gambling and 'each contract is a bet,' respectively. The Wisconsin lawsuit adds to a growing list of state challenges, which may ultimately force the Supreme Court to decide whether labeling something a financial contract is enough to exempt it from being treated as a bet.