Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market industry has consistently maintained that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has taken a differing stance, filing a complaint against several prominent operators, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that they are operating as unlicensed gambling venues. According to Wisconsin Attorney General Josh Kaul, 'attempting to disguise unlawful activities as lawful ones does not make them so'. The core issue at hand is whether these platforms offer financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or if they constitute bets under state gambling laws. This distinction will determine whether the rapidly growing market will be subject to a single federal regulatory framework or be fragmented across 50 states, with each state's gaming regulators exerting jurisdiction. The matter is likely to be ultimately decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three separate ecosystems, naming Crypto.com, Polymarket, and Kalshi, along with its distribution partners Robinhood and Coinbase. The legal argument posits that '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. Examples cited in the filings include traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also references marketing materials from Kalshi and Polymarket, which describe their platforms as facilitating sports betting. State prosecutors contend that the structure of these prediction markets aligns with the statutory definition of a bet, regardless of how the products are labeled. Additionally, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, drawing parallels with a casino's model of 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, thereby 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. Nevertheless, state courts across the U.S. have consistently taken a contrary position, with Nevada and New York characterizing the contracts as indistinguishable from gambling. The Wisconsin suits 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 preclude it from being treated as a bet.