Wisconsin Takes on Prediction Market Platforms, Files Lawsuits Against Multiple Companies

The prediction market industry has consistently maintained that its products are legitimate financial instruments, rather than mere bets. However, Wisconsin has taken a firm stance against this notion, filing complaints against prominent companies such as Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. According to Wisconsin Attorney General Josh Kaul, attempting to disguise unlawful activities as lawful ones is unacceptable. The core issue revolves around the classification of these contracts: are they financial instruments under the Commodity Futures Trading Commission, or are they simply bets subject to state gambling laws? This question has significant implications, as it will determine whether the rapidly growing prediction market operates under a unified federal regulatory framework or is instead subject to individual state regulations. The matter is likely to be resolved by the Supreme Court. Wisconsin's complaints 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, alongside its distribution partners Robinhood and Coinbase. 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 the ability to purchase contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also references the companies' own marketing materials, such as Kalshi's claim of being the 'First Nationwide Legal Sports Betting Platform' and Polymarket's description of itself as a platform for betting on 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. Furthermore, the state points out that these platforms generate revenue by charging transaction fees on each contract, similar 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, thus falling under the exclusive jurisdiction of the CFTC. This position received support from the Third Circuit earlier this month. Nevertheless, state courts across the US have consistently taken a different stance, with Nevada and New York both treating these contracts as indistinguishable from gambling. The Wisconsin lawsuits contribute to a growing list of state challenges, which may ultimately compel the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.