Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has consistently maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has taken a firm stance against this claim, filing a lawsuit against major players such as Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's Attorney General, Josh Kaul, emphasized that attempting to disguise unlawful activities does not make them lawful. The core issue at hand is whether these platforms operate under federal regulations as financial instruments or fall under state gambling laws as bets. This dilemma is likely to be resolved by the Supreme Court, as it has significant implications for the industry's operation across the United States. Wisconsin's complaints target three main ecosystems: Crypto.com and its derivatives arm, Polymarket and its affiliated entities, and Kalshi along with its distribution partners Robinhood and Coinbase. 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 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 points to the platforms' own marketing materials, such as Kalshi's claim of being '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 contends that the structure of these prediction markets aligns with its statutory definition of a bet, regardless of labeling or the counterparty involved. Furthermore, the state notes that these 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 thus fall under the Commodity Futures Trading Commission's (CFTC) exclusive jurisdiction. This position was recently bolstered by a Third Circuit decision. However, state courts across the U.S. have consistently taken a different stance, with Nevada and New York both characterizing these contracts as indistinguishable from gambling. Wisconsin's suits 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.