Wisconsin Takes on Prediction Market Operators in Lawsuit

The prediction market sector has consistently maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed skepticism, and in a recent lawsuit targeting Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, the state is utilizing the companies' own marketing materials to argue that they are, in fact, operating as unlicensed gambling venues. According to Attorney General Josh Kaul, 'Disguising unlawful activities as something lawful does not make them so.' The central issue at play is whether these contracts should be classified as financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or as bets subject to state gaming regulations. This question has significant implications, as it will determine whether the rapidly expanding prediction market operates under a unified federal regulatory framework or is instead subject to a patchwork of state-level regulations. It is likely that this matter will ultimately be decided by the Supreme Court. Wisconsin's complaints, which were filed in Dane County, target three distinct ecosystems. One complaint names Crypto.com and its derivatives arm, while another targets Polymarket and affiliated entities. A third complaint involves Kalshi, as well as its distribution partners Robinhood and Coinbase, and argues that these platforms collectively facilitate sports betting for Wisconsin residents. Across all three complaints, the underlying legal theory is that so-called 'event contracts' are, in essence, wagers: users pay money to take a position on a real-world outcome and receive a fixed payout if they are correct. For example, traders could purchase contracts tied to NCAA tournament games at prices reflecting implied probabilities, with winning positions paying out $1 and losing ones returning nothing. State prosecutors have also cited Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which refer to the platform as 'a platform where people can bet on the outcome of future events.' The state has argued that the structure of prediction markets falls squarely within its statutory definition of a bet, regardless of how the products are labeled or who takes the other side of the trade. Furthermore, the complaints emphasize that these platforms generate revenue by charging transaction fees on each contract, a model akin to a casino taking a cut of wagers placed on its floor. The prediction market 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 CFTC's exclusive jurisdiction. This position received a boost earlier this month when the Third Circuit ruled in favor of the company, treating the regulator's decision not to block the contracts as effectively settling the jurisdictional question. However, state courts across the US have consistently taken a different stance, with Nevada describing the contracts as 'indistinguishable' from gambling and New York AG Letitia James stating that 'each contract is a bet.' For now, Wisconsin's lawsuits add to a growing list of state-level challenges, each contributing to a record that could ultimately force the Supreme Court to decide whether labeling something a financial contract is sufficient to prevent it from being treated as a bet.