Wisconsin Takes on Prediction Market Giants 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, filing a complaint against major players including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. The state's Attorney General, Josh Kaul, emphasized that attempting to disguise unlawful activities does not render them lawful. The core issue at hand 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 gambling laws. This distinction will determine whether the rapidly expanding market operates under a unified federal framework or is instead regulated by individual states. The matter is likely to be ultimately decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, 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 centered on the notion that 'event contracts' 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 examples such as traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also references 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 place where people can 'bet on the outcome of future events.' Wisconsin argues that the structure of prediction markets aligns with its statutory definition of a bet, regardless of labeling or the counterparty involved. The complaints further highlight that these platforms generate revenue by charging transaction fees, 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, thus falling under the CFTC's exclusive jurisdiction. This stance received support from the Third Circuit earlier this month. However, state courts across the U.S. have consistently taken a different view, with Nevada and New York both likening the contracts to gambling. Wisconsin's lawsuit contributes to a growing list of state challenges, which may eventually prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.