Wisconsin Takes on Prediction Markets, Files Lawsuits Against Multiple Companies

The prediction market sector has long maintained that its offerings are legitimate financial instruments, rather than mere bets. However, Wisconsin has taken a firm stance against this claim, filing a complaint that targets several major players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, alleging that these companies are operating unlicensed gambling venues in the state. According to Wisconsin Attorney General Josh Kaul, 'merely disguising 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, which would fall under state gambling laws. This distinction is crucial, as it determines whether the rapidly expanding market will be regulated at the federal level or fragmented across 50 states, subject to the jurisdiction of local gaming regulators. The matter is likely to end up in the Supreme Court. Wisconsin's complaints, filed in Dane County, focus on three distinct ecosystems. One targets Crypto.com and its derivatives arm, another goes after Polymarket and its affiliated entities, and the third involves Kalshi and its distribution partners, Robinhood and Coinbase, with the argument being that these platforms collectively facilitate sports betting for Wisconsin residents. The legal theory underlying these complaints is that so-called 'event contracts' are, in essence, wagers, where users pay to take a position on a real-world outcome, receiving a fixed payout if they are correct. An example cited in the filings involves traders buying contracts tied to NCAA tournament games, with prices reflecting implied probabilities, and winning positions paying out $1, while losing ones return nothing. State prosecutors also point to Kalshi's Instagram ads, which describe the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which refer to it as 'a platform where people can bet on the outcome of future events.' The state contends that the structure of prediction markets aligns with its statutory definition of a bet, regardless of labeling or the counterparty to the trade. Furthermore, the complaints highlight that these platforms generate revenue by charging transaction fees on each contract, drawing parallels with a casino taking a cut of wagers placed on its floor. The industry's defense is centered 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 earlier this month when the Third Circuit ruled in the company's favor, treating the regulator's decision not to block the contracts as effectively settling the jurisdictional question. In contrast, state courts across the U.S. have been consistent in their opposition, with Nevada deeming the contracts 'indistinguishable' from gambling and New York AG Letitia James stating that 'each contract is a bet.' For now, Wisconsin's lawsuits contribute to a growing list of state challenges, each building a record that could ultimately compel the Supreme Court of the United States to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.