Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry maintains that its offerings are legitimate financial instruments, not mere bets. However, Wisconsin has taken issue with this stance, filing a complaint against major players Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their own marketing materials as evidence of unlicensed gambling operations. According to Attorney General Josh Kaul, 'merely disguising unlawful activities does not render them lawful.' The crux of the matter lies in determining whether these contracts constitute financial instruments under the purview of the Commodity Futures Trading Commission (CFTC) or if they are, in fact, bets subject to state gambling laws. This distinction will ultimately decide whether the rapidly expanding market will be governed by a unified federal framework or fragmented across 50 states, falling under the jurisdiction of local gaming regulators. The case is likely to be elevated to the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems, naming Crypto.com and its derivatives arm, Polymarket and affiliated entities, as well as Kalshi, alongside distribution partners Robinhood and Coinbase. The legal argument posits that 'event contracts' are, in essence, wagers, where users purchase contracts tied to real-world outcomes, receiving a fixed payout if their prediction is correct. Examples cited in the filings include traders buying contracts linked to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. State prosecutors also reference Kalshi's Instagram ads, which tout the platform as 'The First Nationwide Legal Sports Betting Platform,' and Polymarket's ads, which describe itself as 'a platform where people can bet on the outcome of future events.' The state contends that, regardless of labeling or the counterparty to the trade, the structure of prediction markets aligns with its statutory definition of a bet. Furthermore, the complaints highlight that platforms generate revenue by charging transaction fees on each contract, drawing parallels with 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 position was recently bolstered by the Third Circuit's decision to side with the company. However, state courts across the U.S. have consistently taken a different stance, with Nevada deeming the contracts 'indistinguishable' from gambling and New York AG Letitia James stating that 'each contract is a bet.' Wisconsin's suits contribute to a growing list of state challenges, gradually building a record that may ultimately compel the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.