Wisconsin Takes on Prediction Market Operators, Alleging Unlicensed Gambling

The prediction market industry maintains that its products are legitimate financial instruments, not mere bets. However, Wisconsin disagrees and has filed a complaint against Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their marketing strategies as evidence of unlicensed gambling operations. According to Attorney General Josh Kaul, 'disguising unlawful activities does not make them lawful.' The core issue revolves around whether these contracts should be classified as financial instruments under the Commodity Futures Trading Commission or as bets under state gambling laws. This distinction will determine whether the market operates under a unified federal rulebook or is regulated by individual states. The complaint targets three separate ecosystems: Crypto.com and its derivatives arm, Polymarket and affiliated entities, and Kalshi alongside distribution partners Robinhood and Coinbase. The legal argument is that 'event contracts' are essentially wagers, where users pay to take a position on a real-world outcome and receive a fixed payout if correct. The state cites examples of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. Wisconsin's prosecutors also reference Kalshi's Instagram ads, which claim the platform is '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 argues that the structure of prediction markets aligns with its definition of a bet, regardless of labeling or trade counterparties. The complaints also highlight that 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, falling under the CFTC's exclusive jurisdiction. This position received support from the Third Circuit earlier this month. However, state courts across the US have consistently taken a different stance, with Nevada and New York characterizing the contracts as 'indistinguishable' from gambling and 'each contract is a bet,' respectively. Wisconsin's suits contribute to a growing list of state challenges, potentially forcing the Supreme Court to decide whether labeling something a financial contract is sufficient to distinguish it from a bet.