Wisconsin Takes on Prediction Market Giants in Lawsuit

The prediction market industry has long maintained that its products are legitimate financial instruments, not mere bets. However, Wisconsin has expressed its skepticism and is now taking legal action against several prominent players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com. In a recent complaint, the state argues that these companies are operating unlicensed gambling venues, citing their own marketing materials as evidence. According to Wisconsin's Attorney General Josh Kaul, 'disguising unlawful conduct does not make it lawful.' The lawsuit centers on the question of whether the contracts offered by these platforms are financial instruments under the Commodity Futures Trading Commission (CFTC) or simply bets under state gambling law. This distinction is crucial, as it will determine whether the industry is subject to a single federal regulatory framework or will be carved up across 50 states, with each state having its own jurisdiction. The issue is likely to end up in the Supreme Court. Wisconsin's complaints target three separate ecosystems, naming Crypto.com, Polymarket, and Kalshi, among others. The state's legal theory is that the so-called 'event contracts' offered by these platforms are, in fact, 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 of traders buying contracts tied to NCAA tournament games, with winning positions paying out $1 and losing ones returning nothing. The state also points to the platforms' own advertising, such as Kalshi's claim to be 'The First Nationwide Legal Sports Betting Platform' and Polymarket's description of itself as 'a platform where people can bet on the outcome of future events.' The state argues that the structure of prediction markets falls within its statutory definition of a bet, regardless of how the products are labeled. The complaints also emphasize that the 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 and therefore fall under the CFTC's exclusive jurisdiction. However, state courts have consistently taken a different position, with Nevada and New York both characterizing the contracts as 'bets.' Wisconsin's lawsuit is the latest in a growing list of state challenges, which may ultimately force the Supreme Court to decide whether calling something a financial contract is enough to keep it from being treated as a bet.