Wisconsin Takes on Prediction Market Operators in Lawsuit

Prediction market operators have consistently maintained that their products are legitimate financial instruments, rather than mere bets. However, Wisconsin has expressed its skepticism, filing a complaint against several prominent players, including Kalshi, Coinbase, Polymarket, Robinhood, and Crypto.com, citing their own marketing materials as evidence of unlawful gambling activities. According to Attorney General Josh Kaul, 'merely disguising illicit conduct does not render it legitimate.' The crux of the issue lies in determining whether these contracts constitute financial instruments under the Commodity Futures Trading Commission or bets under state law, a question that may ultimately be decided by the Supreme Court. Wisconsin's complaints, filed in Dane County, target three distinct ecosystems, including Crypto.com, Polymarket, and Kalshi, alongside its distribution partners Robinhood and Coinbase. The state's legal argument hinges on the notion that 'event contracts' are, in fact, wagers, wherein users pay to take a position on a real-world outcome, receiving a fixed payout if they are correct. Examples cited in the filings include traders purchasing 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 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.' 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 emphasize that these platforms generate revenue by charging transaction fees on each contract, akin 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, thereby falling under the CFTC's exclusive jurisdiction. This position recently received support from the Third Circuit, which treated the regulator's decision not to block the contracts as effectively settling the jurisdictional question. Nevertheless, state courts across the US 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, which may ultimately prompt the Supreme Court to decide whether labeling something a financial contract is sufficient to exempt it from being treated as a bet.