AG Kaul Sues Prediction Markets for Illegal Sports Betting

Speaking at a violence prevention press conference Photo taken Oct. 13, 2021 by Jeramey Jannene.

The Wisconsin Department of Justice (DOJ) is suing major prediction market companies, including Kalshi and Polymarket, alleging that they facilitate illegal sports betting.

The state DOJ recently filed suit against the biggest players in the prediction markets: Kalshi, Polymarket, Coinbase, Robinhood and Crypto.com. These companies allow users to purchase and sell “events contracts,” which enable traders to bet on the likelihood of a given event taking place.

Prediction markets are not new and were formerly a niche financial market. Their popularity exploded only recently after Kalshi, a derivatives exchange, began allowing bets on the outcome of political races. Markets now offer contracts on a wide array of events, ranging from weather predictions to wars. They are priced according to the probability that any given event will occur.

Sporting events are a massive source of activity and revenue in prediction markets. The state DOJ alleges the “events contracts” on the outcomes are “functionally indistinguishable” from sports betting, which is illegal in Wisconsin except in certain Native American tribal gaming operations allowed under state law.

“Thinly disguising unlawful conduct doesn’t make it lawful,” Attorney General Josh Kaul said in a statement Thursday announcing the lawsuits. “These companies’ alleged facilitation of sports betting in Wisconsin should be shut down.”

During the recent NCAA college basketball tournaments, contracts were available for bets on who would win a given game, score the first points or cover the spread. For each contract purchased, the companies collect a fee, which the DOJ compared to the “rake” taken from a casino bet. While the companies do not take the other side of a bet, like a casino, “that does not get them off the hook, since each company still generates significant revenue from these sports bets by charging transaction fees each time event contracts are traded using their platforms,” the DOJ argues.

However, Kalshi, as the DOJ notes in its complaint, does at times take the other side of a bet. For a contract to move forward, there must be both a buyer and a seller, or two traders who are wagering that the opposite outcome will occur. With a sporting event, they are picking different winners. To ensure prediction markets are not lopsided and there are always enough buyers and sellers, Kalshi will take the opposite side of events contracts through an affiliate, Kalshi Trading LLC, according to the DOJ.

The companies are bringing in huge revenues through sports-related bets. The DOJ points to an analysis conducted by the Financial Times that estimated 90% of Kalshi’s revenue, $1.3 billion, was coming from sports trading.

In 2024, just as prediction markets were taking off, the Commodity Futures Trading Commission (CFTC) attempted to prohibit bets on the outcomes of political elections, arguing they constituted election gambling, which is illegal in many parts of the country. Kalshi sued the CFTC and won, ushering in the current era of increasingly all-encompassing prediction markets.

The lawsuits announced by Kaul Thursday mirror similar cases being brought by New York Attorney General Letitia James.

In response, Paul Grewal, the chief legal officer for Coinbase, took to X and said, “Congress was clear — consumers deserve uniform, federal oversight over derivatives markets. As the Third Circuit held, state enforcement that seeks to prohibit prediction markets — like Wisconsin’s lawsuit today against [Coinbase] and others — ‘is exactly the patchwork that Congress replaced whole cloth by creating the CFTC.’ Wisconsin should accept clear and consistent CFTC oversight of prediction markets — just as Congress intended.”