MILWAUKEE (CN) - The Commodity Futures Trading Commission sued Wisconsin Tuesday in response to the attorney general's recent lawsuit against Kalshi, Polymarket, Robinhood and other prediction market services.

"States cannot circumvent the clear directive of Congress," said Chairman Michael S. Selig in a statement. "Our message to Wisconsin is the same as to New York, Arizona and others: if you interfere with the operation of federal law in regulating financial markets, we will sue you."

The CFTC is tasked with the regulation of prediction markets and derivative products, including the event contract market at issue in a recent legal action initiated by Wisconsin Attorney General Josh Kaul against Kalshi, Polymarket, Coinbase, Robinhood and more.

Kaul claimed the platforms' event contract trading between buyers and sellers at agreed-upon prices is functionally identical to sports betting, which is illegal in Wisconsin except for some exceptions outlined in tribal gaming compacts.

On Tuesday, the CFTC hit back to assert its dominance in this regulatory sphere.

"Wisconsin's attempt to criminalize and shut down federally regulated markets intrudes on the exclusive federal scheme Congress designed to oversee national swaps markets," Attorney Alexandra McTague said on behalf of the U.S. Department of Justice Civil Division in the 29-page complaint.

The agency argues in its complaint that Wisconsin misunderstands the difference between a "bet" and a "swap." Event contracts do not fall under the definition of "bets" as defined by Wisconsin statutes, so offering event contracts for trade in Wisconsin cannot violate state law.

Even if state law did prohibit event contract trading, the agency suggests the law would be preempted by federal law and the CFTC's exclusive authority to regulate this kind of transacting.

Congress vested the CFTC with its regulatory authority over commodity derivatives markets in 1974 with the Commodity Exchange Act - a federal statute that provides a federal framework for the regulation of commodity derivatives transactions across the country.  

Derivatives are financial instruments that derive their value from something else, like a benchmark or a physical commodity, according to the agency.

The CFTC filed a similar lawsuit in New York last week, asserting that New York Attorney General Letitia James' recent litigation against prediction market platforms runs afoul of the Commodity Exchange Act.

There, the agency made the same preemption argument in the face of state-level civil suits against Coinbase and Gemini, accusing them of operating unlicensed gambling businesses and seeking forfeiture of profits.

"Once again, this administration is prioritizing big corporations over consumers and New Yorkers' best interests. New York's gambling laws are designed to protect consumers, whether they are placing bets in a prediction market or a casino," James said in a statement on Friday.

Civil suits brought by Wisconsin and New York each charge that event contract trading and prediction markets are nothing more than illegal gambling operations in poor costume.

However, a judge in Arizona earlier this month sided with the CFTC and restrained state lawmakers from regulating prediction market operators in a similar suit.

The Third Circuit also blocked states from regulating the Kalshi prediction market earlier this month. It found states lack jurisdiction to regulate sporting event contracts, effectively handing exclusive regulation of the industry to the CFTC.

Arizona was the first state to file criminal charges against Kalshi. It prohibits unlicensed betting on elections, and the lawsuit centered around political outcomes, college sports and individual player performance options.

Kalshi maintains it's a financial marketplace, not an online casino.

The CFTC says state-led lawsuits targeting prediction markets create a patchwork of regulation across the country and make it more difficult to enforce regulations on the federal level.

"Designated contract markets are forced to guess whether they are held to the standards of the CFTC and Commodities Exchange Act, state regulators, or both. Civil enforcement suits and criminal investigations launched by states discourage [contract market] participation in the market by obfuscating the proper regulatory framework, improperly altering their risk tolerance and causing unnecessary expense to both DCMs and the CFTC," the agency said in the complaint.

The agency asked the court to declare all state laws pertaining to gambling or placing bets preempted as applied to transactions listed or executed by CFTC-designated contract markets like Kalshi.  

Online prediction platforms have exploded in popularity in recent years, allowing customers to buy and sell "yes" or "no" contracts tied to the probable outcome of an event for a fee, which goes to the platform.

The Trump administration has backed the platforms so far and has highlighted them during election cycles when they predict Republican wins.

Trump's eldest son is an adviser for both Kalshi and Polymarket and an investor in the latter. Trump's social media platform, Truth Social, is also launching its own cryptocurrency-based prediction market called Truth Predict.

While Wisconsin and other states have argued the fee amounts to profiting from repeated illegal activity, the CFTC sees the issue differently. It is currently pursuing legal action in Connecticut, Illinois and New York in addition to its Wisconsin suit.

Kaul could not be immediately reached for comment on the lawsuit.

Source: Courthouse News Service