The European Securities and Markets Authority (ESMA) has issued a warning regarding prediction markets that feature binary yes-or-no outcomes and fixed payouts, stating that these products are classified as restricted financial instruments. This announcement, made on Friday, highlighted the increasing prevalence of event contracts and underscored that they may fall under the same regulatory constraints as binary options.
This marks the first instance of the EU’s financial regulator addressing prediction markets, which have seen a surge in popularity in both Europe and North America. Several European gambling authorities have taken action against major platforms like Kalshi and Polymarket for failing to comply with local gambling regulations. In June, a coalition of nine regulators initiated a targeted campaign against unlicensed prediction market sites due to rising concerns surrounding consumer protection and market integrity.
In contrast, Gibraltar is positioning itself as a welcoming environment for operators, providing licensing avenues for prediction market platforms that operate under the scope of intermediary betting.
ESMA’s recent statement refuted the assumptions of many prediction market platforms that adherence to cryptocurrency operations or catering exclusively to professional users might exempt them from stringent financial regulations. The agency clarified that even those targeting institutional investors must obtain the proper authorization.
Certain contracts that may resemble equities, indices, interest rates, currencies, or commodities are classified as financial instruments and are viewed as derivatives. Such designations fall under Annex I of the Markets in Financial Instruments Directive II (MiFID II) framework. This classification is significant as derivatives featuring binary payouts have been subject to strict product intervention measures since 2018. Initially, ESMA imposed a temporary ban on the sale of binary options to retail clients, a prohibition that has since been implemented by various EU member states.
ESMA stated, "The marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited."
While the regulator has indicated that some event contracts may be governed by gambling laws in Europe, it also noted that those considered financial instruments would fall under the forthcoming EU Markets in Crypto-Assets (MiCA) regulation. However, if the contract’s underlying asset is within the scope of MiFID II, it must be treated as a financial derivative.
The concerns surrounding consumer protection—including aggressive marketing tactics and substantial client losses—led to the initial ban on binary options by ESMA in 2018. Despite the expiration of this temporary ban, permanent national restrictions resembling ESMA’s position persist, prohibiting the sale of these products to retail customers across the EU.
The ESMA statement emphasized, "While this public announcement specifically mentions financial instruments marketed as event contracts, the evaluation of national product intervention measures should consider all financial instruments with characteristics similar to event contracts."
The regulatory future for prediction markets in Europe remains uncertain, though the ongoing debate in the United States regarding these markets suggests potential conflicts between financial regulations and gambling oversight. ADI Predictstreet, who has partnered with FIFA to manage prediction markets for the ongoing World Cup, announced plans to expand offerings in Europe beyond merely sports betting contracts. They were the first to secure a license for their prediction market product in Gibraltar back in April. Following this, the US tech start-up WagerWire has also received preliminary approval to launch a prediction market platform in the same jurisdiction.
