The European Securities and Markets Authority (ESMA) has issued a warning regarding prediction markets that feature binary yes-or-no outcomes and fixed payouts, indicating that such markets qualify as restricted financial instruments.
In a statement released on Friday, ESMA highlighted the growing availability of event contracts and clarified that these products may fall under the existing regulations for binary options. This marks the first time the EU’s financial markets regulator has addressed prediction markets amid a surge in their popularity and activity in both North America and Europe.
Several European gambling regulators have already taken action, blocking access to well-known platforms Kalshi and Polymarket for failing to comply with local gambling laws. In June, a coalition of nine regulatory bodies initiated a focused campaign against unlicensed prediction market operators, voicing concerns about consumer protection and potential risks to market integrity.
Contrastingly, Gibraltar aims to attract operators, providing licensing opportunities for prediction markets that function under an intermediary betting framework.
ESMA's statement emphasized that many prediction market platforms have previously operated in Europe under the belief that their reliance on cryptocurrencies or their targeting of professional users instead of retail clients shielded them from stringent financial regulations. However, ESMA clarified that even the distribution of these contracts to professional or institutional clients requires authorization.
The regulator noted that certain contracts may be classified as equities, indices, interest rates, currencies, or commodities, thus categorizing them as financial instruments that should be viewed as derivatives. This classification aligns with Annex I of the Markets in Financial Instruments Directive II (MiFID II) regulation.
This distinction is pivotal because derivatives with binary payoffs have been subject to strict product intervention measures since 2018. ESMA initially imposed a temporary ban on the sale of binary options to retail clients, a prohibition that has since seen national bans enacted across EU member countries.
ESMA clarified that "The marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited."
Looking ahead, the regulator left open the possibility that some event contracts might be governed by gambling regulations in Europe, noting that contracts which are not classified as financial instruments could fall under the forthcoming EU Markets in Crypto-Assets (MiCA) regulation. However, any contracts tied to underlying assets within MiFID II’s scope must be treated as financial derivatives.
The impetus for the original ESMA binary options ban in 2018 was widespread consumer protection concerns, including aggressive marketing tactics and significant client losses. While the temporary ban has expired, many EU member states continue to enforce permanent bans reflecting ESMA’s original guidelines, thus blocking sales to retail clients across the region.
ESMA's statement adds that, "While this public statement specifically mentions financial instruments marketed as event contracts, the assessment of whether the national product intervention measures apply should be conducted for all financial instruments with similar characteristics to event contracts."
The future regulatory landscape for prediction markets in Europe is still uncertain, yet discussions surrounding the topic in the US suggest potential conflicts between financial regulators and those governing gambling laws.
ADI Predictstreet, a partner of FIFA for the ongoing World Cup, announced its plans to broaden its offerings in Europe, beyond just sports betting contracts. The company obtained the first license for its prediction market solution in Gibraltar this past April. Subsequently, the US tech start-up WagerWire has also received provisional approval to launch a prediction market platform in the same jurisdiction.
