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 they qualify as restricted financial instruments. In a statement released on Friday, ESMA highlighted the growing trend of event contracts and clarified that these products may be subject to existing rules governing binary options.
This announcement marks the first occasion on which the EU's financial markets regulator has addressed prediction markets, which have seen significant growth in both North America and Europe. Several European gambling regulators have already blocked access to well-known platforms such as Kalshi and Polymarket for failing to comply with local gambling regulations. In June, a coalition of nine regulators initiated a focused effort against unlicensed prediction market sites, citing mounting worries about consumer protection and market integrity risks.
In contrast, Gibraltar has been proactive, inviting operators and offering licensing opportunities for prediction markets that fit the criteria of an intermediary betting platform. Many platforms have been operating in Europe under the belief that their reliance on cryptocurrencies or a focus on institutional users would exempt them from strict financial oversight.
However, ESMA’s recent statement has challenged these assumptions, emphasizing that even distribution to professional or institutional investors requires prior authorization. The regulators specified that certain contracts can be classified as equities, indices, interest rates, currencies, or commodities, placing them in the category of financial instruments treated as derivatives.
This classification is significant as derivatives with binary payouts have been under rigorous product intervention measures since 2018, initiated by ESMA, which first imposed a temporary ban on sales of binary options to retail clients. This initial ban has evolved into permanent national bans enforced across 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.”
Looking ahead, the regulator suggested that some event contracts might fall under gambling law in Europe, although those not classified as financial instruments could be subjected to the upcoming EU Markets in Crypto-Assets (MiCA) regulation. Nevertheless, if the underlying asset falls within the scope of MiFID II, the contract must be regarded as a financial derivative.
The move to ban binary options stemmed from widespread concerns over consumer protection, particularly regarding aggressive marketing tactics and substantial client losses. While the temporary ban has lapsed, many member states continue to enforce permanent bans, blocking retail client sales across the EU.
ESMA clarified that while this announcement focuses on financial instruments advertised as event contracts, it is crucial to assess whether national product intervention measures should apply to any financial instruments sharing characteristics with event contracts.
The future regulation of prediction markets in Europe remains uncertain. However, recent discussions in the United States suggest a potential conflict between financial and gambling regulators regarding oversight of these products. In related news, ADI Predictstreet, FIFA’s partner for the World Cup prediction markets, announced its intention to widen its offerings in Europe beyond sports betting contracts. They became the first to obtain a license for their prediction market product in Gibraltar back in April. Recently, the US tech startup WagerWire also received provisional approval to establish a prediction market platform in Gibraltar.
