The European Securities and Markets Authority (ESMA) has issued a warning indicating that prediction markets offering binary yes-or-no outcomes with fixed payouts are classified as restricted financial instruments. In a Friday statement, ESMA pointed out the growing number of event contracts and clarified that these products may be subject to current restrictions akin to those on binary options.
This marks ESMA's first public commentary on prediction markets during a period of surging popularity and activity in both North America and Europe. Several European gambling regulators have blocked access to notable platforms such as Kalshi and Polymarket for failing to comply with local gambling regulations. In June, a coalition of nine European regulators initiated a focused effort against unlicensed prediction market platforms.
The group expressed rising concerns over prediction markets, citing potential risks to consumer protection and market integrity. In contrast, Gibraltar is actively inviting operators and providing licensing opportunities for prediction markets that fit within the framework of an intermediary betting platform.
The ESMA’s statement emphasizes that several event contracts may fall under the MiFID financial legislation. Many prediction market platforms had operated under the belief that their reliance on cryptocurrencies or their focus on professional rather than retail clients exempted them from stringent financial regulations. However, ESMA clarified that even products aimed at professional or institutional investors necessitate authorization.
The regulators confirmed that certain contracts could be classified as equities, indices, interest rates, currencies, or commodities, thereby qualifying as financial instruments and necessitating treatment as derivatives. Such derivatives are subject to legislative stipulations found in Annex I of the Markets in Financial Instruments Directive II (MiFID II).
This classification holds significant implications, as derivatives with binary payoffs have faced strict product intervention measures since 2018. ESMA had initially placed a temporary ban on selling binary options to retail clients, a prohibition that has since been reinforced by national bans in various EU member states. ESMA’s statement reiterated, "The marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited."
Looking ahead, the regulator did suggest that some event contracts might still fall under the jurisdiction of European gambling regulations, contrasting those contracts deemed financial instruments, which could be regulated under the forthcoming EU Markets in Crypto-Assets (MiCA) legislation. However, when the underlying asset is classified within the framework of MiFID II, it must be treated as a financial derivative.
The original ESMA binary options ban in 2018 was fueled by widespread consumer protection concerns, including aggressive marketing tactics and substantial losses incurred by clients. While the temporary ban expired, permanent national restrictions akin to ESMA's regulations continue to bar sales to retail clients throughout the EU.
ESMA noted that while its recent statement specifically addresses financial instruments marketed as event contracts, an assessment regarding national product intervention measures should be considered for all financial instruments sharing characteristics with event contracts.
The regulatory landscape for prediction markets in Europe remains uncertain, though ongoing discussions in the U.S. surrounding the same issues could foreshadow similar conflicts between financial and gambling regulators in Europe. ADI Predictstreet, FIFA’s partner for prediction markets during the World Cup, announced its intentions last week to broaden its European offerings, extending beyond just sports betting contracts. This company was the first to earn a license for its prediction market product in Gibraltar back in April. Furthermore, U.S. tech start-up WagerWire has also received preliminary approval to establish a prediction market platform in the jurisdiction.
