Key facts
- ESMA warned that many prediction market contracts may already be banned for EU retail investors under existing binary options rules.
- The regulator stated that product characteristics, such as binary outcomes and fixed payouts, determine classification, not marketing.
- Firms offering such contracts must determine if they qualify as financial instruments under MiFID II, requiring authorization.
- The warning comes as prediction markets expand across crypto and traditional finance.
- Event contracts that qualify as financial instruments are derivatives and fall under binary options restrictions.
Europe's top financial regulator, ESMA, has issued a warning that many prediction market contracts may already be prohibited for retail investors in the European Union. The regulator stated that existing rules against binary options, a high-risk financial product, could apply to these contracts based on their characteristics, such as binary outcomes and fixed payouts, rather than how they are marketed. ESMA clarified that companies offering such products must determine if they qualify as financial instruments under MiFID II, which would necessitate authorization. The warning comes as prediction markets expand across crypto and traditional finance, with platforms like Kalshi and Polymarket facing scrutiny. Kalshi was valued at $22 billion in its latest funding round, and Jump Trading has taken small stakes in both platforms. ESMA emphasized that a product's actual function as a derivative matters more than its commercial name or labeling. Firms offering investment services linked to these products need MiFID II authorization, and event contracts may also fall under national gambling laws or, if tokenized, under the Markets in Crypto-Assets (MiCA) framework. This regulatory scrutiny follows actions by Spanish authorities against Kalshi and Polymarket and a joint statement from nine European gambling authorities. In the United States, regulators including the CFTC and state authorities are also engaged in legal battles over the classification of prediction market contracts.