Key facts
- ESMA warned that many prediction market contracts may already be banned for EU retail investors under existing binary options rules.
- The regulator clarified that product characteristics, such as binary outcomes and fixed payouts, determine classification, not marketing.
- Firms offering such contracts must determine if they are financial instruments under MiFID II, requiring authorization.
- The statement follows actions by Spanish authorities against Kalshi and Polymarket and a joint statement from nine European gambling authorities.
- US regulators, including the CFTC and state authorities, are also engaged in legal battles over the classification of prediction market contracts.
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. This statement follows recent actions by Spanish authorities who temporarily banned Kalshi and Polymarket for lacking a gambling license, and a joint statement from gambling authorities in nine European nations against unlicensed gambling sites. The regulatory scrutiny comes as prediction markets gain traction, with major platforms operating outside Europe and facing legal challenges in the United States from both state regulators viewing them as illegal gambling and the CFTC asserting federal jurisdiction over them as commodity derivatives.