ESMA confirms some prediction markets contracts fall under European financial regulation

The European Securities and Markets Authority (ESMA) has warned that prediction markets with binary yes-or-no outcomes and fixed payouts qualify as restricted financial instruments.

In a statement issued on Friday, ESMA noted the increased offering of event contracts and clarified that such products may fall under existing restrictions on binary options.

This is the first time the EU’s financial markets regulator has spoken out on prediction markets, amid a huge rise in popularity and activity across the vertical in both North America and Europe.

A number of European gambling regulators have blocked access to prominent sites Kalshi and Polymarket for not adhering to local gambling regulations. In June, a consortium of nine regulators launched a targeted initiative against unlicensed prediction market platforms.

The group expressed growing concern over prediction markets, highlighting various consumer protection and market integrity risks.

However, the gambling hub Gibraltar is welcoming operators and offering licensing opportunities for predictions markets that fall within the remit of an intermediary betting platform.

Some event contracts fall under MiFID financial laws

Many prediction market platforms have operated in Europe under assumptions that reliance on cryptocurrencies or a focus on professional rather than retail users safeguarded them from strict financial regulations.

But the ESMA statement refuted these assumptions, clarifying that even distribution to professional or institutional investors requires authorisation.

The regulators confirmed that certain contracts which could be considered equities, indices, interest rates, currencies or commodities, are financial instruments and should be treated as derivatives.

These assets fall under Annex I of the Markets in Financial Instruments Directive II (MiFID II) regulation.

The classification is crucial because derivatives with binary payoffs have been subject to stringent product intervention measures since 2018.

ESMA originally imposed a temporary ban on the sale of binary options to retail clients, which national bans across EU member states have since been enforced.

“The marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited,” ESMA’s statement clarified.

EU crypto laws could govern tokenized event contracts

The regulator left the door open for some event contracts to fall under gambling regulation in Europe, although it said those not deemed financial instruments could be subject to the upcoming EU Markets in Crypto-Assets (MiCA) regulation. However, when the underlying asset is within MiFID II’s scope, the contract must be treated as a financial derivative.

Widespread consumer protection concerns, including aggressive and misleading marketing and significant client losses, prompted the original ESMA binary options ban in 2018.

Although the temporary ban expired, permanent national bans replicating ESMA’s approach remain in effect, maintaining a block on sales to retail clients across the EU.

“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 statement explains.

Europe continues to clamp down on prediction markets

How prediction markets will be regulated across Europe remains to be seen, but the discourse that has erupted in the US over the vertical could indicate a similar grapple between financial and gambling regulators to oversee the product.

ADI Predictstreet, FIFA’s prediction markets partner for the current World Cup, said last week it would expand its current offering in Europe, beyond sports betting contracts.

The company was the first to receive a licence for its prediction market product in Gibraltar in April.

Since then, US tech start-up WagerWire has also received approval in principle to establish a prediction market platform in the jurisdiction.