ESMA warns prediction market contracts breach EU retail ban rules
In brief
- ESMA: prediction market contracts meeting financial instrument definitions already face EU retail bans from 2018 restrictions
- Companies cannot circumvent regulations by rebranding binary-style products as event contracts instead of derivatives
- Professional client offerings still require MiFID II authorization under EU rules
- US prediction market platforms face regulatory split between state gaming authorities and CFTC
EU restrictions on event contracts
ESMA said the assessment depends on a contract's characteristics rather than how it is marketed. Event contracts with binary outcomes and fixed payouts are likely to qualify as financial instruments subject to the restrictions, the regulator said. Contracts meeting the definition of financial instruments are already prohibited from being marketed, distributed, or sold to retail investors under national measures implementing ESMA's 2018 binary options restrictions.
ESMA issued the reminder after observing increased offerings of event contracts and the rapid growth of prediction markets. The warning reflects a broader tension between regulators and the prediction market industry. Offering qualifying event contracts to professional or institutional clients still requires authorization under the EU's Markets in Financial Instruments Directive (MiFID II).
US regulatory battle escalates
The United States presents a starkly different landscape. A regulatory battle over prediction markets is unfolding, pitting state gaming regulators against the Commodity Futures Trading Commission. By March, authorities in 11 states had taken legal or regulatory action against platforms including Kalshi and Polymarket. Nevada became the first state to temporarily block Kalshi's operations, while Arizona brought criminal charges alleging the company was operating an illegal gambling business.
In April, the CFTC asserted exclusive jurisdiction over prediction markets, saying Congress had entrusted the agency with sole authority to regulate commodity derivatives markets. The regulator also sued several states and filed court briefs supporting platforms, including Kalshi. On June 30, a Massachusetts judge allowed state authorities to file an amended complaint against Kalshi in an ongoing lawsuit alleging the company's sports-event contracts constitute illegal gambling.
The Indian Gaming Association and American Gaming Association, joined by tribal and labor groups, urged lawmakers to amend the CLARITY Act to explicitly prohibit sports-related event contracts on prediction market platforms. Some legal experts believe the growing conflict between federal and state regulators over prediction markets could ultimately be decided by the US Supreme Court.
ESMA's warning signals that Europe is moving to enforce existing rules rather than create new ones, a sharper stance than the US regulatory uncertainty.
