Some prediction market products covered by restrictions on retail sales, European regulator affirms

The European Securities and Markets Authority has warned that some prediction market products may be subject to restrictions on financial derivatives.

France.- The European Securities and Markets Authority (ESMA) has cautioned that some prediction platform products fall under the category of restricted financial instruments in the European Union (EU). Its statement affirms that prediction markets structured as binary yes-or-no contracts with fixed payouts may fall under prohibitions on the marketing and sale of binary options to retail customers.

It’s the first time the financial watchdog has formally addressed the growing sector. It acknowledged the increased availability of event contracts and stated that it believes some must be considered as derivatives under the scope of Annex 1 of the Markets in Financial Instruments Directive II (MiFID II), which covers contracts linked to equities, indices, interest rates, currencies or commodities, and these are considered financial instruments.

Since 2018, the sale of derivatives with binary payouts has been subject torestrictions, first under ESMA’s own temporary ban on binary option sales to retail clients and then under permanent bans introduced by regulators at the national level.

These restrictions were imposed due to consumer protection concerns over aggressive marketing and client losses. Reliance on cryptocurrencies or limiting access to professional investors did not exempt platforms from oversight, ESMA said.

The authority acknowledged that some event contracts could instead fall under gambling regulation and others under the EU’s forthcoming Markets in Crypto-Assets (MiCA) framework. Nevertheless, when the underlying asset is covered by MiFID II, the contract must be treated as a financial derivative, the regulator said.

“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 regulator clarified.

Several European gambling regulators have blocked access to platforms such as Kalshi and Polymarket. The German gambling regulator recently launched an investigation into FIFA partner ADI Predictstreet, which received a gambling licence in Gibraltar earlier this year. Last month, nine European regulators issued a joint statement against prediction platforms, warning the public that they do not comply with European regulations.