EU Regulators Warn Prediction Markets May Violate Binary Options Ban

The European Securities and Markets Authority has warned that some prediction market contracts could fall under the EU’s existing binary options ban, potentially barring their sale to retail investors even as the sector grows rapidly worldwide.

Function Over Labeling

ESMA said yes-or-no event contracts cannot be marketed, distributed or sold to retail clients if they meet the legal definition of financial instruments, regardless of how they’re branded. The regulator focused on contracts with binary payouts, typically a fixed amount or nothing, tied to the outcome of a future event, stating that calling something an “event contract” doesn’t exempt it from classification as a derivative under EU rules.

Broad Reach Across The Market

According to ESMA, event contracts that qualify as financial instruments fall under existing national restrictions on binary options. The regulator also said offering related investment services within the EU requires proper authorization under MiFID II, even when a platform limits itself to non-retail clients. Additional payments, such as rewards or interest on user funds, don’t change a product’s underlying binary structure, ESMA noted, adding that firms must evaluate products based on their actual features rather than commercial names.

Comes Amid Rapid Sector Growth

The warning arrives as prediction markets expand across both crypto and traditional finance. Platforms like Kalshi and Polymarket have drawn attention as potential acquisition targets as the lines between exchanges, brokerages and sportsbooks continue to blur. Kalshi was valued at $22 billion in its most recent funding round, while trading firm Jump Trading has taken small stakes in both Kalshi and Polymarket in exchange for providing liquidity.

ESMA noted that event contracts falling outside financial instrument rules could still be subject to national gambling laws, or fall under the EU’s Markets in Crypto-Assets framework if tokenized.