EU Crackdown Looms as Retail Investors Flood Booming Prediction Platforms

European regulators have emphasized that a product’s regulatory status is determined by its actual function, not the name under which it is marketed.

The European Securities and Markets Authority (ESMA) warned that certain prediction-market contracts may fall under the European Union’s binary options ban. This means that yes-or-no event contracts cannot be marketed, distributed, or sold to retail investors if they meet the definition of financial instruments.

“This means that the marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited,” ESMA said.

The regulator is targeting contracts with binary payoffs, where investors receive either a fixed return or nothing based on the outcome of a future event.

ESMA made clear that branding a product as an “event contract” does not exempt it from regulation. If its underlying characteristics align with derivatives under MiFID II, it will be classified as a financial instrument.

Such contracts are therefore treated as derivatives and fall within the scope of national restrictions on binary options.

The warning comes as prediction markets continue to expand across both crypto and traditional finance. Platforms like Kalshi and Polymarket have drawn attention as potential M&A targets, reflecting the growing convergence of exchanges, brokerages, and betting platforms.

Kalshi was recently valued at $22 billion, while Jump Trading has taken minority stakes in both Kalshi and Polymarket in exchange for providing liquidity.

ESMA also clarified that incentives such as coupons, rewards, or interest-like payments do not alter the binary structure of these products. Firms must assess regulatory classification based on how the product operates in practice, rather than how it is presented commercially.

The scope of the restrictions extends beyond retail platforms. Firms offering investment services tied to such contracts in the EU must obtain MiFID II authorization, even if they only cater to professional or institutional clients.

Depending on their structure, ESMA added, event contracts may also fall under national gambling laws or—if tokenized and not considered financial instruments—under the EU’s Markets in Crypto-Assets (MiCA) framework.