The European regulator said companies cannot circumvent EU financial rules by marketing binary-style products as event contracts rather than derivatives.
The European Securities and Markets Authority (ESMA) has warned that many prediction market contracts may already fall under existing restrictions on binary options, saying companies cannot avoid financial regulations simply by marketing them as "event contracts."
In a public statement on Friday, the regulator reminded companies that event 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 said the assessment depends on a contract's characteristics rather than how it is marketed, adding that event contracts with binary outcomes and fixed payouts are likely to qualify as financial instruments subject to the restrictions.
The regulator also told companies that offering qualifying event contracts to professional or institutional clients still requires authorization under the EU's Markets in Financial Instruments Directive, or MiFID II, regardless of whether retail investors are excluded.
Excerpt from ESMA's July statement on event contracts. Source: ESMA
The statement does not introduce new restrictions. ESMA said it issued the reminder after observing increased offerings of event contracts and the rapid growth of prediction markets, noting that qualifying binary options have already been subject to national restrictions across the EU since 2018.
Related: StanChart joins ESMA's first MiCA register update since deadline
In the United States, a regulatory battle over prediction markets is unfolding, pitting state gaming regulators against the Commodity Futures Trading Commission (CFTC) over whether event contracts should be treated as gambling or federally regulated derivatives.
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.
The following month, the CFTC asserted "exclusive jurisdiction" over prediction markets, saying Congress had entrusted the agency with sole authority to regulate commodity derivatives markets, including event contracts. The regulator also said it had sued several states and filed court briefs supporting platforms, including Kalshi.
The CFTC's April announcement defending its authority over prediction markets. Source: CFTC.gov
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