EU Targets Retail Access as Multibillion-Dollar Prediction Markets Surge

European regulators have stressed that a product’s actual economic function takes precedence over its branding or labeling when determining whether it complies with financial rules.

The European Securities and Markets Authority (ESMA) warned that certain prediction market contracts could fall under the European Union’s ban on binary options. As a result, yes-or-no event contracts cannot be marketed, distributed, or sold to retail investors if they qualify as 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 specifically pointed to contracts with binary payouts—typically offering either a fixed return or nothing—based on the outcome of a future event.

ESMA emphasized that labeling does not determine regulatory treatment. Even if marketed as “event contracts,” such products may still be classified as financial instruments under MiFID II if their underlying characteristics fall within derivatives categories.

If deemed financial instruments, these event contracts are treated as derivatives and therefore fall within the scope of national restrictions on binary options.

The warning comes amid rapid growth in prediction markets across both crypto and traditional finance. Platforms such as Kalshi and Polymarket have reportedly drawn interest as potential merger and acquisition targets, reflecting increasing overlap between exchanges, brokerages, and betting platforms.

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

ESMA also clarified that offering coupons, rewards, or interest-like returns on user funds does not alter a product’s binary nature. Firms are required to assess classification based on how the product operates in practice, rather than how it is marketed.

The regulator added that these restrictions extend beyond retail-facing platforms. Companies providing investment services tied to such products within the EU must obtain MiFID II authorization, even if they only serve professional or institutional clients.

Finally, ESMA noted that depending on their structure, event contracts could also fall under national gambling laws or, if tokenized and not classified as financial instruments, under the EU’s Markets in Crypto-Assets (MiCA) framework.