ESMA Tightens Scrutiny of Prediction Markets Under Existing EU Rules

The European Securities and Markets Authority (ESMA) has clarified that existing European Union rules banning binary options for retail investors could already apply to prediction market contracts, increasing regulatory pressure on platforms such as Polymarket, Kalshi, and Crypto.com.

Rather than introducing new regulations, ESMA reinforced guidance under the Markets in Financial Instruments Directive (MiFID II), signaling that firms and national regulators must determine whether event-based contracts offered in Europe qualify as financial instruments. If they do, the EU’s retail ban on binary options, first introduced in 2018, would automatically apply.

The clarification follows growing scrutiny of prediction market platforms. Polymarket recently faced allegations of deceptive advertising aimed at U.S. users, adding to regulatory concerns over how these products are marketed and sold.

ESMA’s July 3 statement comes after a series of enforcement actions across Europe. On May 26, Spain’s Ministry of Consumer Affairs temporarily banned Kalshi and Polymarket for operating without a gambling license. On June 19, gambling regulators from nine European countries, including Belgium, France, Germany, and Spain, issued a joint warning against unlicensed gambling websites, citing consumer protection risks linked to major sporting events such as the FIFA World Cup.

Most leading prediction market platforms currently operate outside the European Union. Kalshi and Crypto.com fall under the oversight of the U.S. Commodity Futures Trading Commission (CFTC), while Polymarket operates offshore. Last month, the Kentucky government also filed a lawsuit against Polymarket and Kalshi, alleging they were involved in illegal sports betting.

With no major prediction market platform currently licensed in the EU, ESMA’s guidance appears designed to prevent regulatory issues before companies formally enter the European market.

For firms planning a European launch, the message is clear. They must determine whether their event contracts qualify as financial instruments under MiFID II and whether those products could also be classified as gambling under national laws. Failure to address both regulatory frameworks could expose platforms to enforcement actions similar to those already taken by Spanish authorities.