ESMA Tells Event Contracts to Read the Room: Binary Rules Already Crashed This Party 🎯

The European Securities and Markets Authority (ESMA) issued a public statement on Friday warning that many prediction market event contracts may already fall under the EU's existing restrictions on binary options, reminding companies that financial regulations cannot be sidestepped through marketing language alone. The regulator said the classification of a contract depends on its characteristics rather than how it is sold, adding that event contracts with binary outcomes and fixed payouts are likely to qualify as financial instruments subject to the restrictions. ESMA confirmed the statement does not introduce new rules, explaining that qualifying binary options have been prohibited from being marketed, distributed or sold to retail investors under national measures implementing its 2018 binary options restrictions.

The regulator also clarified 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. ESMA said the reminder followed its observation of increased offerings of event contracts and the rapid growth of prediction markets across the region. The statement targets both firms offering such products and national regulators overseeing compliance, signaling that platforms must independently assess whether their contracts meet the definition of financial instruments under existing law.

The development comes as regulators across Europe have stepped up enforcement against prediction market operators. Spain's Ministry of Consumer Affairs temporarily banned Kalshi and Polymarket on May 26 for operating without a gambling license, according to CoinGape. On June 19, gambling authorities from nine European nations, including Belgium, France, Germany and Spain, released a joint statement against unlicensed gambling sites citing consumer protection risks. ESMA's July 3 press release followed those actions, reinforcing that existing binary options rules may already apply to products currently being marketed.

In the United States, a separate regulatory battle is unfolding over whether event contracts should be treated as gambling or as federally regulated derivatives. By March, authorities in 11 states had taken legal or regulatory action against platforms including Kalshi and Polymarket, with Nevada becoming the first state to temporarily block Kalshi's operations and Arizona bringing criminal charges alleging the company was operating an illegal gambling business. In April, the Commodity Futures Trading Commission asserted "exclusive jurisdiction" over prediction markets, saying Congress had entrusted the agency with sole authority to regulate commodity derivatives markets, including event contracts, and noted it had sued several states and filed court briefs supporting platforms including Kalshi. On June 30, a Massachusetts judge allowed state authorities to file an amended complaint against Kalshi in an ongoing lawsuit alleging that the company's sports-event contracts constitute illegal gambling under state law. Last month, the Indian Gaming Association and American Gaming Association, joined by tribal and labor groups, urged lawmakers to act, while StanChart joined ESMA's first MiCA register update since the deadline for the EU's Markets in Crypto-Assets regulation.