European regulators have underscored that how a product functions in practice—not how it is branded—determines its regulatory treatment.
The European Securities and Markets Authority (ESMA) warned that certain prediction-market contracts could fall within the European Union’s ban on binary options. Under this interpretation, 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 is focusing on contracts with binary payoffs, typically delivering either a fixed return or no payout at all depending on the outcome of a future event.
ESMA made clear that product labels carry no regulatory weight. Contracts marketed as “event contracts” may still be classified as financial instruments under MiFID II if their underlying features place them within derivatives categories.
When categorized this way, event contracts are treated as derivatives and fall under national product intervention measures targeting binary options.
The warning comes as prediction markets continue to expand across both crypto and traditional finance. Platforms such as Kalshi and Polymarket have attracted attention as potential acquisition targets, highlighting the growing convergence between exchanges, brokerages, and betting platforms.
Kalshi was recently valued at $22 billion in a funding round, while Jump Trading has acquired minority stakes in both Kalshi and Polymarket in exchange for providing liquidity.
ESMA also noted that adding coupons, rewards, or interest-like returns to user funds does not change the underlying binary structure of these products. Firms must assess classification based on the product’s design and operation, not its marketing.
The scope of the restriction extends beyond retail-facing platforms. Firms offering investment services linked to such contracts within the EU are required to obtain MiFID II authorization, even if they only serve professional or institutional clients.
Depending on their structure, ESMA added, event contracts could also fall under national gambling laws or—if tokenized and not considered financial instruments—under the EU’s Markets in Crypto-Assets (MiCA) framework.
