European regulators have reiterated that a product’s regulatory classification depends on its underlying function rather than its branding or label.
The European Securities and Markets Authority (ESMA) cautioned that certain prediction-market contracts may fall under the European Union’s ban on binary options. As such, yes-or-no event contracts cannot be marketed, distributed, or sold to retail investors if they meet the criteria of 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 targeting contracts with binary outcomes, where payouts typically consist of either a fixed sum or nothing, depending on a future event.
ESMA emphasized that calling a product an “event contract” does not exclude it from regulation. If its underlying characteristics align with derivatives under MiFID II, it will be treated as a financial instrument.
In such cases, these contracts are classified as derivatives and fall within the scope of national measures restricting binary options.
The warning comes as prediction markets gain traction across both crypto and traditional financial sectors. Platforms like Kalshi and Polymarket have emerged as potential acquisition targets, reflecting increasing overlap between trading venues, brokerage services, and betting platforms.
Kalshi was recently valued at $22 billion, while Jump Trading has taken minority stakes in both Kalshi and Polymarket in exchange for providing liquidity.
ESMA also clarified that adding incentives such as coupons, rewards, or interest-like returns does not alter the product’s binary structure. Firms must determine classification based on how the product operates in reality, not how it is marketed.
The restrictions are not limited to retail-facing firms. Companies offering investment services tied to these products within the EU must secure MiFID II authorization, even if their services are limited to institutional or professional clients.
Depending on their design, ESMA added, event contracts may also fall under national gambling regulations or—if tokenized and not classified as financial instruments—under the EU’s Markets in Crypto-Assets (MiCA) framework.
