Regulators in the region highlighted that the actual function of a product as a derivative is more significant than its commercial designation when evaluating compliance.
By Francisco Rodrigues, AI Boost|Edited by Aoyon Ashraf Jul 4, 2026, 1:56 p.m. 2 min readMake preferred on ShareShare this articleCopy linkX (Twitter)LinkedInFacebookEmailMake preferred on SummaryShow- ESMA cautions that certain prediction-market event contracts could breach the EU's ban on binary options if they are deemed financial instruments for retail consumers.
- Regulators stressed that the inherent function of a product as a derivative is more crucial than its commercial title or labeling for compliance evaluations.
- Companies providing investment services linked to these products must acquire MiFID II authorization, possibly facing national gambling or MiCA regulations as well.
The European Securities and Markets Authority (ESMA) indicated that certain prediction-market contracts might fall under the European Union's prohibition on binary options, cautioning firms against marketing yes-or-no event contracts to retail clients if they are classified 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,” stated ESMA.
This warning specifically targets contracts with binary payouts, typically resulting in either a fixed sum or nothing, contingent on the result of a future event.
ESMA clarified that the name of the product is inconsequential, as an “event contract” could still be classified as a MiFID II financial instrument if it fits within the derivatives category.
Contracts that qualify as financial instruments are considered derivatives, ESMA noted, placing them under the jurisdiction of national product intervention measures for binary options.
This advisory emerges as prediction markets grow in both cryptocurrency and traditional finance sectors. Companies like Kalshi and Polymarket are seen as potential acquisition targets as the lines between exchanges, brokerages, and sportsbooks blur.
Kalshi was recently valued at $22 billion in its latest funding round, while Jump Trading has sought to acquire minor stakes in Kalshi and Polymarket in exchange for providing liquidity.
ESMA stated that offering a coupon, reward, or interest-like payment on user funds does not alter the product's binary nature. Firms are required to evaluate the legal classification based on the product's characteristics and operation, rather than its commercial title.
This restriction is applicable beyond just retail platforms. ESMA asserted that companies providing investment services associated with these products in the EU must obtain MiFID II authorization, even if their distribution is limited to professional clients.
Event contracts might also be subject to national gambling regulations or, if tokenized and not considered financial instruments, fall under the block's Markets in Crypto-Assets (MiCA) framework, according to ESMA.