Europe’s financial watchdog is warning that many prediction market “event contracts” may already be subject to existing binary options rules, regardless of how they are described or marketed. The European Securities and Markets Authority (ESMA) says companies cannot sidestep retail investor protections simply by rebranding certain derivatives-like payouts as “event contracts.”
At the same time, the United States is witnessing its own escalation: state gaming regulators and the Commodity Futures Trading Commission (CFTC) are fighting over whether prediction markets should be treated as gambling or federally regulated derivatives. Together, the two stories underline a central fault line for the sector—what matters legally is the contract’s structure, not its branding.
Key takeaways
- ESMA says event contracts can fall under binary options restrictions based on their characteristics, especially binary outcomes and fixed payouts.
- Even if retail investors are excluded, ESMA warns that offering qualifying event contracts to professional or institutional clients may still require MiFID II authorization.
- ESMA notes the reminder is not new regulation, but a response to increased offerings as prediction markets grow.
- In the U.S., state actions against platforms such as Kalshi and Polymarket continue alongside the CFTC’s position that it has “exclusive jurisdiction” over event contracts.
- Litigation in multiple jurisdictions has intensified speculation that the dispute could eventually reach the U.S. Supreme Court.
ESMA’s reminder: “event contracts” can still be binary options
In a public statement released on Friday, ESMA reminded firms that contracts meeting the definition of financial instruments are already prohibited from being marketed, distributed, or sold to retail investors under national measures implementing ESMA’s 2018 binary options restrictions.
The regulator emphasized that the legal assessment hinges on the contract’s features rather than on marketing language. In particular, ESMA highlighted that event contracts with binary outcomes and fixed payouts are likely to qualify as financial instruments subject to the restrictions.
ESMA also focused on authorization requirements for firms selling into more sophisticated client categories. According to the statement, providing qualifying event contracts to professional or institutional clients still requires authorization under MiFID II, even if retail investors are not directly targeted.
ESMA framed its intervention as enforcement clarity rather than policy change. The regulator said it issued the reminder after observing more event contract offerings and rapid growth in prediction markets, noting that qualifying binary options have been under national restrictions across the EU since 2018.
For readers and market participants, the key implication is that the industry’s current naming conventions may not provide regulatory shelter. ESMA’s approach suggests that product designers and legal teams must evaluate payout mechanics and outcome structures early—before launching—because regulators may treat certain prediction constructs as financial instruments from the outset.
ESMA’s public statement on the application of national binary options measures to event contracts
What ESMA’s approach could mean for European platforms
While ESMA did not claim to introduce new restrictions, the message still carries practical consequences for platforms operating in or distributing into EU markets. ESMA’s insistence on contract-based assessment—binary outcomes and fixed payouts—creates a straightforward but unforgiving compliance test for many prediction-market formats.
In practice, this means firms may face pressure to restructure offerings that resemble fixed-payoff binary options. Alternatively, companies may need to ensure they remain within the boundaries of allowed products and client categories, including meeting MiFID II authorization requirements where applicable.
ESMA also appears to be pushing back against a common industry tactic: presenting payouts as “event-based” rather than as option-like financial instruments. The regulator’s reminder suggests that, from an enforcement standpoint, the distinction may not hold when the economic effect is functionally similar to a prohibited binary option for retail clients.
Builders and investors watching the space should treat ESMA’s statement as a signal about regulatory risk management. In a sector that often iterates quickly, compliance reviews that focus on contract architecture—not UI wording or product naming—may become a gating factor for expansion into regulated markets.
Meanwhile in the U.S., states and the CFTC keep clashing
Across the Atlantic, prediction markets are caught in a jurisdictional fight. The conflict pits state gaming regulators against the CFTC over whether event contracts should be treated as gambling under state law or as federally regulated derivatives under the CFTC’s oversight.
By March, action had already been taken by authorities in 11 states against platforms including Kalshi and Polymarket. Nevada became the first state to temporarily block Kalshi’s operations, while Arizona brought criminal charges alleging the company was running an illegal gambling business.
The following month, the CFTC argued for “exclusive jurisdiction” over prediction markets, saying Congress entrusted the agency with sole authority to regulate commodity derivatives markets, including event contracts. The agency also said it sued several states and filed court briefs supporting platforms such as Kalshi.
The litigation has continued to escalate. On June 30, a Massachusetts judge allowed state authorities to file an amended complaint against Kalshi in an ongoing case alleging the company’s sports-event contracts constitute illegal gambling under state law.
These battles have also driven calls for congressional clarification. Last month, the Indian Gaming Association and the American Gaming Association—joined by tribal and labor groups—urged lawmakers to amend the CLARITY Act to explicitly prohibit sports-related event contracts on prediction market platforms, arguing these products should fall outside the CFTC’s authority and remain governed by state gambling laws.
Legal experts cited in earlier coverage believe the deepening disagreement between federal and state regulators could ultimately be resolved by the U.S. Supreme Court.
CFTC press release asserting its authority over prediction markets
Why both regions are converging on the same legal question
Despite differing regulatory frameworks, the EU and U.S. stories share a similar center of gravity: regulators are focusing on how event contracts work economically, not on the label operators choose. In Europe, ESMA points to binary outcomes and fixed payouts as key triggers for binary options treatment. In the U.S., the dispute turns on whether event contracts are properly categorized as gambling or as derivatives subject to federal oversight.
For operators, the stakes are immediate. In Europe, ESMA’s reminder highlights that retail-facing marketing can quickly trigger product intervention rules, while institutional sales may still require MiFID II authorization depending on contract characteristics. In the U.S., state enforcement and federal claims of exclusive jurisdiction have pushed prediction market firms into a patchwork of legal outcomes.
The practical takeaway for market participants is to treat legal categorization as product design input. The compliance and litigation burden can increase sharply when a platform’s core contract mechanics resemble the category regulators are already prepared to police.
As ESMA’s guidance circulates and U.S. court battles continue—possibly moving toward higher-level review—watch for two things: whether prediction platforms adjust contract structures to better fit regulatory definitions in the EU, and whether the U.S. dispute narrows around a definitive jurisdictional ruling rather than expanding across states and claims.
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