The European Securities and Markets Authority (ESMA) has recently turned its attention to two prominent prediction‑market platforms, Polymarket and Kalshi, as they seek to expand their services within the European Union. While both companies have built reputations for offering users the ability to trade on the outcomes of real‑world events, the regulator is raising concerns that their product offerings may not fit neatly into existing EU regulatory frameworks. In particular, ESMA is warning that the platforms could be operating without the necessary authorisations, potentially breaching the bloc’s strict rules on binary‑option contracts, the newly‑adopted Markets in Crypto‑Assets (MiCA) regulation, and a patchwork of national gambling statutes.

### Background on the platforms Polymarket, founded in 2020, operates as a decentralized information market where participants can place bets on a wide range of topics, from political elections to public‑health developments. The platform utilises cryptocurrency for settlement, which has helped it attract a global user base.

Kalshi, on the other hand, is a US‑based exchange that offers regulated event contracts under the oversight of the Commodity Futures Trading Commission (CFTC). Kalshi’s model is more traditional, with contracts settled in fiat currency and a focus on compliance with US financial regulations. Both firms argue that their services are distinct from illegal gambling or prohibited binary options because they provide a market‑driven price discovery mechanism rather than a simple win‑or‑lose wager.

However, ESMA’s assessment suggests that the line between a legitimate financial instrument and a prohibited binary option can be thin, especially when the contracts are short‑dated, binary in payoff, and settled on a single outcome. ### The EU’s binary‑option ban In 2018, the European Commission introduced a comprehensive ban on binary options for retail investors, citing the high risk of loss and the lack of transparency associated with such products. The ban covers contracts that pay a fixed amount if a specific event occurs and nothing otherwise – a structure that mirrors many of the event contracts offered by Polymarket and Kalshi.

ESMA’s current statement indicates that, under the existing prohibition, any contract that delivers a binary payoff based on a single event could be deemed illegal unless it falls under a recognised exemption, such as a regulated exchange‑traded product. ### MiCA and crypto‑asset regulation The MiCA framework, which came into force in early 2024, creates a harmonised regime for crypto‑assets across the EU. It classifies certain digital tokens as “financial instruments” and subjects them to the same oversight as traditional securities. While MiCA does not explicitly ban prediction‑market contracts, it does require issuers and service providers to obtain appropriate licences if their tokens are used for investment‑type activities.

Because Polymarket settles trades using crypto‑tokens, the platform could be considered a MiCA‑regulated entity. Failure to secure the necessary authorisation could expose it to enforcement actions, fines, or a forced cessation of operations within the EU.

### National gambling legislation Beyond EU‑wide rules, each member state maintains its own gambling laws, many of which define “games of chance” in broad terms that could encompass prediction‑market contracts. For example, the United Kingdom’s Gambling Act and France’s Autorité Nationale des Jeux both treat betting on real‑world events as gambling unless the activity is explicitly licensed as a financial service.

Consequently, Polymarket and Kalshi may need to navigate a complex mosaic of national regulations, obtaining gambling licences in some jurisdictions while seeking financial‑services authorisations in others. ### ESMA’s specific concerns ESMA’s warning highlights three primary gaps: 1.

**Authorization** – Neither Polymarket nor Kalshi appears to hold an EU‑wide licence that would cover the full range of their event contracts. Without such authorisation, the platforms risk breaching both the binary‑option ban and MiCA requirements.

2. **Consumer protection** – The regulator stresses that retail participants may not fully understand the risks associated with binary‑style contracts, especially when settlement occurs in volatile cryptocurrencies. 3. **Market integrity** – Unregulated prediction markets could be vulnerable to manipulation, insider information, or coordinated attacks, undermining confidence in the broader EU financial ecosystem.

### Potential pathways for compliance To address ESMA’s concerns, both platforms could pursue several strategies: - **Obtain a MiCA licence** – By registering as a crypto‑asset service provider, Polymarket could align its operations with EU law, provided it meets capital, governance, and disclosure standards. - **Seek a financial‑instrument licence** – If the contracts are classified as derivatives, the platforms might apply for authorisation under the EU’s Markets in Financial Instruments Directive (MiFID II), which would grant them a clear regulatory footing. - **Partner with licensed entities** – Collaborating with an EU‑based exchange or a regulated gambling operator could allow the platforms to offer their services under an existing licence, thereby sidestepping the need for a standalone authorisation. - **Adapt product design** – Modifying contract structures to avoid a purely binary payoff—such as introducing a range of outcomes or a variable payout—could place the products outside the scope of the binary‑option ban.

### Implications for the broader industry ESMA’s scrutiny of Polymarket and Kalshi sends a clear signal to the burgeoning prediction‑market sector: the EU will not tolerate a regulatory vacuum. As more innovators explore blockchain‑based information markets, regulators are likely to tighten oversight, ensuring that consumer protection, market transparency, and financial stability remain paramount.

Companies that proactively engage with regulators, secure the appropriate licences, and design products that respect existing legal boundaries will be better positioned to thrive in the European market. ### Outlook The next few months will be critical for both Polymarket and Kalshi. ESMA is expected to publish detailed guidance on how event‑type contracts should be categorised under MiCA and MiFID II. Meanwhile, national regulators may issue their own statements, prompting the platforms to adjust their compliance strategies on a country‑by‑country basis.

Should the firms fail to obtain the necessary authorisations, they could face enforcement actions ranging from fines to outright bans on offering services to EU residents. In summary, while Polymarket and Kalshi bring innovative, data‑driven trading experiences to users, their expansion into Europe hinges on navigating a complex regulatory landscape.

By aligning with ESMA’s expectations—securing licences, enhancing consumer safeguards, and ensuring market integrity—both platforms can potentially unlock the sizable EU market while maintaining the trust of regulators and participants alike.