The European Securities and Markets Authority (ESMA), which serves as the continent’s principal supervisory body for financial markets, has recently turned its attention to two prominent prediction‑market platforms, Polymarket and Kalshi, questioning the legality of their operations within the European Union. The regulator’s inquiry stems from concerns that the contracts offered on these platforms—often referred to as event contracts—might fall under a variety of existing regulatory frameworks, creating a complex compliance landscape that the firms may not have fully addressed. At the heart of ESMA’s concerns is the classification of these event contracts.
In many jurisdictions, contracts that pay out based on the outcome of a specific event are treated similarly to binary options, a financial instrument that the EU has effectively banned for retail investors due to its high risk and speculative nature. The ban, enacted under the Markets in Financial Instruments Directive II (MiFID II), was designed to protect consumers from products that can lead to rapid loss of capital. If ESMA determines that Polymarket’s and Kalshi’s offerings meet the definition of binary options, the platforms could be in direct violation of EU law, exposing them to enforcement actions, fines, or the requirement to cease offering those products to EU residents. Beyond the binary‑options prohibition, the regulator also highlighted the newly adopted Markets in Crypto‑Assets Regulation (MiCA).
MiCA establishes a comprehensive regulatory regime for crypto‑assets, including tokens that may be used as a medium of exchange, a store of value, or a unit of account. While MiCA primarily targets crypto‑assets, its broad language could encompass certain event contracts if they are tokenised or otherwise structured on a blockchain.
In such a scenario, the platforms would need to secure a crypto‑asset service provider licence, implement robust anti‑money‑laundering (AML) procedures, and comply with transparency and consumer‑protection standards set out by the regulation. Failure to meet these obligations could result in significant penalties and the revocation of any existing authorisations. In addition to EU‑wide legislation, each member state retains the authority to enforce its own gambling laws. Many European countries maintain strict rules governing games of chance, betting, and other forms of wagering.
Event contracts that are essentially bets on real‑world outcomes could be interpreted as gambling activities, thereby falling under national gambling statutes rather than financial regulation. This dual regulatory exposure creates a potential “authorisation gap” where a platform might be compliant with financial rules but still breach gambling legislation, or vice versa.
ESMA’s warning signals that Polymarket and Kalshi must conduct a thorough legal review to determine which, if any, national gambling licences they need to obtain in order to operate legally across the EU. The regulator’s statement also underscores the importance of a clear and consistent regulatory approach for emerging fintech innovations. Prediction markets, which allow participants to trade on the likelihood of future events—ranging from political elections to weather outcomes—have gained popularity for their ability to aggregate information and provide insight into collective expectations. However, their novelty also means that existing regulatory frameworks were not designed with these platforms in mind, leading to ambiguities about how they should be classified and supervised.
Polymarket, founded in 2020, has positioned itself as a decentralized information market where users can create and trade on a wide array of event contracts. The platform leverages blockchain technology to ensure transparency and immutability of trades. 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). Both companies have sought to expand globally, and Europe represents a significant market opportunity given its large, financially sophisticated user base.
In response to ESMA’s concerns, the two firms are likely to undertake a multi‑pronged strategy. First, they will need to map each of their offered contracts against the definitions provided in MiFID II, MiCA, and relevant national gambling codes. This mapping exercise will help identify which products are potentially non‑compliant and require modification, removal, or the acquisition of additional licences.
Second, they may engage with national regulators to seek clarification or obtain the necessary authorisations, a process that could involve submitting detailed documentation on product design, risk controls, and consumer‑protection measures. Moreover, the platforms might consider redesigning certain contracts to fit within permissible categories. For example, by structuring payouts as non‑financial rewards or by embedding the contracts within a broader investment product that meets existing financial‑instrument criteria, they could potentially sidestep the binary‑options prohibition. Alternatively, they could adopt a licensing model that aligns with MiCA’s crypto‑asset service provider framework, ensuring that all token‑based activities are fully compliant with the new EU crypto rules.
From a broader perspective, ESMA’s intervention highlights the need for a harmonised EU‑wide approach to regulating prediction markets. While the regulator’s current stance is precautionary, it may pave the way for future legislative initiatives that explicitly address event contracts, providing clearer guidance for innovators and protecting consumers from undue risk. Stakeholders, including industry groups, consumer advocates, and member‑state authorities, will likely engage in a dialogue to shape the regulatory trajectory. In conclusion, the European Securities and Markets Authority has raised significant questions about the legal status of Polymarket’s and Kalshi’s event contracts within the EU.
By pointing to potential overlaps with the binary‑options ban, the MiCA crypto‑asset regime, and national gambling laws, ESMA signals that the platforms could be operating in a regulatory grey area. To continue serving European users, Polymarket and Kalshi will need to conduct comprehensive compliance reviews, possibly obtain new licences, and consider product redesigns that align with EU standards.
Their response will not only affect their own market access but could also set a precedent for how emerging prediction‑market technologies are regulated across the continent.