The European Securities and Markets Authority (ESMA) has recently turned its attention to two high‑profile prediction‑market platforms, Polymarket and Kalshi, raising questions about whether these services can legally operate within the European Union. At the heart of the regulator’s inquiry is a concern that the contracts offered by these platforms – often termed "event contracts" or "binary‑style" products – may fall under a number of existing legislative frameworks that either prohibit or heavily regulate such instruments.
First, ESMA points to the EU’s longstanding prohibition on binary options. Since 2018, the European Commission has enforced a ban on binary‑option contracts that are offered to retail investors, citing the high risk of loss and the potential for market manipulation. Binary options are essentially all‑or‑nothing bets on the outcome of a specific event, and the regulatory language used to describe them is broad enough that many modern prediction‑market products could be interpreted as falling within this category.
If Polymarket’s or Kalshi’s offerings are deemed binary options, the platforms would be required to cease providing those contracts to EU residents unless they secure a specific exemption or authorisation that is currently unavailable. Second, the regulator highlights the Markets in Crypto‑Assets Regulation (MiCA), which entered into force in early 2024 and creates a comprehensive framework for crypto‑related assets across the bloc. MiCA defines a "crypto‑asset" in a way that can encompass a wide array of digital tokens, including those used to settle bets on future events.
Under MiCA, any service that issues, offers, or trades crypto‑assets must be authorised by a national competent authority and must comply with strict transparency, consumer‑protection, and anti‑money‑laundering requirements. Because Polymarket and Kalshi both operate using blockchain‑based tokens to facilitate settlement, ESMA is assessing whether these tokens qualify as crypto‑assets under MiCA and, if so, whether the platforms have obtained the necessary licences. Third, national gambling laws add another layer of complexity.
Each EU member state maintains its own set of regulations governing games of chance, betting, and gambling. In many jurisdictions, prediction markets that allow users to wager on real‑world outcomes are classified as gambling activities, which are subject to licensing, age‑verification, and responsible‑gaming obligations. For instance, in Germany, the Glücksspielstaatsvertrag (State Treaty on Gambling) requires operators to obtain a licence from the state authority and to implement robust player‑protection measures.
Similar regimes exist in France, Italy, and the United Kingdom (though the UK is no longer part of the EU, its regulatory approach often influences EU policy). If the event contracts on Polymarket or Kalshi are considered gambling, the platforms would need to navigate a fragmented landscape of national licences, each with its own compliance demands. ESMA’s statement underscores that the regulator is not yet concluding that these platforms are in breach, but rather that there is a “potential authorisation gap” that must be clarified. The authority is urging Polymarket and Kalshi to engage in a dialogue with national supervisory bodies to determine the precise legal classification of their products.
This proactive approach aims to prevent a situation where the platforms inadvertently operate in a regulatory vacuum, exposing both the firms and their users to legal risk. The implications of ESMA’s inquiry are significant for the broader fintech and crypto‑asset industry.
Prediction markets have gained popularity as tools for price discovery, risk hedging, and even civic engagement, allowing participants to bet on outcomes ranging from election results to commodity price movements. However, the lack of a harmonised EU framework for these specific types of contracts creates uncertainty. While MiCA provides a unified set of rules for many crypto‑related activities, it does not explicitly address prediction‑market contracts, leaving room for divergent national interpretations. In response to ESMA’s concerns, both Polymarket and Kalshi have indicated a willingness to cooperate with regulators.
They have emphasized that their platforms are designed to comply with existing consumer‑protection standards, employ rigorous KYC/AML procedures, and provide transparent pricing mechanisms. Nonetheless, the companies may need to adjust their product offerings, such as by restricting certain high‑risk contracts, implementing stricter user‑verification processes, or obtaining additional licences under national gambling statutes. For investors and users within the EU, the regulator’s warning serves as a reminder to exercise caution when engaging with prediction‑market platforms.
Until the authorisation status is clarified, participants should be aware that their contracts could be deemed illegal under one or more regulatory regimes, potentially leading to the suspension of services or the loss of funds. Looking ahead, the EU may consider drafting specific legislation or guidance that directly addresses event‑based contracts, thereby reducing regulatory fragmentation.
Such a move would align with the broader EU agenda of fostering innovation while safeguarding market integrity and consumer interests. Until then, ESMA’s current scrutiny will likely prompt a period of heightened compliance activity across the sector, with platforms either seeking the necessary authorisations or re‑structuring their offerings to fit within the existing legal framework.
In summary, ESMA’s recent statement highlights three primary regulatory avenues—binary‑option bans, the MiCA crypto‑asset regime, and national gambling laws—through which Polymarket and Kalshi’s EU operations could be evaluated. The authority’s call for clarification aims to close any potential gaps in authorisation, ensuring that prediction‑market services operate transparently, responsibly, and within the bounds of EU law.
The outcome of this dialogue will shape the future landscape for digital prediction markets across Europe, influencing everything from product design to cross‑border service provision.