The European Securities and Markets Authority (ESMA) has recently turned its attention to two prominent prediction‑market platforms, Polymarket and Kalshi, questioning whether their operations can be legitimately carried out within the European Union under the existing regulatory framework. The regulator’s inquiry stems from concerns that the types of contracts offered by these platforms—essentially wagers on the outcome of future events—might fall within the scope of several overlapping legal regimes that currently restrict or prohibit similar activities. At the heart of ESMA’s analysis is the classification of these products as "event contracts." In the EU, event contracts are often treated in the same vein as binary options, a class of financial instruments that allow investors to receive a fixed payout if a certain condition is met at expiry, or lose their stake otherwise.
Following a series of high‑profile scandals and concerns about retail investor protection, the European Commission introduced a blanket ban on binary options for retail customers in 2018. This prohibition was subsequently incorporated into national legislation across member states, creating a harmonised barrier against the marketing and distribution of such products to non‑professional investors. Polymarket and Kalshi, however, operate on a model that blends elements of traditional finance with the emerging world of decentralized finance (DeFi) and crypto‑based assets.
Users can create or trade on markets that predict outcomes ranging from political elections to sports results, with settlements often denominated in stablecoins or other digital tokens. Because of this hybrid nature, ESMA is evaluating whether the platforms might also be subject to the Markets in Crypto‑Assets Regulation (MiCA), which came into force in early 2024.
MiCA establishes a comprehensive regulatory regime for crypto‑assets, including requirements for licensing, consumer protection, and anti‑money‑laundering measures. If the event contracts are deemed crypto‑assets under MiCA, the platforms would need to obtain the appropriate authorisation from national competent authorities, adhere to strict disclosure standards, and implement robust governance controls. In addition to the binary‑options and MiCA lenses, ESMA is also considering national gambling laws.
Many EU countries maintain strict regulations governing games of chance and betting activities, often requiring operators to hold specific gambling licences and to implement safeguards to prevent problem gambling. Because the outcome‑based nature of prediction markets can be interpreted as a form of betting, national regulators could argue that Polymarket and Kalshi must comply with gambling legislation rather than—or in addition to—financial market rules. This creates a potential regulatory overlap where a single activity could be simultaneously subject to financial, crypto‑asset, and gambling oversight. The regulator’s warning highlights a broader challenge for innovative fintech firms seeking to expand into the European market.
The EU’s regulatory landscape, while striving for a unified approach, still contains pockets of divergence where national authorities retain discretion over certain product categories. For firms like Polymarket and Kalshi, navigating this mosaic of rules requires a clear understanding of how their services are classified under each regime and whether they need to secure multiple licences to operate legally across the bloc. ESMA has called for clarification from the platforms regarding their business models, the nature of the tokens used for settlement, and the safeguards they have in place to protect retail participants. The authority is also urging member states to coordinate their supervisory efforts to avoid regulatory arbitrage, where a company could exploit inconsistencies between jurisdictions to offer services in a loophole‑filled environment.
If Polymarket and Kalshi are found to be operating without the necessary authorisations, they could face enforcement actions ranging from fines to the suspension of services within the EU. Conversely, a clear regulatory pathway could emerge if the platforms adapt their offerings to meet the stipulated requirements, such as implementing KYC/AML procedures, limiting exposure for retail users, or obtaining the appropriate gambling licences where applicable.
The situation underscores the importance of regulatory clarity for the burgeoning prediction‑market sector. As investors and users increasingly seek novel ways to hedge risk or express views on future events, regulators must balance innovation with consumer protection. ESMA’s proactive stance signals that the EU is prepared to enforce existing rules while it continues to refine its approach to new digital financial products. In summary, ESMA’s scrutiny of Polymarket and Kalshi serves as a reminder that event‑based contracts may be caught by the EU’s binary‑options ban, the MiCA framework for crypto‑assets, or national gambling statutes.
Companies aiming to serve European customers must conduct thorough legal assessments, potentially secure multiple licences, and align their operational practices with the highest standards of transparency and investor protection. The outcome of this regulatory review will likely set a precedent for how similar platforms are treated across the continent, shaping the future landscape of digital prediction markets within the EU.