The European Securities and Markets Authority (ESMA) has recently turned its attention to two prominent prediction‑market platforms, Polymarket and Kalshi, raising serious questions about the legality of their operations within the European Union. In a series of statements and preliminary assessments, the regulator highlighted a series of potential regulatory blind spots that could affect the companies’ ability to offer their services to EU residents without obtaining the appropriate authorisations. At the core of ESMA’s concerns is the classification of the contracts that both platforms trade. Polymarket and Kalshi specialise in event‑linked contracts, often referred to as "prediction markets" or "binary‑style" products, where participants place bets on the outcome of real‑world events ranging from political elections to economic indicators.
While these instruments are popular among retail and institutional traders for their simplicity and the immediacy of payoff, they also sit at the intersection of several regulatory frameworks that have traditionally been applied to very different types of financial products. First, ESMA noted that many of the contracts offered by the two platforms could be interpreted as binary options, a class of financial instrument that the EU has effectively banned for retail investors since the implementation of the 2018 MiFID II amendments. The ban was introduced after a series of high‑profile scandals in which binary‑option brokers were found to be engaging in deceptive marketing, mis‑selling, and, in some cases, outright fraud.
The regulatory language describing binary options is fairly broad, encompassing any contract that provides a fixed payout if a specific condition is met at expiry, and a total loss otherwise. Since Polymarket and Kalshi’s products often follow this payoff structure, ESMA cautioned that they could fall squarely within the scope of the prohibition, unless a clear exemption is granted or a new licensing regime is established. Second, the regulator pointed to the European Union’s forthcoming Markets in Crypto‑Assets (MiCA) framework, which is set to become the primary legislative instrument governing crypto‑related assets and services across the bloc.
MiCA defines a wide range of crypto‑assets, including utility tokens, asset‑referenced tokens, and e‑money tokens, and imposes a comprehensive licensing and supervisory regime on entities that issue, trade, or provide services related to these assets. Although Polymarket and Kalshi do not issue their own tokens, they do operate on blockchain‑based infrastructure and allow users to settle contracts using crypto‑assets. This raises the possibility that their activities could be deemed “crypto‑asset services” under MiCA, thereby subjecting them to the same stringent capital, governance, and consumer‑protection requirements that apply to crypto‑exchanges and custodians. A third dimension of the regulatory puzzle concerns national gambling laws.
Many EU member states maintain strict licensing regimes for games of chance, betting, and other forms of gambling. The line between a financial contract and a gambling activity can be blurry, especially when the outcome of a contract is based on an event that is not traditionally considered a financial market variable (for example, the result of a sports match or a political election).
Several national regulators have previously taken the view that prediction markets constitute a form of gambling, requiring operators to obtain a gambling licence and to comply with responsible‑gaming safeguards. ESMA’s warning therefore signals that Polymarket and Kalshi may need to navigate a patchwork of national gambling regulations in addition to EU‑wide financial rules. The implications of ESMA’s preliminary findings are significant for both platforms.
If the contracts are deemed to be illegal binary options, the companies would be forced to either cease offering those products to EU users or to redesign them in a way that removes the binary payoff structure. Should the MiCA framework be applied, Polymarket and Kalshi would need to secure a crypto‑asset service provider licence, meet capital adequacy thresholds, implement robust AML/KYC procedures, and provide extensive disclosures to consumers.
Finally, compliance with national gambling legislation could entail obtaining multiple licences across different jurisdictions, each with its own set of technical, fiscal, and consumer‑protection obligations. In response to ESMA’s concerns, both Polymarket and Kalshi have indicated a willingness to engage with regulators and to adapt their product offerings where necessary. The companies have highlighted their commitment to transparency, user protection, and the development of a responsible‑trading environment. They argue that their platforms provide valuable market‑derived information, improve price discovery for a wide range of events, and can serve as a hedge for participants looking to manage risk.
Nevertheless, the regulator’s message is clear: operating within the EU without a thorough understanding of the overlapping regulatory regimes is fraught with risk. Market participants, investors, and potential users are advised to monitor the evolving regulatory landscape closely, as the final determination on the status of event‑linked contracts will shape the future of prediction‑market services across Europe.
Until definitive guidance is issued, both platforms are likely to adopt a cautious approach, potentially limiting access for EU residents or restructuring their contracts to align with existing legal frameworks. Overall, ESMA’s scrutiny underscores a broader trend in the EU towards tighter oversight of innovative financial products that blur the lines between traditional finance, crypto‑assets, and gambling. As regulators continue to refine their approach, firms operating at these intersections must be prepared to adapt quickly, ensuring that compliance, consumer protection, and market integrity remain at the forefront of their business models.