The European Securities and Markets Authority (ESMA) has recently turned its attention to two prominent prediction‑market platforms, Polymarket and Kalshi, questioning whether their proposed operations within the European Union comply with existing regulatory frameworks. The regulator’s concerns stem from the ambiguous classification of event‑based contracts, which can resemble binary options, fall under the emerging Markets in Crypto‑Assets (MiCA) regulation, or be interpreted as forms of gambling under national laws. By raising these issues, ESMA is signalling that any firm seeking to offer such products to EU consumers must first secure the appropriate authorisations, or risk being deemed non‑compliant. **Background on the platforms** Polymarket and Kalshi are both online marketplaces that allow users to trade on the outcomes of real‑world events, ranging from political elections to sports results and economic indicators.
Participants buy and sell contracts that pay a fixed amount if a specified event occurs, effectively creating a market price that reflects the collective probability assigned to that outcome. While these platforms market themselves as tools for information aggregation and risk management, the structure of their contracts closely mirrors that of binary options, a financial instrument that has been heavily restricted in the EU due to concerns over consumer protection and market integrity.
**EU bans on binary options** Since 2018, the European Union has imposed a blanket prohibition on the marketing, distribution, and sale of binary options to retail investors. The ban was introduced after regulators identified a pattern of high‑risk products being sold to unsophisticated consumers, often with misleading advertising and inadequate risk warnings. Under the EU’s Markets in Financial Instruments Directive (MiFID II) and the accompanying national implementing measures, binary options are classified as “high‑risk” contracts that do not meet the threshold for regulated financial instruments.
Consequently, any service that offers contracts paying a fixed amount based on a binary outcome must either fall outside the definition of a binary option or obtain a specific exemption – a hurdle that Polymarket and Kalshi have not yet demonstrated they can clear. **The MiCA framework** In parallel, the EU has been developing a comprehensive regulatory regime for crypto‑assets, known as the Markets in Crypto‑Assets Regulation (MiCA).
MiCA aims to bring clarity to a fragmented market by establishing licensing requirements, consumer‑protection standards, and supervisory powers for issuers and service providers dealing with crypto‑tokens, stablecoins, and other digital assets. Although Polymarket and Kalshi are not traditional crypto‑exchanges, the contracts they trade are often tokenised and settled on blockchain networks, which could bring them within the scope of MiCA.
If the contracts are deemed “crypto‑assets” under the regulation, the platforms would need to obtain a crypto‑asset service provider licence from the relevant national competent authority, comply with AML/KYC obligations, and adhere to disclosure and governance rules. **National gambling legislation** Beyond financial‑services law, many EU Member States maintain strict gambling regulations that prohibit or tightly control betting on the outcome of events.
In several jurisdictions, the line between a financial contract and a game of chance is drawn based on the purpose of the transaction and the expectation of profit. If the primary motive of a user is to wager on an unpredictable event rather than to hedge exposure, the activity may be classified as gambling. This interpretation could subject Polymarket and Kalshi to licensing regimes overseen by gambling authorities, requiring permits, responsible‑gaming safeguards, and contributions to problem‑gambling prevention funds. **ESMA’s warning and next steps** ESMA’s recent statement does not constitute a formal enforcement action but serves as a clear advisory to market participants.
The regulator highlighted three potential regulatory gaps: 1. **Binary‑option classification** – Event contracts may be viewed as prohibited binary options unless they meet specific exemptions. 2.
**MiCA applicability** – Tokenised contracts could be treated as crypto‑assets, triggering licensing and compliance obligations under MiCA. 3.
**Gambling law exposure** – National gambling regulators may consider the contracts gambling products, requiring separate authorisation. The authority urged Polymarket, Kalshi, and any other firms planning to launch similar services in the EU to conduct a thorough legal assessment, engage with national regulators early in the process, and, if necessary, adjust product design to fit within permissible categories.
Failure to obtain the appropriate authorisations could lead to market bans, fines, or other supervisory measures. **Implications for the broader industry** ESMA’s scrutiny reflects a growing regulatory consensus that prediction‑market platforms cannot operate in a legal vacuum. As the EU tightens its approach to both binary‑option products and crypto‑assets, firms must navigate a complex overlay of financial, technological, and gambling rules. The guidance also signals to investors that the EU is committed to safeguarding retail participants from high‑risk speculative products while ensuring that innovative financial services are offered responsibly.
**Conclusion** In summary, the European regulator has raised substantive questions about the legality of Polymarket and Kalshi’s proposed EU activities. By pointing out the possible overlap with existing binary‑option bans, the MiCA crypto‑asset framework, and national gambling statutes, ESMA is urging these platforms to secure the necessary authorisations before proceeding. The outcome of this regulatory review will likely set a precedent for how event‑based contracts are treated across the continent, shaping the future landscape for prediction markets and related digital‑asset services within the European Union.