European regulators are sending a clear message to the financial sector: simply changing the name of a product does not mean you can bypass the rules. The European Securities and Markets Authority (ESMA) recently issued a stern warning that many prediction market contracts already fall under the EU’s existing restrictions on binary options. Financial companies cannot dodge oversight by cleverly marketing these binary-style products as “event contracts” to avoid being classified as derivatives. If a contract relies on a simple yes-or-no outcome and offers a fixed payout, ESMA considers it a financial instrument. Consequently, these products are legally prohibited from being marketed, distributed, or sold to retail investors under the national measures that enforce ESMA’s 2018 binary options ban.
This assessment is based entirely on how the contract actually functions in the real world, rather than the marketing jargon used to sell it. ESMA also clarified that companies trying to bypass retail restrictions by targeting institutional or professional investors are not off the hook. Offering qualifying event contracts to higher-level clients still requires strict authorization under the EU’s Markets in Financial Instruments Directive, commonly known as MiFID II. While ESMA is not introducing any new laws with this statement, the rapid explosion of prediction markets prompted the regulator to remind the industry that qualifying binary options have been tightly regulated across Europe for years.
The US Prediction Market Showdown: CFTC vs. State Regulators
While the European Union relies on established frameworks to manage prediction markets, a massive regulatory turf war is currently unfolding across the United States. State gaming commissions and the federal Commodity Futures Trading Commission (CFTC) are locked in a heated battle over how to classify these platforms. The core debate comes down to whether event contracts should be strictly treated as traditional gambling or regulated federally as financial derivatives. By the spring, authorities in eleven different states had initiated legal action against major prediction platforms like Kalshi and Polymarket. Nevada made headlines by temporarily halting Kalshi’s operations, while Arizona took things a step further by filing criminal charges that accused the platform of running an illegal gambling ring.
In response to the state-level crackdown, the federal government quickly stepped in. The CFTC asserted exclusive jurisdiction over prediction markets, arguing that Congress gave the agency sole authority to regulate commodity derivatives, which they believe includes event contracts. The CFTC even went as far as suing several states and filing court briefs to support the prediction platforms. However, this has only caused the legal friction to escalate. For example, a Massachusetts judge recently allowed state authorities to push forward with a lawsuit claiming that sports-related event contracts are simply illegal sports betting. This growing chaos has led major industry players, like the American Gaming Association and various tribal groups, to demand congressional intervention. As both sides refuse to back down, legal experts are beginning to suspect that the ultimate fate of US prediction markets will have to be decided by the Supreme Court.
