REGULATION | The European Union Warns Many Prediction Markets Are Off-Limits to Retail Investors

Europe’s securities watchdog warned that many prediction market contracts could already be prohibited from being offered to retail investors under existing European Union (EU) rules signalling increased regulatory scrutiny of platforms offering event-based financial products.

The European Securities and Markets Authority (ESMA) said firms cannot avoid financial regulations by describing binary-style products as ‘event contracts’ or prediction markets if they exhibit the characteristics of financial instruments.

Under the EU’s Markets in Financial Instruments Directive (MiFID II), many event contracts may qualify as binary options, which have been banned for sale to retail investors across the bloc since 2018 because of concerns over investor protection and the products’ speculative nature.

The statement reads:

Event contracts qualifying as financial instruments are derivatives and fall within the scope of the temporary product intervention measures on binary options which were initially adopted by ESMA Decision (EU) 2018/7952 and which were subsequently replaced by permanent national product intervention measures mirroring the ESMA temporary measures.

This means that the marketing, distribution or sale to retail clients of event contracts that meet the definition of financial instruments is prohibited.

ESMA said the legal classification of each contract, not its marketing or branding, will determine which regulatory framework applies adding that providers must assess whether their products fall under financial services legislation before making them available in the EU.

The guidance comes as prediction market platforms have attracted growing attention from regulators worldwide amid surging interest in contracts tied to elections, politics, sports, and other real-world events.

The warning also comes days after the European Union completed the transition to its new crypto regulatory regime under the Markets in Crypto-Assets (MiCA) regulation as regulators step up enforcement across digital asset markets.

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