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The European Securities and Markets Authority just drew a line in the sand for prediction markets, and it runs right through the business models of Polymarket and Kalshi.
On July 3, ESMA issued a statement clarifying that event contracts with binary payouts tied to financial instruments under MiFID II qualify as derivatives. That single classification pulls these contracts into the EU’s retail binary options ban, a prohibition that has been in effect since 2018.
The regulatory squeeze tightens
ESMA’s move doesn’t just affect retail traders. Even platforms serving professional clients will need to secure MiFID II authorization to operate legally in the EU. For Polymarket and Kalshi, neither of which holds such authorization, this amounts to a “closed” sign hanging on the door of a 450-million-person market.
Spain’s gambling authority, the DGOJ, issued a precautionary block on both Polymarket and Kalshi’s websites around May 26. France followed with an even more aggressive measure: ISP-level blocking of Polymarket access following a decision by the ANJ, France’s gambling regulator, around July 17. Nine European gambling regulators issued a joint warning on June 19, targeting unlicensed prediction market platforms. Belgium, the Netherlands, the Czech Republic, Romania, and Portugal have all layered on additional restrictions of their own.
Derivatives, gambling, or crypto: pick your regulator
If a contract’s payout is tied to a financial instrument, like whether a stock index closes above a certain level, ESMA says it’s a derivative. That means MiFID II rules apply, including the ban on selling binary options to retail investors.
Contracts that don’t reference financial instruments — a bet on whether a particular political candidate wins an election, for instance — could fall under national gambling laws or, if they’re tokenized, potentially under the Markets in Crypto-Assets (MiCA) framework.
Polymarket settles its contracts in USDC, the stablecoin issued by Circle. Tokenized event contracts that don’t qualify as MiFID II instruments might end up regulated under MiCA instead. There are currently zero licensed prediction market operations anywhere in the EU.
What Polymarket and Kalshi are up against
Polymarket surged in visibility during the 2024 US presidential election cycle, attracting hundreds of millions of dollars in trading volume. Kalshi holds CFTC approval in the US for certain event contracts.
A subsequent ESMA risk report released on September 10 underscored the authority’s concerns, highlighting insider trading risks and market exploitation as specific threats posed by unauthorized prediction market platforms. The report emphasized the unauthorized status of these platforms across the EU, framing them not just as a regulatory gap but as an active investor protection concern.
For Polymarket, the platform operates on the Polygon blockchain and has historically positioned itself as a protocol rather than a licensed intermediary. Fitting that model into MiFID II’s framework, which is built around identifiable, accountable entities, would require significant structural changes.
Kalshi, as a CFTC-regulated entity, has experience navigating strict regulatory environments, but building out EU-specific compliance infrastructure takes time, money, and regulatory goodwill — the last of which may be in short supply given the enforcement actions already underway.
A fragmented path forward
Each member state adds its own layer of gambling regulation on top of the EU-level financial services framework. A platform would need to satisfy both simultaneously, and the rules don’t always align.
Investors in the prediction market sector should watch for whether any platform attempts to obtain MiFID II authorization as a test case. That process could take well over a year and would set important precedents for how these hybrid instruments are treated under European law.
Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.
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