EU regulator warns some aspects of prediction markets are illegal

Europe’s top financial markets regulator warned that many products within prediction market platforms could be in breach of existing EU rules. 

The European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, issued a clarification on the position of prediction markets within EU law. 

It said that regulation differs depending on the question being asked within the ‘event contract’.

If it relates to a number of finance-related questions and features a binary option (ie a fixed payout or zero payout), then it classifies as a regulated financial instrument and falls under the EU’s ban on binary options from being marketed and sold to retail traders.

Questions related to securities, currencies, interest rates or yields, emission allowances or other derivatives instruments, commodities, and contracts relating to climatic variables, freight rates or inflation rates or other official economic statistics all fall under this category.

The European authority said that the commercial name provided by firms (eg ‘event contracts’) is irrelevant in terms of this categorisation and advised firms to conduct a careful legal analysis of these products to check whether they fall within this category or not. 

“Firms must conduct this careful legal analysis by adhering at all times to the overarching obligation to act honestly, fairly and professionally in accordance with the best interests of clients, to which they are bound,” ESMA said. 

ESMA added that other event contracts within prediction markets may also classify as a bet under national gambling legislation. If they relate to crypto-assets that aren’t financial instruments, they are regulated under the EU’s Markets in Crypto-Assets Regulation (MiCA) framework. 

Commenting on ESMA’s clarification, Maltese technology lawyer Terence Cassar said that the business model of prediction markets requires some form of structured guidance to determine prediction categorisations and relative applicable legal frameworks.

“It is only those regulators that understand this nuance that will be able to regulate this model which trespasses across legal institutes in an educated and proper fashion,” he said.

Back in March, Economy Minister Silvio Schembri said that Malta is “actively exploring” the establishment of a legal framework that would provide regulatory clarity to online prediction markets.