A massive EU regulatory crackdown is threatening the explosive boom of multibillion-dollar prediction markets

The European Securities and Markets Authority (ESMA) said some prediction-market contracts may be covered by the European Union’s binary options ban, warning firms that yes-or-no event contracts cannot be marketed, distributed or sold to retail clients when they qualify as financial instruments.

“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 in a statement.

The regulator targeted contracts whose payout is binary, usually a fixed amount or nothing, and depends on the outcome of a future event.

ESMA said the product label is irrelevant, as a contract sold as an “event contract” can still be a MiFID II financial instrument if its underlying falls within the derivatives categories.

Event contracts that qualify as financial instruments are derivatives, ESMA said. That puts them within the scope of national product intervention measures for binary options.

The warning comes as prediction markets expand across crypto and traditional finance. Kalshi and Polymarket have been discussed as potential M&A targets as operational lines blur between exchanges, brokerages and sportsbooks.