European regulators have made clear that a product’s true economic function—not its branding—determines how it is regulated.

The European Securities and Markets Authority (ESMA) warned that some prediction-market contracts may fall within the European Union’s ban on binary options. As a result, yes-or-no event contracts cannot be marketed, distributed, or sold to retail investors if 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.

The regulator is focusing on contracts with binary outcomes, where investors receive either a fixed payout or nothing depending on a future event.

ESMA stressed that product labels are not determinative. Even if marketed as “event contracts,” such products may still be classified as financial instruments under MiFID II if their underlying structure fits derivatives criteria.

Once classified as such, these contracts are treated as derivatives and fall under national restrictions targeting binary options.

The warning comes as prediction markets expand rapidly across both crypto and traditional finance. Platforms such as Kalshi and Polymarket have attracted interest as potential acquisition targets, underscoring the growing convergence between exchanges, brokerages, and betting platforms.

Kalshi was recently valued at $22 billion, while Jump Trading has taken minority stakes in both Kalshi and Polymarket in exchange for providing liquidity.

ESMA also noted that adding features such as coupons, rewards, or interest-like payments does not change a product’s binary nature. Firms are required to assess classification based on how the product operates, rather than how it is marketed.

The scope of the restriction extends beyond retail platforms. Firms offering investment services linked to these contracts in the EU must obtain MiFID II authorization, even if they only serve professional or institutional clients.

Depending on their structure, ESMA added, event contracts could also fall under national gambling laws or—if tokenized and not classified as financial instruments—under the EU’s Markets in Crypto-Assets (MiCA) framework.