In Europe, prediction markets mainly operate with binary contracts linked to uncertain events, whose outcomes are defined in a binary way, such as yes or no. These platforms allow trading collective probabilities on various events, from political elections to international conflicts. However, the sector faces regulatory obstacles, especially due to the lack of legal uniformity among European Union (EU) member countries.
Countries such as Belgium, France, Germany, Greece, and the United Kingdom have implemented specific measures to prohibit operators of these markets in their territories. In the case of the United Kingdom, authorities understand that prediction markets do not qualify as products outside the scope of gambling, creating a distinct regulatory scenario. On the other hand, operators of these markets do not assume the financial risks of the events themselves but earn revenue through commissions or fees charged on transactions made by users.
According to the Autorité Nationale des Jeux of France, the price of binary contracts reflects the collective probability of the occurrence of the negotiated facts, functioning as an indicator of the participants’ consensus. The diversity of traded events includes both conventional situations and controversial topics, broadening the scope and, consequently, the legal complexities for their regulation.
The MiFID II Directive (Markets in Financial Instruments Directive), which regulates financial and derivative markets in the European Union, also covers financial instruments such as binary options. These are derivatives with a fixed payment conditioned on specific occurrences of the underlying asset. The European Securities and Markets Authority (ESMA) even imposed temporary restrictions on the marketing of binary options throughout the EU. However, these limitations were not renewed, as several member states implemented similar permanent rules in their countries.
Regulatory uncertainties persist largely due to the lack of harmonization between national gambling laws and MiFID II provisions. Contracts resembling binary options may be prohibited for retail investors in most member states, highlighting the fragmentation of the European market. Furthermore, activities regulated by MiFID II require that operations on multilateral systems obtain specific authorization to operate legally.
Many governments also use public norms based on criteria such as morality, dignity, and safety to limit the offer of certain types of predictions. In the case of contracts related to sports, they are often equated with traditional betting, subjecting them to regulatory regimes typical of gambling laws. Thus, operators may simultaneously need licenses under both MiFID II and national gambling legislations, increasing bureaucratic complexity.
The main difficulty lies in the lack of a clear and uniform definition of when a contract should be considered a derivative instrument or gambling. This ambiguity is aggravated by the wide variety of events that can be predicted, making the legal classification of prediction markets across Europe difficult. Some jurisdictions, such as Malta, have adopted structured tests, for example, the Financial Instrument Test, to assist in the categorization of assets and contracts.
Given this scenario, experts suggest the creation of a specific test for prediction markets, similar to the Maltese model. A “Prediction Test” could provide clear criteria to guide the classification and regulation of these contracts, offering greater legal certainty. The conclusion of the process still depends on regulatory evaluations in several European Union countries, which should analyze the particularities of these markets and establish rules that reconcile financial principles and gambling legislation.
