ESMA warns prediction contracts face EU ban as 11 US states sue Kalshi

Europe's top securities regulator has effectively closed the door on retail prediction market trading across the EU, citing existing binary options restrictions.

The European Securities and Markets Authority said July 3 that many prediction market contracts with binary outcomes and fixed payouts likely qualify as financial instruments already subject to a 2018 ban on marketing binary options to retail investors across the bloc.

"Companies cannot circumvent EU financial rules by marketing binary-style products as event contracts rather than derivatives," ESMA said in a public statement, reminding firms that the assessment depends on a contract's characteristics, not how it is labeled.

The statement does not introduce new restrictions but responds to the rapid growth of prediction markets, where monthly trading volume surged from less than $5 billion in September 2025 to about $24 billion in April 2026, according to Pew Research Center data. ESMA said offering qualifying event contracts to professional or institutional clients still requires authorization under the EU's Markets in Financial Instruments Directive, known as MiFID II.

The European warning arrives as prediction market operators face an escalating legal battle in the US, where 11 states have taken legal or regulatory action against platforms including Kalshi and Polymarket, and the Commodity Futures Trading Commission has asserted exclusive federal jurisdiction over event contracts — a conflict legal experts say could ultimately reach the US Supreme Court.

US legal front widens as states pursue multiple strategies

In the US, the regulatory fight has taken three distinct forms. Nevada became the first state to secure a temporary restraining order against Kalshi in March 2026, while Arizona filed criminal charges alleging the company operates an illegal gambling business — charges a federal judge has since paused. Massachusetts obtained a preliminary injunction blocking sports-related contracts, and a judge there on June 30 allowed state authorities to file an amended complaint against Kalshi.

Polymarket's US division, QCX LLC, has filed its own lawsuits against Massachusetts, Michigan, Minnesota and New Mexico, seeking injunctive relief from state enforcement actions. The CFTC has pending litigation against nine US jurisdictions and filed its own lawsuit against New Mexico on June 12, days after the state took legal action against Kalshi. Four New Mexico tribes also sued Kalshi in May, arguing the platform bypasses exclusive gaming rights under the Indian Gaming Regulatory Act.

Some states are taking a different approach. Kentucky in April enacted a 14.25% excise tax on prediction market operators' transaction fees, and North Carolina is imposing a 6% tax on net trading fee revenue — moves that narrow the tax advantage prediction markets hold over licensed sportsbooks, which face state gaming taxes as high as 51% in New York.

Industry growth draws M&A interest despite legal uncertainty

Despite the legal headwinds, prediction market volume continues to climb. Kalshi's user base exceeds 2 million active members, with trading volume in the billions for individual markets including the 2026 World Cup winner. Robinhood has traded more than 16 billion event contracts this year, and DraftKings disclosed annualized consumer prediction volume approaching $3.4 billion.

Wall Street broker Bernstein said in a June 30 report that Kalshi and Polymarket could emerge as acquisition targets as vertically integrated platforms that own both consumer distribution and exchange infrastructure capture more economics in-house. Robinhood partnered with Susquehanna to build its own exchange, Rothera, while DraftKings acquired Railbird to launch DKeX and Coinbase acquired The Clearing Company.

The Indian Gaming Association and American Gaming Association, joined by tribal and labor groups, last month urged Congress to amend the CLARITY Act to explicitly prohibit sports-related event contracts on prediction market platforms, arguing they fall outside the CFTC's authority. Minnesota is set to enact criminal enforcement against prediction exchanges starting Aug. 1, while a federal appeals court in May sided with Kalshi in New Jersey — the first appellate-level victory for the industry. The growing split among state and federal courts makes Supreme Court intervention increasingly likely, with legal experts projecting a case could arrive by 2027 or 2028.

This article is for informational purposes only and does not constitute investment advice.