Authors: Joseph F.Borg, Donna Bugelli, Galyna Podoprikhina, Maria Gatt – WH Partners
Prediction markets, platforms through which participants take positions on the outcome of future events, have attracted increasing attention from operators seeking a regulated European base. Their growth raises a fundamental question that any prospective provider must address at the outset: under EU law, and the laws of each respective Member State, does a prediction market constitute a financial product, a gaming service, or something else entirely? The answer is not academic. It determines licensing obligations, distribution restrictions, and the viability of cross-border operations across the EU.
This article sets out the principal regulatory considerations, with particular focus on Malta, a jurisdiction that, for reasons explained below, merits early attention in any serious assessment.
The Classification Question
The regulatory characterisation of a prediction market product depends heavily on its structural features rather than its commercial label. EU regulators and national competent authorities tend to focus on a small number of determinative factors: whether the platform acts as a venue matching opposing participant positions or as an issuer and counterparty; whether the product’s payoff structure resembles a financial instrument, and whether the product is being distributed to retail clients.
These factors largely determine whether a prediction market falls within the scope of EU financial services law, principally MiFID II, or within the scope of gaming and betting regulation, which in Europe remains a matter of national law.
MiFID II: Harmonised, but With Significant Retail Constraints
MiFID II provides a harmonised framework for investment services across the EU, including a structured authorisation regime and cross-border passporting mechanics. For an operator whose product is classified as a financial instrument and whose activities constitute investment services, MiFID II offers a degree of regulatory predictability that gaming law, as discussed below, does not.
However, operators considering the MiFID II route should be alert to the EU’s established position on binary-outcome speculative products offered to retail clients. In 2018, the European Securities and Markets Authority (“ESMA”) exercised its product intervention powers under Article 40 of MiFIR to impose a temporary prohibition on the marketing, distribution, and sale of binary options to retail investors across the EU. The measure was grounded in ESMA’s finding that binary options, characterised by a fixed, predetermined payoff contingent on a discrete event, generated significant investor detriment. ESMA renewed the temporary prohibition on several occasions before allowing it to lapse in July 2019, on the basis that the majority of national competent authorities or their governments had by that point, adopted permanent national measures that were, in ESMA’s assessment, at least as stringent as the EU-level restriction.
The practical consequence is that the retail distribution of products structured as binary-outcome contracts on financial or other events remains heavily constrained across most EU Member States. A prediction market designed for broad retail access and structured around fixed-payoff, event-contingent contracts will face material regulatory friction if routed through the financial services framework, irrespective of the sophistication of the underlying technology or the novelty of the product’s framing.
The Malta Financial Services Authority (the “MFSA”) has itself issued public warnings to retail investors regarding the risks associated with binary options, contracts for difference, and similar speculative products – a position consistent with the broader EU supervisory trend.
That said, the characterisation of a prediction market contract as a binary option is not self-evident. The MFSA’s own definition makes clear that a binary option is, in the first instance, a derivative – a contract whose value is derived from and fluctuates with an underlying asset or variable. A prediction market contract that provides a fixed payoff contingent on a discrete event occurring, rather than a return that moves proportionally with the value of an underlying, may not satisfy that threshold condition. There are, accordingly, substantive arguments that well-structured prediction market contracts fall outside the binary options definition altogether. The regulatory and legal analysis underpinning this distinction is product-specific and fact-sensitive, but operators should examine it carefully before assuming that the binary options framework applies to their product.
Gaming Regulation: A Better Fit Economically, but Without EU-Level Harmonisation
For many prediction market operators, particularly those operating peer-to-peer platforms in which participants take opposing positions and the operator earns commission rather than assuming outcome risk, gaming regulation may represent a more natural regulatory classification.
The structural parallel is clear: a commission-based platform that matches participants holding opposing views on the outcome of a binary event is economically indistinguishable from a betting exchange. The operator is not the counterparty; it does not set odds, and it assumes no directional risk. Revenue derives from participation fees or a percentage of winnings, not from the result of any event.
That said, operators must be clear-eyed about the principal limitation of the gaming route: there is no harmonised EU gambling framework. Unlike MiFID II, which provides a single authorisation regime and passporting rights, gambling regulation in the EU remains, for the most part, a matter of national law. The European Commission has confirmed on multiple occasions that there is no sector-specific EU legislation governing online gambling, and Member States retain broad discretion to regulate gambling services within their territories, subject to the Treaty provisions on the freedom to provide services and the freedom of establishment as interpreted by the Court of Justice of the European Union.
The commercial implication is significant. An operator licensed in one Member State cannot rely on that licence to access players in other Member States as of right. Cross-border rollout under a gaming model requires a jurisdiction-by-jurisdiction analysis, assessing local licensing requirements, advertising restrictions, payment processing rules, and enforcement risk in each target market.
Why Malta Merits Particular Attention
Within this fragmented EU gaming landscape, Malta occupies a distinctive position. The Malta Gaming Authority (“MGA”) operates one of Europe’s most established and well-regarded remote gaming regulatory frameworks. Critically for prediction market operators, Malta’s Gaming Act expressly recognizes a category of service, the Type 3 gaming service, that encompasses pool betting (including betting exchanges) and commission-based games, and under which a prediction market may potentially be considered.
This matters because the Type 3 category maps directly onto the economic model that many prediction market operators seek to adopt: a peer-to-peer, venue-style platform in which the operator earns commissions and assumes no risk on outcomes. Unlike many other EU jurisdictions, Malta does not require operators to force their model into an ill-fitting category. The framework was designed, in part, with exchange-style models in mind.
Malta’s regulatory environment also benefits from the MGA’s technology-neutral, risk-based supervisory approach. Product classification turns on the substance of the service offered, not on the label applied to it. A prediction market platform that is structurally a betting exchange will be assessed as such.
Operators deploying prediction markets on blockchain infrastructure should also consider whether the Markets in Crypto-Assets Regulation (“MiCA”), which entered into full effect in December 2024, has any bearing on their activities. In general, MiCA regulates the issuance of and dealing in crypto-assets, including asset-referenced tokens and e-money tokens, but does not purport to regulate gaming services or financial instruments already within the scope of MiFID II and MiFIR. Accordingly, a prediction market may require authorisations under MiCA if it offers a service regulated under MiCA, such as the custody and transfer of tokens.
Prediction markets present a genuinely novel classification challenge in the European regulatory landscape. MiFID II offers harmonisation and passporting, but the EU’s established position on binary-outcome products and their retail distribution significantly constrains the available space under that framework. Gaming regulation may align more naturally with the economic model many operators are pursuing, but it comes without the cross-border infrastructure that financial services law provides.
Operators considering the Maltese gaming route should be prepared for a structured application process before the MGA, which includes the submission of a detailed business plan, the identification and vetting of key function holders (including compliance, anti-money laundering, and responsible gaming officers), and a systems audit. Early pre-application engagement with the MGA is both possible and advisable, as it allows operators to obtain preliminary guidance on product classification and licensing requirements before committing to a formal application.
The appropriate regulatory path will ultimately depend on the specific structural features of the product and the intended distribution model. Malta, however, offers a compelling combination of factors: a mature and internationally recognised gaming regulatory framework and a licensing category that is structurally aligned with exchange-style and commission-based models. In a regulatory environment where prediction markets do not fit neatly into any single EU-wide framework, Malta provides both the legal infrastructure and the institutional openness to accommodate them. For many prediction market operators, it is not merely a viable option, it is the natural starting point for that conversation.
