What the US can learn from Europe on prediction markets—and vice versa
Since they burst into the public consciousness in 2025, prediction markets such as Kalshi and Polymarket—and the event contracts traded on them—have become impossible to ignore. With their combined global trading volumes reaching approximately $24 billion in April and mounting concerns over manipulation and transparency, these platforms have not only dominated news headlines but also become a focal point in US financial regulation debates.
Congress has already begun investigating reports of alleged military and political insider trading, with Kalshi and Polymarket now directly in the crosshairs—and in the months ahead, lawmakers are expected to decide how they should be regulated (or whether prediction markets should exist in their current form at all). This effort need not start from scratch. US policymakers can look across the Atlantic for guidance, where European regulators have largely banned the sale of binary options—a category of contracts that includes event contracts—to retail market participants.
The rise of yes-or-no bets
Event contracts are futures contracts linked to a yes-or-no proposition. Unlike traditional derivatives, which have linear payouts, binary options contracts operate on an all-or-nothing payout structure. For example, whereas the payouts from corn futures rise or fall with the price of corn, binary options would pay out in full if the price of a bushel exceeded a specified threshold and would otherwise pay nothing.
Despite their perceived novelty, event contracts—and the prediction markets that facilitate their trading—are not new. In 1988, the Iowa Electronic Market, operated by professors at the University of Iowa, began offering binary options on political events. Likewise, the derivatives exchange HedgeStreet, which would later change its name to Nadex and is currently owned by Crypto.com, has been listing event contracts on financial indices since 2004.
What is new, however, is the sheer volume of binary options available to the public, along with the growing political debate around their use.
Europe’s crackdown on binary options
In 2018, the European Securities and Markets Authority (ESMA)—the European Union (EU) equivalent of the US Securities and Exchange Commission—temporarily prohibited the marketing, distribution, or sale of binary options to retail investors on the grounds that “the risks related to the inherent features of binary options…make these products unsuitable for retail investors.”
A number of factors influenced this decision, two of which are particularly relevant to the debate over US prediction markets. First, ESMA noted that binary options have “a structural expected negative return”—that is, the expected payoff is lower than the initial investment. Because retail investors lack “access to information and systems to properly price these products” while trading against professional investors, “the more positions an investor takes, the more likely they are to lose money on a cumulative basis.”
Second, ESMA explained that, whereas traditional options “can serve a valuable role in hedging exposure to certain assets, binary options do not meet any genuine investment needs for retail investors.” This is because “investors stand either to make a substantial return or to lose their entire investment,” which is a “fundamental feature of gambling products.” Indeed, ESMA observed that binary options are “inherently like gambling products” and can “attract compulsive gambling behaviour.”
Following ESMA’s temporary determination, all EU and most non-EU nations within the European Economic Area quickly banned binary options. Today, there is only one OECD nation in Europe that allows retail investors to trade binary options: Switzerland. Although the Swiss Financial Market Supervisory Authority has warned that unauthorized platforms “lure investors [into binary options] with the promise of quick profits and low starting capital,” it has also stated that there are “reputable providers” of binary options.
A blueprint for Congress
In response to concerns that prediction markets are too much like gambling, cause harm to individual traders, or are rife with insider trading, US lawmakers have introduced twenty-one bills to date aimed at addressing these thorny problems. Their solutions range from banning individuals who potentially have inside information from participating in prediction markets, to excluding contracts based on particular events (e.g., sports or elections), to imposing gambling-like regulations.
But European policymakers have adopted a simpler solution that Congress should learn from: banning the sale of derivatives with binary outcomes to retail traders. This solution would both protect retail traders, who tend to lose money on these contracts, and prevent individuals who may be able to influence real-world events from profiting unfairly from their bets.
At the same time, institutions that rely on binary options to mitigate real economic risk could continue to trade these contracts, preserving the traditional role of derivatives as hedging instruments.
Where Washington may be better equipped than Brussels
Yet Europe’s regulatory framework also highlights the limits of treating prediction markets solely as financial products. Whereas event contracts are derivatives under US law because they are based on “the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence,” EU law appears to lack such a provision.
ESMA’s 2018 intervention therefore applies only to binary options within its jurisdiction—that is, contracts that are considered “financial instruments” under the EU’s Regulation No 600/2014 of the European Parliament and of the Council. These are limited to “derivative contracts relating to assets, rights, obligations, indices and measures … which have the characteristics of other derivative financial instruments.”
It is unclear whether many of the event contracts listed by Kalshi or Polymarket would satisfy that definition. As a result, several European countries—from France to the United Kingdom to Spain—have required prediction markets to obtain gambling licenses or cease operations altogether, rather than simply restricting access to non-retail traders.
This is one area where Europe can learn from the US. Even if Congress were to ban the sale of binary options to retail investors, such contracts would remain available to institutional traders. In much of Europe, by contrast, comparable products are effectively out of reach for European businesses.
Toward a regulatory playbook
Against this backdrop, the key question for lawmakers—both in the US and in Europe—is not simply whether prediction markets should be permitted, but rather who should have access to them.
Retail traders tend to treat event contracts as gambling products, whereas businesses can use them to hedge economic risk. Finding the right balance between limiting retail exposure to negative expected returns and preserving institutional access will be critical to the development of an effective regulatory framework.
Todd Phillips is a financial services consultant based in Washington, DC.
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Image: Advertising outside Madison Square Garden in New York on June 10, 2026, promoting Polymarket’s prediction betting service for NBA Finals wagers. Source: REUTERS/Richard B. Levine.