Prediction Markets: Financial Instrument or Gambling?

Prediction markets: financial instrument or gambling? How Polymarket and Kalshi are regulated in the US and Europe

Platforms like Polymarket and Kalshi let users bet on the outcome of future events by buying «shares» in what will happen. In this MERGE Madrid talk, we explore why the very same product is treated as a regulated financial instrument in the United States, while European regulators tend to classify it as gambling, and what that means for any project planning to launch prediction markets outside its home jurisdiction.

What you'll learn

• What prediction markets are: how event contracts work and why they look more like a bet than a traditional investment
• The US model: why the CFTC and the Commodity Exchange Act allow Polymarket and Kalshi to operate as regulated financial-instrument exchanges
• The European framework (MiFID II): why the lack of a «valid economic rationale» keeps these products outside the definition of a financial instrument in Europe
• When it's gambling: the three elements —payment, chance and prize— that trigger gambling law, and why they vary by country
• Regulatory risk: how copying a product into a new market can turn innovation into unlicensed illegal gambling

Session summary

US: a financial instrument. In the United States, Polymarket and Kalshi operate as designated contract markets supervised by the CFTC. After a USD 1.4 million fine in 2021 and a ban on onboarding US users, Polymarket returned to regulated US operations in September 2025 after acquiring an exchange. The Commodity Exchange Act expressly regulates these event contracts, so they are compliant despite some state-level litigation.

Europe: the economic-rationale test. MiFID II does not define event contracts; they could only fit through the catch-all clause in Annex I. European regulators require something US rules do not: a valid economic rationale, such as hedging a real risk. Buying a «share» on whether Real Madrid wins doesn't meet that bar, and without a Multilateral Trading Facility (MTF) licence these platforms are not marketing financial instruments in Europe.

So what are they offering? Gambling. Most jurisdictions define gambling by three elements: a price to play, chance influencing the outcome, and a prize. Rules are fragmented: Colombia treats even free games as gambling, while Spain only requires that chance influence the result —not that it be the only factor. Applied to prediction markets, the case falls squarely within the gambling definition.

The regulatory trend. Poland and Belgium already block access to Polymarket as an illegal gambling operator; Colombia has banned it; in France, the ANJ is investigating the platform after a multi-million-euro bet on the 2024 US election. A similar outcome looks likely in Spain.

Watch the full session

Watch the full talk on MERGE's YouTube channel for the complete legal analysis of how prediction markets are regulated in the United States and Europe.

FAQs

What are prediction markets?
They are platforms that let you invest or bet on the outcome of future events by buying «shares» in what will happen; if you're right, you receive a fixed payout. Well-known examples include Polymarket and Kalshi.

Why are they financial instruments in the US but not in Europe?
In the US, the Commodity Exchange Act expressly regulates event contracts under the CFTC. In Europe, MiFID II requires a valid economic rationale (such as hedging a risk) that these products lack, so they don't qualify as financial instruments.

Why are they considered gambling in Europe?
Because they meet the three elements of the gambling definition: paying a price, chance influencing the outcome, and winning a prize. Without a gambling licence they are deemed illegal gambling in countries such as Spain, Belgium, Poland and Colombia.

What should a project launching prediction markets keep in mind?
That regulatory frameworks are fragmented: a product designed for one jurisdiction can be illegal in another. If in practice they are bets, the safest route is to operate under a gambling licence.