Crypto prediction contracts are not just simple bets

Esma has just issued a clarification, reminding the market that binary-outcome contracts based on financial assets may be derivatives that cannot be marketed to retail investors.

The statement is short, but the message is unmistakable. Esma has reminded issuers and distributors of so-called event contracts of their obligations. ''This publication is driven by the growing popularity of prediction markets (or event contracts) and the increasing participation of retail investors worldwide''', the European securities markets authority said.

Derivatives or just bets?

The focus is specifically on contracts (''event contracts'') with a binary outcome, resulting in a total loss or a fixed gain, depending on whether or not a future event occurs.

There is some ambiguity around these contracts. They can be simple bets when the event is tied to a sports result or an election result (win/loss, hitting or not hitting a precise score, etc.). In that case, they fall under local gambling laws.

However, these contracts can also be written on events involving financial instruments. In that case, Esma warns, they may be treated as financial products classified as derivatives. Moreover, given their binary nature, they are directly caught by the measures already adopted at the European level on binary options, which prohibit their marketing to retail investors.

An invitation to be compliant

While Esma does not give any names, it clearly has platforms in its sights that enable users to bet on the price moves of crypto-assets and cryptocurrencies. It does not matter whether these instruments are labeled as event contracts or prediction contracts and are not presented as binary options. What matters is the very nature of the events they reference, which determines how they should be classified.

The authority is therefore urging the firms concerned to carry out a rigorous legal analysis of their business to verify their compliance.

It also took the opportunity to issue another brief reminder on status and required authorizations. ''Distributing event contracts that qualify as financial instruments in the EU requires authorization as an investment firm, even when distribution is limited to non-retail clients,'' the statement said.