Prediction markets ‘difficult to pin down’
Lawyers at Matheson say that Ireland appears to be leaning towards dealing with most prediction markets under gambling laws.
Such markets allow trading on the probability of a future event through so-called ‘event contracts’, bought on a particular election result, court decision, or sports outcome.
If the buyer is correct, the contract pays out a fixed amount; if not, the buyer receives nothing.
In an analysis on the firm’s website, the Matheson lawyers say that the simple binary structure of these contracts – a yes or no answer – is why they have proven so popular, but is also why they have proven so difficult for regulators to pin down.
“Whilst prediction markets are a relatively well-known concept in the US, recent World Cup sponsorship deals say a lot about the industry’s intent to capture a wider audience – including in the EU – going from niche curiosity to mass-market,” the firm states.
Financial instruments
It points to the most recent EU development in the area, from markets regulator ESMA last month.
It confirmed that event contracts with binary, all-or-nothing pay-outs constituted financial instruments under MiFID, provided the underlying event was one of the types listed in the directive – for example, financial indices, currencies, or interest rates.
“The larger and more interesting question is what about everything else – such as political elections, sporting results, entertainment outcomes?” the Matheson lawyers say.
Three approaches
They list three candidates for regulatory treatment of such events, adding that which one ultimately applies will depend on the structure and context of the products:
- MiCAR,
- Gambling laws, and
- MiFID.
On MiCAR, the Matheson lawyers say that an event contract issued or settled on distributed-ledger technology may fall within MiCAR’s definition of a crypto-asset.
They also point out that, despite the ESMA statement, what falls within scope of being a MiFID financial instrument is not definitive.
The firm says that recent Irish developments indicate that Ireland is leaning towards dealing with the majority of these products under gambling laws, citing comments from the Gambling Regulatory Authority of Ireland (GRAI) earlier this year that they bore “the hallmarks of betting activity“.
GRAI activity
In July, the GRAI confirmed that its enforcement team had been active in this area over the last year, leading to a number of prediction-market website operators voluntarily geo-blocking Ireland.
The GRAI also confirmed that where prediction market operators had not taken such action themselves, it had issued warning letters to those operators threatening court action to obtain a blocking order.
“Notably, Kalshi and Polymarket, two of the largest prediction markets, have added Ireland to their restricted list, restricting access for Irish investors to enter their platforms,” Matheson states.
The firm says that Ireland’s approach aligns with that seen in some other EU member states, such as France.
‘More scrutiny, not less’
Its lawyers point out, however, that Gibraltar has built a “dedicated and distinct” regulatory regime that exempts prediction markets from being considered to be gambling operators.
They suggest that Ireland is not likely to follow Gibraltar’s example in the short term, given political concerns and the position of the GRAI.
The firm urges anyone building or distributing such products not to wait for the regulatory picture to fully settle before engaging.
“The direction of travel is towards more scrutiny, not less,” its lawyers conclude.