What are Prediction Markets?
Political elections, football matches, the setting of interest rates and the weather all share one defining characteristic: uncertainty. Until these events actually occur, no predictive method, regardless of its sophistication, can determine their outcome with complete certainty.
Prediction markets seek to monetise that uncertainty by allowing participants to trade contacts based on the outcome of future events. Unlike a traditional bookmaker, a prediction market operates as an online marketplace where participants buy and sell contracts linked to specific questions. These may range from whether a political party will win an election, whether the European Central Bank will increase interest rates, or whether a football club will win the UEFA Champions League.
If the predicted event occurs, the contract pays a predetermined amount; if it does not, it expires worthless. As contracts are traded, their prices fluctuate to reflect the market's collective assessment of the probability of the event occurring. For example, where a contract paying €1 is trading at €0.70, the market is effectively pricing the event as having a 70% chance of happening.
The Rising Popularity of Prediction Markets
The concept is simple, but its growth has been remarkable. According to Forbes, monthly trading volume increased from less than USD 5 billion in September to approximately USD 24 billion by April 2026. Some industry observers now predict that annual trading volumes could eventually exceed USD 1 trillion
Part of their appeal lies in the sheer diversity of events of markets available. Politics, sport, economics, entertainment and even global news events have all become subjects of prediction market trading. Supporters argue that prediction markets do more than facilitate speculation: by aggregating dispersed information, they may produce forecasts that outperform opinion polls or expert predictions.
Despite this remarkable growth, however, one fundamental question has continued to cast uncertainty over the industry's future: how should they be regulated?
The Regulatory Question: Gambling or Financial Services?
Success often attracts regulators, and prediction markets are no exception. As prediction markets have grown into platforms facilitating billions of dollars in transactions, regulators have struggled to determine where they belong. Are these contracts gambling products? Financial derivatives? Or do they represent an entirely new category requiring a bespoke regulatory framework?
The United States illustrates this uncertainty particularly well. At the federal level, qualifying event contracts are generally regulated by the Commodity Futures Trading Commission (CFTC) as financial derivatives. Yet several states have argued that certain prediction market products fall within their gambling laws and consumer protection regimes. The result is a fragmented regulatory landscape where the boundary between gambling and financial regulation continues to be tested.
Despite this fragmentation, the underlying objective remains the same: to accommodate prediction markets within a coherent legal framework that balances innovation, market integrity, consumer protection and the economic opportunities these markets may generate.
Europe Has Already Drawn a Line
At first glance, the European position appears different.
Unlike financial services, gambling has not been harmonised across the European Union. Responsibility for regulating gaming remains with the Member States, each of which determines its own licensing, operational and advertising requirements. It might therefore appear that prediction markets also fall entirely within national competence, leaving Malta free to develop its own regulatory regime.
Malta’s Opening Position
That was, in fact, the direction Malta initially appeared to be taking. Before ESMA's intervention, the Malta Gaming Authority (MGA) publicly stated that its existing gaming framework was sufficiently technology-neutral to accommodate prediction market products. Depending on their structure, such products could potentially fall within either a Type 2 fixed-odds betting licence or a Type 3 betting exchange licence. At the same time, however, the Authority recognised that certain prediction market features might require a differentiated regulatory approach and confirmed that it was reviewing whether additional guidance or regulatory amendments would be necessary.
That approach reflected the assumption that prediction markets could, at least in principle, be regulated as gaming products under national law. That conclusion, however, is now only partly correct.
ESMA’s Intervention
The legal landscape changed significantly earlier this month when the European Securities and Markets Authority (ESMA) clarified that many prediction market products are already captured by existing EU financial services legislation. Rather than introducing new rules, ESMA confirmed that an existing legal prohibition on unregulated services already applies to many of these contracts.
The key principle is straightforward. A product is classified according to its economic substance rather than its commercial branding. Whether described as an event contract, prediction share or forecast token, a binary contract linked to matters falling within Annex I of MiFID II constitutes a financial instrument in the form of a derivative.
Accordingly, contracts referencing interest rates, inflation, commodity prices, weather or freight fall within MiFID II regardless of the terminology adopted by their issuer or under national law.
The consequence is significant. The prohibition on unregulated marketing, distribution and sale of binary options to retail clients, introduced in 2018, already applies to many prediction market products. ESMA did not expand the law; it clarified that the existing legal framework already captures them.
For Member States, including Malta, this means that contracts falling within MiFID II cannot simply be reclassified through domestic legislation.
Malta Has Been Here Before
For Malta, the debate feels familiar.
Over the past three decades, the country has established itself as one of Europe's leading financial services jurisdictions. Through a combination of regulatory innovation, specialist expertise and a business-friendly environment, it has attracted investment firms, insurers, fintech businesses and digital asset operators while remaining aligned with the evolving European regulatory framework.
Its next challenge may well be prediction markets.
Malta encountered a remarkably similar classification problem in 2018. Crypto-assets occupied an uncertain legal space and were left in the regulatory gorge between electronic money and financial instruments. Rather than forcing them into existing legal categories, Malta enacted the Virtual Financial Assets Act, creating a bespoke framework for assets that fell outside traditional financial services legislation.
The approach earned Malta international attention and helped establish its reputation as "Blockchain Island." It was an ambitious attempt to regulate an emerging industry before much of Europe had reached a consensus.
Ultimately, European harmonisation overtook national experimentation. The Markets in Crypto-Assets Regulation (MiCA) established a single regulatory framework across the European Union, and Malta ceased accepting new applications under the Virtual Financial Assets Act as firms transitioned to the directly applicable European regime. Nevertheless, the experience proved valuable. The MFSA developed considerable expertise in supervising innovative financial products, positioning Malta as an attractive jurisdiction for firms seeking authorisation under MiCA.
Why Prediction Markets Are Different
Prediction markets may appear to present another opportunity for regulatory innovation, but the legal landscape has changed.
Unlike crypto-assets in 2018, a substantial category of prediction market contracts has already been brought within the scope of EU financial services legislation. ESMA's recent clarification means that Malta cannot create a separate domestic category for contracts that already qualify as financial instruments under MiFID II.
Any uniquely Maltese framework would therefore be limited to contracts falling outside financial services legislation, such as those linked to elections, sporting events or entertainment.
Even then, another obstacle remains.
Unlike firms authorised under MiFID II, a purely domestic prediction market licence would not benefit from passporting rights across the European Union. Other Member States would remain free to classify such products under their own gambling or financial services legislation, exposing operators to inconsistent treatment and enforcement.
This is no longer a hypothetical concern. Several European gambling regulators have already taken enforcement action against unlicensed prediction market platforms, demonstrating that national authorities remain prepared to intervene where products are considered to fall within domestic gambling laws.
Malta’s Opportunity Ahead: Certainty, Not Speed
None of this means Malta should step back from the industry.
If anything, prediction markets represent another opportunity for Malta to do what it has done successfully for decades: provide regulatory certainty in sectors where innovation is moving faster than legislation.
The lesson from crypto is not that Malta should attempt to outpace European law once again. Rather, it is that expertise matters. Jurisdictions capable of combining legal certainty, efficient supervision and a sophisticated understanding of emerging technologies will remain attractive destinations for investment, even within a harmonised European framework.
Prediction markets are no longer a niche phenomenon. They have become a global industry attracting billions of dollars in trading volume, substantial venture capital investment and increasing institutional attention. Jurisdictions around the world have begun to recognise this shift. Gibraltar, for example, is in the process of becoming the first jurisdiction to introduce a dedicated regulatory framework designed specifically for prediction market operators. Rather than focusing on labels, its approach emphasises effective supervision, market integrity, participant protection and financial crime prevention, while recognising the increasing role of digital assets within the sector.
Malta cannot simply replicate Gibraltar's approach. As a Member State of the European Union, it is bound by the limits imposed by MiFID II and the wider EU regulatory framework. Nevertheless, this should not discourage Malta from acting decisively. Where Gibraltar has identified prediction markets as an emerging strategic industry, Malta should likewise position itself at the forefront of the European debate. By engaging proactively with regulators, developing supervisory expertise and providing a clear regulatory environment for those activities that remain within national competence, Malta can establish itself as the jurisdiction of choice for compliant prediction market businesses seeking access to the European market.
Prediction markets are unlikely to remain a regulatory grey area forever. Europe will eventually determine where they belong. The question is whether Malta intends to wait for that framework to emerge or whether it will help shape it. Given its track record in financial services, fintech and digital assets, Malta is uniquely placed not merely to participate in the industry's development, but to become its European centre of excellence.
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