Prediction Markets
Prediction markets are rapidly emerging as one of the most closely watched digital business models.
The recent commercial success of major US operators has brought the sector mainstream attention while simultaneously triggering regulatory scrutiny. Widespread litigation in the United States is ongoing and centres on whether prediction markets constitute “gambling”, falling under state jurisdiction, or “derivative-based financial products” subject to federal regulation. Across Europe, several countries have already acted against operators under national gambling laws.
Malta, however, appears politically receptive. The Prime Minister has publicly confirmed Malta is considering proposals for dedicated regulation, while the Economy Minister stated the country aims to become among the first jurisdictions to regulate the sector. Although little detail has been published to date, protection against abuse and insider trading appears to be a central consideration.
The Business Model and Regulatory Challenges
The mechanics of prediction markets are straightforward. Users acquire contracts linked to binary outcomes — effectively a “yes” or “no” on whether a specified event will occur, with prices fluctuating according to market sentiment and perceived probability.
Users may profit in two ways. First, they may hold the contract until settlement and receive a payout if the outcome materialises. Secondly, they may trade the contract before settlement, realising gains/losses through price movements.
Importantly, operators generally do not assume risk on the underlying event itself. Instead, they function as intermediaries facilitating trading between users, generating revenue through commissions, transaction fees or similar fees. Economically, the structure resembles an exchange more than a traditional bookmaker model, which incurs risk relative to the event’s outcome.
Underlying events may range from elections and sporting results to economic indicators, entertainment outcomes, or geopolitical developments. Conceptually, any objectively verifiable event could become the subject of a prediction contract.
This near-limitless scope creates legal classification challenges. Contracts based on uncertain future events are not new; gambling, insurance, and financial regulation have long dealt with such arrangements. However, those frameworks were not designed around a model where virtually any event could become in scope and tradeable, potentially overlapping multiple regulatory regimes.
Legal complexity is further increased because the predictions may potentially be user-generated, or suggested, while additional issues arise regarding crypto-assets, decentralised infrastructure and blockchain-based models.
The current central legal debate is whether prediction markets should be regulated as gambling products, financial instruments, or something entirely distinct. Regulatory treatment will ultimately depend on the precise activities conducted rather than the labels applied, particularly regarding the nature of contracts offered.
Many commentators argue that existing financial services legislation — principally the Markets in Financial Instruments Directive (“MiFID II”) — may apply. MiFID II regulates investment services and financial instruments, including derivatives and many argue licensing as a multilateral facility in terms of MiFID II may apply.
Undoubtedly, certain prediction contracts resemble derivatives, particularly binary options. However, MiFID II does not comprehensively define “derivatives”, instead listing categories such as options, futures, swaps, forwards, and contracts for differences.
The comparison to binary options is significant because the European Securities and Markets Authority (“ESMA”) previously prohibited the marketing and sale of binary options to retail investors across the EU, citing substantial investor detriment and describing them as “binary bets”.
Although ESMA’s temporary measures were later not renewed, this largely occurred because national EU regulators had already implemented equivalent or stricter domestic restrictions. The practical result is that retail-facing binary speculative products are heavily constrained across Europe.
For operators seeking mass-market participation within the EU, this creates material friction under the financial services framework irrespective of the potential for licensing as a multi-lateral facility.
At the same time, the resemblance with betting exchanges is difficult to ignore. This matters because gambling laws in Malta already regulates gaming exchange activities, and several EU states have already pursued enforcement through gambling frameworks.
The complexity is compounded by the absence of harmonised gambling regulation across Europe. Member States adopt differing interpretations of what constitutes “gambling” and the extent to which such activities may lawfully operate.
Malta’s Strategic Advantages
The fact that regulatory action across Europe has largely been taken through gambling law is particularly relevant for Malta.
Malta’s gaming framework, established under the Gaming Act (Chapter 583 of the Laws of Malta), represents one of Europe’s most mature gaming regimes, backed by long-standing public policy in the field of gaming. Crucially, it already regulates exchange-style and commission-based structures through the Type 3 gaming service category, which amongst others encompasses peer-to-peer betting, betting exchanges, and intermediary-style models.
This means licensing for prediction market structures is already possible under existing gaming legislation. Unlike some jurisdictions where such models fit awkwardly within gaming frameworks — or may not be permissible at all (such as because of allowed event types) — Malta already possesses legislation conceptually designed for peer-to-peer and commission-based mechanics.
Equally important is Malta’s technology-neutral regulatory approach. Classification depends on the substance of the service provided rather than commercial terminology. Existing gaming regulation is therefore already structurally capable of addressing the model from a gambling perspective, including integrity monitoring and insider trading concerns such as through parallels with sports integrity obligations.
Within Europe’s fragmented regulatory landscape, Malta may therefore be uniquely positioned to accommodate prediction markets from a gaming aspect, and its attractiveness extends beyond the already existing licensing route under gaming law. Over two decades, the country has developed a sophisticated ecosystem surrounding gaming, financial services, and emerging technologies. The jurisdiction hosts a concentration of lawyers, compliance professionals, payments specialists, software providers, and operational talent experienced in cross-border digital business models.
Malta has also pioneered legislation relating to distributed ledger technology and crypto-assets, regulated by the Malta Financial Services Authority, has a unique regulator for overseeing emerging technologies, namely the Malta Digital Innovation Authority, while the Malta Gaming Authority already maintains a policy framework relating to crypto-assets and distributed ledger technologies within gaming. This familiarity with innovative business models may prove valuable for prediction market operators navigating uncertain regulatory classifications.
Malta may therefore offer something increasingly valuable in this sector: a jurisdiction whose legal and regulatory architecture already aligns naturally with the operational reality of prediction markets and which appears willing to regulate and accommodate the industry.
If Malta adopts a dedicated framework, it is likely other jurisdictions may follow. To the extent that gambling law continues to dominate the European approach, Malta possesses further strategic advantages. Its legislation already addresses aggregation of gaming licences from multiple jurisdictions within the same entity — an important consideration for operators seeking to establish a European hub. Recent VAT reforms may also create favourable conditions for operators engaged in cross-border EU activity, particularly regarding recoverability of input VAT.
Together with Malta’s established regulatory infrastructure and industry ecosystem, these and other factors already position the country as a natural headquarters jurisdiction for Europe’s prediction markets sector, a position which may be only further consolidated once the proposals on the sector are published.
For any additional information or assistance, please contact us at info@gtg.com.mt
Author: Dr Terence Cassar
