Prediction markets and event contracts in Germany: At the crossroads between gambling law and financial regulation

Prediction markets are the talk of the town. They have moved from a niche curiosity to making daily headlines across the globe. While the precise mechanisms of prediction markets vary depending on the operator of the marketplace, participants typically trade binary "event contracts" on anything from political events, sports, or the weather. The event contracts are instruments that pay out a sum of money primarily if the defined future event occurs as the buyer predicted and which do not pay out any money, if it does not. The market price typically reflects the public’s probability estimate. Market participants predicting a different outcome are typically on the other side of the trades.

The recent rise of prediction markets calls for a renewed examination of the delineation between gambling law and financial regulation. Regulatory requirements vary depending on the jurisdiction. Internationally, prediction market operators are often considered to operate in – at least – a grey area of the law. In light of a recent critical publication by the Joint Gambling Authority of the German Federal States (Gemeinsame Glücksspielbehörde der Länder, GGL), the German regulator for gambling, and its dedicated FAQ website on societal bets, this blogpost outlines the key regulatory challenges for prediction market operators and participants in general and Germany specifically. For an overview of the US perspective, see our recent blogpost.

1. Gambling authority's position in Germany: A blanket prohibition

In its August 2026 publication, the GGL took a clear and, so far, undifferentiated stance on the legality of prediction markets. In the eyes of this regulator, prediction markets involve placing bets on the outcome of social, political, economic, or other events. According to the GGL, such bets constitute gambling under German law and cannot be permitted (even if an operator applied for a licence), since under German gambling law, only sports betting and horse racing bets are licensable forms of betting. Every other type of betting falls outside the categories that can be licensed in the first place.

For the regulatory assessment of a specific potential gambling offering, the decisive factor is whether the offering is accessible in Germany. If a provider effectively excludes participation from Germany and (geo-)blocks its offering for the German market, such offering would typically not qualify as an unauthorized gambling offering in Germany.

The consequences of the qualification as illegal gambling may be severe. Offering gambling publicly and participating in illegal gambling are criminal offences, carrying prison sentences of up to five years or fines. The GGL actively pursues violations by referring suspected offences to public prosecutors, initiating administrative fine proceedings and reporting suspected tax offences and money laundering to the competent authorities. In addition, illegal gambling contracts are void under German civil law and cannot be enforced (Sections 134, 762 of the German Civil Code, BGB). This can also expose operators and other involved parties – such as payment service providers – to unjust enrichment and tort law claims by participants seeking to reclaim stakes or losses paid under a void contract, a risk that has already materialized regularly in Germany in relation to unlicensed gambling. 

2. The financial-regulatory counter-perspective: Derivative qualification

The GGL’s blanket prohibition of event contracts as illegal gambling needs to be aligned with financial regulatory law, as an event contract may also qualify as a regulated derivative. In this regard, Section 99 of the German Securities Trading Act (STA) provides that the unenforceability of the contract ordered by Section 762 BGB shall not apply to futures transactions, in which at least one party to the contract is a company that (on a commercial basis or to an extent requiring a business operation organized in a commercial manner) enters into or acts as an intermediary in the conclusion of futures transactions, or engages in the purchase, sale, or brokerage of futures transactions. The provision is also understood in legal literature to have an impact beyond civil law, and to rule out criminal liability and gambling law with regard to futures transactions covered by Section 99 STA. 

The first question for the legality of an offering is, therefore, whether an event contract qualifies as a futures transaction. While the derivative test involves multiple criteria, the key question in this context is whether the contract has an eligible underlying asset. For that purpose, the STA largely follows the eligibility criteria of Directive 2014/65/EU (MiFID II) (Sections C4 to C10 of Annex I to MiFID II), which covers derivatives with financial and non-financial underlying assets, such as – among others – securities, currencies, interest rates, financial indices, commodities and climatic variables, inflation rates and other official economic statistics (C4 to C7), credit derivatives (C8) and contracts for difference (C9). Other assets, rights, obligations, indices and measures may be eligible as underlying assets only insofar as they have characteristics of other derivative financial instruments (C10). Crypto-assets are recognized as an eligible underlying under Section 2(3) sent. 1 lit. b) STA.

Taking into account these general principles, only a limited set of event contracts can qualify as derivatives under C4 to C7. Event contracts concerning, for example, political events or celebrity divorces, are unlikely to fall into one of those categories. It also seems questionable whether the binary nature of pay-outs under event contracts allows for a qualification as a contract for difference (C9), whose pay-out structure is typically linear towards the value of the respective underlying. Such event contracts will therefore only qualify as regulated derivatives insofar as they comply with the requirements for derivatives in C10. By contrast, event contracts concerning the official German gross domestic product or whether a certain number of days above a certain temperature is recorded at a specific weather station, for example, may relate to recognized underliers and are more likely to qualify as derivatives.

While the qualification as a futures transaction may therefore bar the prosecution for illegal gambling, it opens up potential prosecution of the prediction market operators if they provide investment services without the required licence. The operators may qualify as Multilateral Trading Facilities (MTFs) or Organized Trading Facilities (OTFs) if they provide a platform where event contracts can be traded. They may also be engaging in other investment services if they sell event contracts to German customers. Engaging in investment services without the required licence is also a criminal offence. Only duly authorized German or passported EU financial services firms are permitted to engage in such activities. 

The execution of event contracts may be automated via smart contracts and distributed ledger technology. This renders these event contracts potentially eligible as a crypto-asset under the Markets in Crypto-Assets Regulation (MiCAR) if and insofar as it does not qualify as a derivative under MiFID II. While the provision of services in relation to crypto-assets triggers similar licence obligations as the provision of investment services in relation to derivatives, crypto-assets are not mentioned in Section 99 STA.

3. A further hurdle: The binary options ban 

Even where an event contract qualifies as a derivative and the operator holds the required MTF, OTF or other financial services licence, a further and entirely independent restriction may still apply: The German financial regulator Bafin’s general notice (Allgemeinverfügung) issued in 2019, which bans the marketing, distribution and sale of binary options to retail clients. Bafin’s rationale for the ban was that binary options resemble gambling because of their inherent all-or-nothing principle, their marketing and the design of their trading process. 

Bafin defines a binary option as a derivative that (a) is cash-settled, (b) only pays out once the position is closed out or expires, and (c) pays either a fixed amount or nothing once a set condition is triggered – for instance, once the underlying reaches a certain price by expiry. Event contracts will typically satisfy all three elements: cash settlement is provided because the underlying event cannot be physically delivered and a monetary sum is paid instead; a position can typically be closed out early by taking the opposite position, and otherwise simply runs until the event is resolved; and they pay a fixed amount if the event happens or expire worthless if it does not. 

On 3 July 2026, the European Securities and Markets Authority ESMA said it considers it “likely” that event contracts fall under these binary options rules. ESMA also pointed out that the existence of a ‘coupon’ or ‘reward’ that represents the interest earned on the funds paid does not change the binary nature of the event contract itself.

Put simply, qualifying as a derivative is not the end of the story – even a properly licensed operator selling genuine derivative event contracts in Germany would still need to test whether the binary options ban applies, a separate question that sits on top of, not instead of, the licensing issues discussed above, and one that ESMA’s cautious statement has not yet definitively resolved.

4. Summary

The qualification of event contracts as gambling or derivatives shows that neither route offers a clear safe harbour. Event contracts without an eligible underlying remain gambling and are prohibited outright, while even those that clear the derivative hurdle may still fall foul of the binary options ban, as ESMA itself now considers likely. Unless market participants can make a convincing case that prediction markets differ materially from the binary options Bafin had in mind, the current legal landscape leaves comparatively little room for a compliant offering of event contracts to German retail customers. If a provider does not operate within the boundaries of the law under either pathway, the consequences can be serious, exposing participants and operators alike to criminal liability. The voidness of gambling contracts and therefore potential repayment claims may have a considerable economic impact, not only for the participants but also for the banks involved in the payment transactions. 

Interested market participants should therefore carefully test the derivative qualification of an event contract, but also whether the binary options ban nonetheless applies, together with the regulatory status of the seller of the event contract.