Prediction Markets in Cyprus: Regulation & Licensing

Prediction markets have developed rapidly in recent years, particularly through online platforms that allow users to take financial positions on the outcome of future events. Markets may concern elections, sporting events, economic indicators, cryptocurrency prices, court decisions, entertainment awards or virtually any objectively verifiable event.

The regulatory position of such platforms is not uniform internationally. Depending on their structure, a prediction market may be characterised as betting, a betting exchange, gambling, a derivative financial instrument or, in certain circumstances, a crypto-asset related activity.

For businesses established in Cyprus, or operators intending to make prediction markets available to persons in Cyprus, the distinction is particularly important. Cyprus permits licensed online fixed-odds betting but expressly prohibits betting exchanges. Consequently, many conventional prediction-market models cannot presently be licensed in Cyprus.

What Is a Prediction Market?

A prediction market ordinarily allows participants to trade or acquire positions corresponding to possible outcomes of a future event.

A simplified example would be a market asking whether a particular candidate will win an election. A user may purchase a “Yes” or “No” position. The value of that position may fluctuate according to market demand, with the successful position ultimately settling at a predetermined amount when the outcome becomes known.

The economic substance can therefore resemble either a wager or a financial contract. The regulatory classification depends considerably upon the contractual arrangements and mechanics of the particular platform.

Important factors include:

• whether the operator acts as principal against the customer;
• whether customers are effectively betting against one another;
• whether users can buy and sell positions before an event is determined;
• whether the operator merely provides a marketplace matching counterparties;
• whether returns depend upon the occurrence of an uncertain event;
• whether the contract constitutes a financial instrument;
• whether fiat currency, cryptocurrency or another asset is used for settlement; and
• whether the operator takes custody of customer funds or crypto-assets.

The description given to the product by the operator is not decisive. Calling a product an “event contract”, “prediction contract” or “information market” does not prevent gambling legislation from applying where the substance of the arrangement amounts to betting.

The Cyprus Regulatory Framework

Betting in the Republic of Cyprus is principally regulated under the Betting Law of 2019, Law 37(I)/2019, which substantially amended and replaced the earlier framework contained in Law 106(I)/2012.

The competent regulator is the National Betting Authority (“NBA”). The NBA is responsible for regulating and supervising betting activity in Cyprus, including betting on sporting and other events.

Cyprus distinguishes principally between:

• Class A licences, covering land-based betting; and
• Class B licences, covering online or electronic betting.

For an ordinary online bookmaker wishing to accept lawful online bets from customers in Cyprus, the relevant authorisation is therefore generally a Class B bookmaker’s licence.

The difficulty for prediction-market operators is that not every form of online betting permitted elsewhere falls within the activities that Cyprus allows a Class B bookmaker to conduct.

Prediction Markets and Betting Exchanges

The most significant provision for prediction-market businesses is section 80 of the Betting Law.

Section 80 expressly prohibits betting conducted through a betting exchange. In substance, this concerns a service designed to facilitate the placing or acceptance of bets between players.

This distinction is fundamental.

A conventional bookmaker accepts a customer’s bet itself. The customer therefore contracts with the bookmaker.

A betting exchange instead creates a marketplace through which customers effectively take opposing positions against other customers, while the platform facilitates or matches those positions.

Many modern prediction markets economically resemble the second model.

Where, for example, one participant acquires a “Yes” position and another participant takes the corresponding “No” position, with the platform facilitating the market between them, there is a substantial risk that the arrangement would constitute a betting exchange for the purposes of Cyprus law.

Can Betting Exchanges Be Licensed in Cyprus?

There is no separate Cyprus “prediction market licence” and a Class B bookmaker’s licence does not authorise an operator to conduct a betting exchange.

Section 80 expressly prohibits betting through betting exchanges. Section 81 goes further by making the provision of services for conducting betting through a betting exchange a criminal offence. A person convicted of that offence may face imprisonment for up to five years, a fine of up to €300,000, or both.

The National Betting Authority also identifies betting exchanges among the illegal betting services for which websites may be included on its blocking list.

Accordingly, an operator cannot overcome the prohibition simply by applying for a Class B licence. Where a prediction-market model amounts in substance to a player-to-player betting exchange, it cannot presently be licensed as such in Cyprus.

Can a Prediction Market Obtain a Cyprus Betting Licence?

Potentially, but the platform would need to be structured as a form of betting which is permitted under Cyprus law rather than as a betting exchange.

For example, a platform under which the licensed operator acts as bookmaker and accepts bets directly from customers on the outcome of sporting or other events may potentially fall within the Class B regime.

The Cyprus regulatory framework is not necessarily confined to traditional football, horse racing or other sporting wagers. Event-based betting may potentially fall within the scope of the licensing regime, provided that the structure does not amount to a prohibited betting exchange.

The critical distinction is generally between an operator accepting bets as principal, which may potentially fall within the Class B licensing regime, and an operator providing infrastructure through which customers effectively bet against one another, which risks constituting a prohibited betting exchange.

A legal and regulatory assessment should therefore be undertaken before developing or launching the platform.

Class B Online Betting Licence Requirements

Where the prediction-market business can lawfully be structured as an online bookmaker rather than a betting exchange, a Class B licence from the National Betting Authority would generally be required before betting services could be offered in Cyprus.

Corporate Structure

An application must be made by a company limited by shares. The applicant may be a company incorporated in Cyprus or a foreign company maintaining a registered branch in Cyprus. Its principal activity must be the provision of betting services.

Minimum Share Capital

The applicant must maintain issued and fully paid-up share capital of at least €500,000. This is a statutory capital requirement rather than simply an application cost.

Bank Guarantee

The application must also be accompanied by a bank guarantee of €550,000. The guarantee must be provided by an eligible commercial bank providing banking services in Cyprus or another EU Member State, or by another qualifying credit institution within the statutory framework.

An operator therefore requires significant financial substance before a Class B licence application is commercially realistic.

Licensing Fees

The regulatory fees for Class A and Class B bookmaker licences are generally €30,000 for a one-year licence or €45,000 for a two-year licence, subject to the applicable regulatory fee schedule at the time of application.

Suitability of Shareholders, UBOs and Officers

The National Betting Authority assesses the applicant company as well as its officers, ultimate beneficial owners and persons holding significant interests.

The regulatory assessment includes suitability, criminal-record considerations, financial standing, financial history and the resources available for carrying on the proposed betting business.

The licensing process therefore extends substantially beyond merely satisfying the minimum capital requirement.

Operational and Compliance Requirements

A licensed Class B operator is subject to continuing regulatory requirements concerning its online betting operations.

These include requirements relating to player registration, player accounts, acceptance of bets, payment of winnings, transactions, customer funds, website operation, record keeping and reporting.

Customer funds require particular attention. Amounts belonging to players must be maintained in a dedicated client bank account and separated from the bookmaker’s own funds. Appropriate safeguards must also be established with the credit institution maintaining that account.

An applicant should therefore expect the licensing process to involve detailed consideration of its:

• business plan and financial projections;
• corporate and ownership structure;
• source of funds and capital;
• directors and key personnel;
• technical platform;
• betting rules and market-settlement procedures;
• customer terms and conditions;
• player registration and verification procedures;
• AML and compliance framework;
• responsible gambling procedures;
• customer-funds arrangements;
• banking and payment infrastructure;
• cybersecurity and data-protection arrangements;
• complaints procedures; and
• internal controls and record-keeping systems.

Taxation of Licensed Betting Activities

A Class A or Class B licensed bookmaker is presently subject to betting tax equal to 10% of its net betting revenue.

An additional statutory contribution of 3% of net betting revenue is also payable. The effective betting-specific charge is therefore 13% of net betting revenue, separately from the wider corporate and tax consequences applicable to the operator.

Prediction Markets Using Cryptocurrency

The use of cryptocurrency does not, by itself, take a prediction market outside Cyprus betting legislation.

If users stake value on an uncertain event and receive value depending upon its outcome, the underlying arrangement must still be examined under the Betting Law irrespective of whether settlement takes place in euros, stablecoins or other crypto-assets.

Crypto-based prediction markets may, however, create an additional regulatory layer.

Depending upon the platform’s activities, consideration may also need to be given to Regulation (EU) 2023/1114 on Markets in Crypto-Assets (“MiCA”), particularly where the operator provides custody, transfer, exchange or other regulated crypto-asset services.

The fact that a platform is decentralised, uses smart contracts or allows users to connect self-custody wallets does not automatically determine the regulatory character of the underlying prediction activity.

The actual services performed by the operator, front-end provider, market creator and any related entities must be examined individually.

Could Prediction Markets Be Financial Instruments?

A separate issue arises where a prediction product is constructed as a tradeable financial contract rather than a conventional wager.

Depending upon its characteristics, consideration may need to be given to Directive 2014/65/EU on markets in financial instruments (“MiFID II”) and the Cyprus legislation implementing the EU investment-services framework.

This does not mean that describing a prediction-market position as a “contract” or “derivative” converts an otherwise prohibited betting exchange into a financial service. Regulatory classification depends upon the substantive characteristics of the instrument.

Particular caution is required where event contracts are tradeable, capable of being closed before settlement, structured as derivatives, or linked to financial assets, indices, currencies or cryptocurrency prices.

In such cases, both the betting and financial-services regulatory frameworks should be analysed before determining whether the product may lawfully be offered from Cyprus.

Operating From Cyprus While Excluding Cyprus Customers

A different question arises where a Cyprus company provides technology, administrative, payment, marketing or other services to a foreign licensed prediction-market operator but the underlying prediction-market services are not offered to persons in Cyprus.

The existence of a Cyprus company does not necessarily mean that the underlying gambling activity is licensed in Cyprus. Equally, incorporating a separate foreign operating company does not automatically remove Cyprus regulatory risk.

Among other matters, consideration should be given to:

• which entity contracts with the player;
• which entity determines and settles the prediction markets;
• which entity receives customer funds;
• where the gambling or betting service is legally supplied;
• the jurisdictions from which customers are accepted;
• applicable foreign gambling licences;
• intellectual property and technology ownership;
• marketing arrangements;
• payment processing;
• whether the Cyprus entity receives betting revenue or only arm’s-length service fees;
• website disclosures and contractual documentation; and
• effective geo-blocking of prohibited jurisdictions.

Where Cyprus residents are not permitted to participate, robust geo-blocking, KYC controls and contractual restrictions are particularly important.

Foreign Prediction-Market Licences and Cyprus

An offshore or foreign gambling licence does not automatically entitle an operator to offer prediction markets in Cyprus.

Gambling regulation remains substantially national within the European Union. An operator cannot therefore generally rely upon a gambling licence issued by another jurisdiction as though it benefited from the passporting regime applicable to certain EU financial services.

Where a website provides betting services requiring a Cyprus licence without holding one, or provides prohibited services such as betting exchanges, the National Betting Authority may place the website on its blocking list.

Operators targeting multiple jurisdictions consequently require a jurisdiction-by-jurisdiction regulatory assessment.

The Regulatory Position in Practice

For Cyprus purposes, prediction markets can broadly be divided into three categories.

First, a prediction market where the operator accepts event-based bets directly from customers may potentially be capable of operating under a Class B bookmaker’s licence, subject to the particular nature of the markets and compliance with the Betting Law.

Second, a prediction market which facilitates betting between users is likely to raise the betting-exchange prohibition under sections 80 and 81. Such a business model cannot presently obtain a Cyprus betting licence permitting betting-exchange activity.

Third, a platform involving genuinely structured financial instruments may potentially fall within the CySEC and MiFID framework rather than, or in addition to, betting regulation. This requires a separate financial-services analysis and should not be treated as a means of circumventing the Betting Law.

Conclusion

Prediction markets occupy an increasingly complex intersection between gambling, financial services and crypto-asset regulation.

Cyprus provides a well-established licensing regime for conventional online betting through the Class B bookmaker’s licence. The regime requires, amongst other matters, minimum paid-up share capital of €500,000, a €550,000 bank guarantee, regulatory approval of the relevant corporate participants and payment of the applicable licence fee.

However, Cyprus law draws a clear distinction between licensed online betting and betting exchanges.

Where a prediction-market platform facilitates bets or opposing positions between users, sections 80 and 81 of the Betting Law become particularly significant. Betting exchanges are expressly prohibited and providing betting-exchange services constitutes a serious criminal offence.

Businesses contemplating the establishment of a prediction-market operation in Cyprus should therefore obtain a regulatory classification of the proposed model before incorporation, platform development or licence application. The contractual relationship between users, the identity of the counterparty, market-matching mechanics, custody of funds, settlement arrangements and use of crypto-assets can materially alter the regulatory outcome.

Chambers & Co advises on Cyprus betting and gaming regulation, Class B bookmaker licensing, prediction-market structures, crypto-asset regulation and cross-border gaming structures. We can review a proposed platform at an early stage and determine whether it is capable of licensing in Cyprus, requires restructuring, or should operate through an appropriately licensed entity in another jurisdiction while excluding the Cyprus market.