The European Securities and Markets Authority (ESMA) has issued a warning regarding the rapid rise of prediction markets like Polymarket and Kalshi, citing potential risks to investor protection and market integrity. This highlights a significant regulatory disparity between Europe and the United States.
In its most recent biannual risk report, ESMA expressed concerns that prediction markets pose “a range of investor protection and market integrity issues” and emphasized the need for ongoing vigilance.
According to ESMA, these platforms provide retail investors with speculative gambling opportunities that lack the investment safeguards typically found in regulated financial products, especially when accessed through unapproved platforms in the EU.
The regulatory body further noted that the gamified nature of these markets, combined with emotional influences and promotion via social media, significantly heightens the risk of financial losses, addictive behaviors, and exploitation by more experienced traders.
ESMA also pointed out that the potential for market manipulation and insider trading is particularly pronounced in prediction markets, especially those with minimal identity verification processes. “An increasing number of incidents demonstrate that insider trading is prevalent in these markets,” it stated.
In a notable case, U.S. soldier Gannon Ken Van Dyke was charged in April for placing bets on Polymarket related to a raid targeting Venezuelan leader Nicolás Maduro, from which he allegedly profited substantially. Van Dyke has pleaded not guilty to these charges.
This warning stands in contrast to the more permissive stance taken by U.S. authorities, who have approved various financial products based on prediction contracts. In many European countries, however, Polymarket and Kalshi remain largely unauthorized, although some users may circumvent restrictions by using a VPN.
ESMA mentioned that Malta is considering a regulatory framework for prediction markets. Both Polymarket and Kalshi indicate on their websites that users from “some but not all EU countries” are restricted from placing bets.
In the UK, the Financial Conduct Authority (FCA) is evaluating the possibility of reforming regulations concerning retail investor access to prediction markets. However, the FCA has previously maintained that its prohibition on binary options is “suitable given the speculative, gambling-like nature of these contracts and the high risk of consumer harm.”
This week, Polymarket announced its intention to enhance its presence in Europe and has joined the Brussels-based trade association Blockchain for Europe. Neal Kumar, the company’s Chief Legal Officer, stated that Polymarket is dedicated to “early and transparent engagement” with EU policymakers.
Polymarket operates both a crypto-based international version and a more restricted U.S.-only version that is regulated by the Commodity Futures Trading Commission (CFTC).
Kalshi, which recently surpassed Polymarket to become the largest prediction market by trading volume, is also aiming to replicate its U.S.-regulated model internationally. Co-founder Luana Lopes Lara mentioned in July that Kalshi is in discussions with various global regulators and is “very excited” about the prospects for expansion in Europe.