The European Securities and Markets Authority (ESMA) has warned that fast-growing prediction markets such as Polymarket and Kalshi pose investor protection and market integrity risks, highlighting a regulatory divide with the United States.
In its latest twice-yearly risk report, ESMA said prediction markets raised “a range of investor protection and market integrity concerns” and required “continued monitoring.”
“To retail investors, prediction platforms offer speculative gambling environments without the investment protection measures typically associated with regulated financial products when accessed through platforms that are not authorised in the EU,” ESMA said.
The watchdog added that “their gamified structure, emotional dynamics and social media-driven promotion expose inexperienced retail investors to significant risks of financial loss, addictive behaviour and exploitation by more sophisticated traders.”
ESMA said market manipulation and insider trading risks “reach new levels” on prediction markets, particularly those with limited identity verification. “A growing number of incidents illustrates that prediction markets are rife with insider trading,” it said.
In April, U.S. soldier Gannon Ken Van Dyke was charged with placing Polymarket wagers on a raid targeting Venezuelan leader Nicolás Maduro and earning a large profit. Van Dyke pleaded not guilty to the charges.
The warning contrasts with a more welcoming U.S. approach, where federal authorities have approved several financial products based on prediction-style contracts. In much of Europe, Polymarket and Kalshi remain largely unauthorised, although some users may access the platforms by masking their location with a VPN.
ESMA noted that Malta was exploring a regulatory framework for prediction markets. Polymarket and Kalshi state on their websites that users in “some but not all EU states” are prohibited from placing orders.
In the UK, the Financial Conduct Authority is considering whether to reform rules on retail investor access to prediction markets. However, the FCA has previously said its ban on binary options remains “appropriate given the speculative, gambling-like nature of these contracts and the high risk of consumer harm”.
Polymarket said this week it was “growing its presence and expanding into Europe” and has joined Brussels-based trade association Blockchain for Europe. Its Chief Legal Officer Neal Kumar said the company was committed to “engaging early and openly” with EU policymakers.
Polymarket operates a crypto-based international version and a more limited U.S.-only version regulated by the Commodity Futures Trading Commission (CFTC).
Kalshi, which this year overtook Polymarket to become the largest prediction market by volume, is also seeking to replicate its U.S.-regulated model overseas. In July, co-founder Luana Lopes Lara told Bloomberg that Kalshi was in talks with various international regulators and was “very excited” about future expansion in Europe.