EU watchdog warns prediction markets pose investor protection and market abuse risks

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EU warns on prediction markets

Highlights

Esma's risk report warns that prediction markets like Polymarket and Kalshi increase risks of market abuse and investor exploitation, especially for retail users lacking regulatory protections.
The watchdog highlights that limited identity verification on these platforms has led to more insider trading, referencing a recent U.S. case involving Polymarket wagers and an April indictment.
While the U.S. approves new products, prediction markets stay largely unauthorised in most of Europe, even as Polymarket joins Blockchain for Europe and Kalshi pursues overseas expansion.

Esma flags market abuse and retail investor risks

As reported by Financial Times, the European Securities and Markets Authority says in its latest twice-yearly risk report that prediction markets such as Polymarket and Kalshi raise investor protection and market integrity concerns and require continued monitoring.

Esma says these platforms can expose retail users to speculative, gambling-like environments without the safeguards usually attached to regulated financial products when they are accessed through services not authorised in the EU. It adds that gamified design, emotional trading behaviour and social media promotion increase the risk of financial losses, addictive behaviour and exploitation by more sophisticated traders.

The watchdog says the risks of market manipulation and insider trading reach new levels on prediction markets, especially on platforms with limited identity verification. It also says a growing number of incidents shows the sector is rife with insider trading.

Concerns are rising around market participants using advance knowledge of real-world events to trade these contracts. In April, a U.S. soldier involved in a raid targeting Venezuelan leader Nicolás Maduro was charged with placing Polymarket wagers on the mission, and Gannon Ken Van Dyke pleaded not guilty to those charges.

Europe keeps restrictions as companies push expansion

The EU stance contrasts with a more welcoming approach in the U.S., where authorities have approved several new financial products based on prediction-style contracts. In much of Europe, platforms such as Polymarket and Kalshi remain largely unauthorised, making their sites prohibited for consumers, although some users may still gain access by masking their location with a VPN.

Esma says Malta is exploring a regulatory framework for prediction markets, while Polymarket and Kalshi state on their websites that users in some, but not all, EU states are barred from placing orders. In the UK, the Financial Conduct Authority recently says it is considering whether to reform its rules on retail investor access to prediction markets, even as it maintains that its ban on binary options is appropriate because of the speculative, gambling-like nature of such contracts and the high risk of consumer harm.

Polymarket says it is growing its presence and expanding into Europe, and on Wednesday it announces that it is joining Brussels-based trade association Blockchain for Europe. Chief legal officer Neal Kumar says the company is committed to engaging early and openly with EU policymakers; the group operates a crypto-based international version and a more limited U.S.-only version regulated by the Commodity Futures Trading Commission.

Earlier this year, the CFTC opens an investigation into Polymarket. Kalshi, which this year overtakes Polymarket to become the largest prediction market by volume, also says it is working to replicate its U.S.-regulated model overseas, and co-founder Luana Lopes Lara tells Bloomberg Línea in July that the company is in talks with international regulators and is very excited about future expansion in Europe.

Our earlier report on the NSE warning about “Stock Dost” covered regulators’ concerns over unauthorized trading services and claims of guaranteed returns offered to retail investors through apps, websites, and social media groups. The NSE said the people behind the scheme were not registered members or authorized persons, noted potential legal consequences, and stressed that users of such illegal platforms may lose access to exchange-backed grievance redressal, dispute resolution, and investor-protection mechanisms.

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