According to the European Securities and Markets Authority (ESMA), fast-growing prediction markets like Polymarket and Kalshi pose significant investor protection and market integrity risks, including rampant insider trading, manipulation, and structural disadvantages for retail participants.
ESMA Flags Insider Trading and Market Manipulation Risks in Polymarket and Kalshi
As platforms allow users to wager on geopolitical conflicts, elections, and economic data, regulatory scrutiny has intensified globally. According to Bonus.com, ESMA highlighted that these platforms present severe integrity vulnerabilities as sophisticated traders compete directly against retail users.
ESMA cited multiple recent incidents demonstrating how participants can exploit private information. Newly created wallets generated $1.2 million in profits shortly before the February strike on Iran, according to regulatory findings. Further investigations by blockchain analytics firm Bubblemaps traced nine linked accounts that amassed roughly $2.4 million from Iran-related Polymarket bets, winning 98% of their wagers. In a separate enforcement case, a U.S. Army master sergeant named Gannon Ken Van Dyke was charged over more than $400,000 in profits tied to wagers on the capture of Venezuelan President Nicolás Maduro. Van Dyke has pleaded not guilty to the charges.
Regulatory Divergence Between the European Union and the United States
While prediction markets have achieved massive trading volumes in the United States—with Kalshi recording quarterly volumes of $8.8 billion and Polymarket reaching $12 billion—they have failed to gain comparable traction within the European Union, according to ESMA. This limited adoption stems largely from strict EU rules on binary options, which effectively prohibit the marketing, distribution, and sale of event-driven contracts to retail investors.
| Platform | Reported Volume | Primary Regulatory Environment |
|---|---|---|
| Polymarket | $12 billion (Quarterly) / $44.8 billion (Monthly combined peak) | Regulated internationally via crypto products; CFTC-limited in US |
| Kalshi | $8.8 billion (Quarterly) | Regulated primarily in the US under the CFTC |
Depending on their specific characteristics, prediction market contracts fall within established EU financial frameworks, including MiFID II and MiCA, while certain activities can trigger national gambling rules. Although platforms like Polymarket and Kalshi actively restrict users in various European jurisdictions and prohibit virtual private networks (VPNs) to bypass geographic limits, ESMA questioned the overall effectiveness of these access controls.
Retail Harm and Gamified Platform Structures
Beyond market abuse, ESMA warned that prediction markets expose inexperienced retail investors to severe financial losses. According to regulatory warnings reported by Bonus.com, the gamified structure, emotional dynamics and social media-driven promotion
of these sites encourage addictive behavior. Retail participants frequently face asymmetric information disadvantages when trading against sophisticated operators who possess specialized industry knowledge.
Additional threats stem from technical vulnerabilities in contract settlement. In April, suspected tampering with weather sensors used to settle specific prediction market contracts prompted Météo-France to file a formal police complaint. ESMA noted that platform responses to such manipulation remain largely reactive, often addressing illicit profits only after suspicious trading has already concluded.
Pro Tip: Understanding Jurisdictional Compliance
Traders operating across international borders must verify whether event contracts are classified as financial derivatives, crypto-assets, or gambling products under local laws, as enforcement actions and authorization requirements vary drastically between the EU and the US.
Frequently Asked Questions
What are the primary risks identified by ESMA in prediction markets?
ESMA flagged insider trading, market manipulation, unclear contract settlement outcomes, retail investor harm, and unequal access to information between retail and sophisticated participants.
Why haven’t prediction markets gained widespread traction in the European Union?
European rules on binary options restrict the marketing, distribution, and sale of event contracts to retail investors, placing many prediction market products under strict MiFID II, MiCA, or national gambling frameworks.
How do Polymarket and Kalshi operate internationally?
Both platforms have pursued global expansion despite regulatory friction. Polymarket operates an international crypto-based product alongside a limited U.S. version regulated by the CFTC, while Kalshi has engaged international regulators regarding foreign market entry.
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