The European Securities and Markets Authority (ESMA) has highlighted insider trading and market manipulation as significant risks in prediction markets, dedicating a section of its latest risk monitor to the sector.
ESMA cited three specific incidents of suspected insider trading. New cryptocurrency wallets generated $1.2 million in profits hours before a February strike on Iran, with nine linked accounts later traced to $2.4 million in Iran-related bets that won 98% of the time. A U.S. Army master sergeant faced charges related to $400,000 in profits from bets on the capture of Venezuelan president Nicolás Maduro on Polymarket. Additionally, suspected tampering with weather sensors used to settle Polymarket contracts prompted Météo-France to file a police complaint in April.
ESMA noted that platform responses to suspected manipulation have been "largely reactive," occurring only after profits are secured. Polymarket's chief legal officer countered that enforcement demonstrates the platforms are not truly anonymous.
Limited Adoption in Europe
Prediction markets have not gained significant traction in the European Union, according to ESMA, attributing this to regulatory barriers rather than lack of interest. Event contracts may qualify as financial instruments under MiFID II, fall under MiCA regulations, or be classified as gambling under national law. Where classified as financial instruments, they are treated as derivatives, and national rules aligned with ESMA's binary options intervention prohibit selling them to retail investors.
Kalshi and Polymarket restrict access in some EU countries but not others, and the regulator questioned why all member states are not uniformly included. While both platforms ban VPNs, their practical effectiveness remains uncertain. Malta is the only EU member state currently drafting a specific framework for prediction markets.
Trading volumes have increased substantially since ESMA's data collection period. The regulator's data, which stopped in November 2025 for Kalshi and January 2026 for Polymarket, showed quarterly volumes of $8.8 billion and $12 billion respectively. By June, combined monthly volume reached $44.8 billion, with Kalshi alone accounting for $31.5 billion. Sports comprise 73% of Kalshi's volume, while Polymarket spreads across politics, sports, and crypto markets.
ESMA cited findings that 67% of Polymarket gains went to 0.1% of accounts, and that most users experience losses.
U.S. Regulatory Approach
The regulatory approach in the United States differs significantly. The Commodity Futures Trading Commission (CFTC) has defended its jurisdiction and proposed barring contracts related to wars and assassinations. U.S. regulators are debating which types of contracts to permit rather than whether to allow prediction markets at all.
