ESMA Warns of Investor Protection Gaps and Insider Trading Risks on Prediction Markets

The European Securities and Markets Authority has warned that fast-growing prediction markets such as Polymarket and Kalshi create investor protection and market integrity risks. In its latest twice-yearly risk report, ESMA stressed the need for continued monitoring of these platforms. The assessment underscores a clear regulatory divide with the United States, as reported by Yogonet International.

ESMA stated that prediction platforms offer retail investors 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. 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.

Core Risks of Manipulation and Insider Activity

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. One case cited occurred in April when 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.

Polymarket and Kalshi remain largely unauthorised in much of Europe, though users can access them via VPN. ESMA noted that Malta was exploring a regulatory framework for prediction markets. In the UK, the Financial Conduct Authority is considering whether to reform rules on retail investor access but 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.

Transatlantic Divide and Platform Responses

The ESMA position contrasts with a more welcoming U.S. approach, where federal authorities have approved several financial products based on prediction-style contracts. Polymarket operates a crypto-based international version and a more limited U.S.-only version regulated by the Commodity Futures Trading Commission. Kalshi, which this year overtook Polymarket to become the largest prediction market by volume, is 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.

Polymarket this week joined the 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. Operators eyeing EU growth must treat the identified integrity gaps as binding constraints on any licensing strategy. Regulators will continue to calibrate frameworks around the precise risks ESMA has documented rather than broad innovation goals.

Reporting: Yogonet International

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