The European Securities and Markets Authority (Esma) has issued a cautionary assessment of prediction markets, warning that these platforms are increasingly susceptible to insider trading and pose significant risks to investors. In its latest biannual risk report released this week, Esma highlighted the fast expansion of prediction markets such as Polymarket and Kalshi, underscoring concerns about investor protection and market integrity.

Prediction markets allow users to trade contracts based on the outcomes of future events, including sports results, elections, and commodity prices. While these platforms have gained traction in the United States, their status in Europe remains largely restricted due to regulatory constraints. Esma noted that many prediction platforms accessible to European retail investors operate without authorization within the region, effectively classifying them as speculative gambling environments rather than regulated financial products.

The watchdog emphasized that the combination of platform design, social media promotion, and inadequate investor safeguards exposes less experienced traders to substantial financial risks, potential addictive behaviors, and exploitation by more sophisticated market participants. It also identified heightened threats of market manipulation and insider trading, especially on platforms with limited know-your-customer procedures, such as Polymarket.

Illustrating these concerns, Esma cited a recent high-profile case involving a U.S. military serviceman charged with using privileged information to place bets on a Polymarket contract related to a covert operation targeting Venezuelan leader Nicolás Maduro. The soldier, Gannon Ken Van Dyke, has pleaded not guilty to insider trading allegations.

This critical stance by European regulators contrasts with the more permissive regulatory environment in the United States, where several prediction market operators have obtained approvals for new financial products structured on prediction-style contracts. Kalshi, one of the largest U.S.-based platforms by trading volume, has expressed interest in expanding internationally and is reportedly engaging in talks with various regulators as it seeks to establish a regulated presence in Europe. Polymarket, meanwhile, has stated its intention to grow its footprint in the European market while engaging proactively with regulators. It currently operates separate platforms: a crypto-based international version and a regulated U.S.-only platform overseen by the Commodity Futures Trading Commission (CFTC). The CFTC also opened an investigation into Polymarket earlier this year.

Within Europe, the regulatory landscape remains fragmented. While outright bans prevail in many jurisdictions, Malta has reportedly begun exploring a framework to regulate prediction markets. The UK’s Financial Conduct Authority (FCA) is reviewing retail investor access to these platforms, despite affirming the appropriateness of existing bans on binary options due to their speculative and gambling-like characteristics.

Both Polymarket and Kalshi acknowledge restrictions apply across certain EU member states, and some European users reportedly access platforms via VPNs to circumvent rules. Industry efforts to loosen regulatory barriers continue, reflecting the tension between innovation in financial products and investor safety concerns across jurisdictions.