ESMA Says Prediction Markets Operate in EU Without Authorization

The European Securities and Markets Authority has concluded that the world’s largest prediction market platforms are marketing and selling event contracts to EU residents without the authorization required under bloc rules. In a report published Thursday, the Paris-based regulator singled out Polymarket and Kalshi, questioning whether their partial geographic restrictions actually keep EU users out — and suggesting they largely do not.

The finding matters because prediction markets, once a niche corner of political betting and forecasting, have grown into platforms handling contracts on everything from elections to macroeconomic data to individual political careers. ESMA’s report treats this growth as a regulatory blind spot: platforms operating across borders on the internet, but without the licenses that EU law demands for anything resembling a financial instrument or a gambling product sold to retail consumers.

Why Brussels Is Paying Attention

Event contracts occupy an unusually murky legal space. ESMA’s report lays out three possible classifications, each carrying different obligations. A contract could fall under MiFID II, the EU’s core securities law, if it behaves like a financial instrument or derivative. It could fall under MiCA, the bloc’s newer framework built for blockchain-based instruments, if it runs on distributed ledger technology — which is the case for Polymarket. Or it could simply be gambling, regulated at the national rather than EU level, with rules that vary sharply from one member state to another.

That ambiguity has real teeth. ESMA notes that contracts classified as derivatives would trigger national bans that already exist across the EU on marketing binary options to retail investors — bans put in place after previous waves of speculative retail products caused consumer harm. If prediction market contracts are functionally similar to binary options, as ESMA’s framing implies, platforms offering them to EU retail users could be violating rules that have been on the books for years.

Our earlier coverage of ESMA’s questions about the legal footing of Polymarket and Kalshi detailed how the regulator arrived at this position, and Thursday’s report adds specifics on enforcement gaps rather than a change in direction.

Geoblocking That Doesn’t Quite Block

Both Polymarket and Kalshi restrict access from some EU countries, but not all, and ESMA points out the obvious workaround: a basic VPN is enough to make a blocked jurisdiction look like an unblocked one. That is not a new problem in online regulation, but it is a pointed one for platforms handling financial-style products, where regulators generally expect stronger identity verification than geography-based filtering alone.

The report also flags a second layer of risk specific to how these markets are built. On pseudonymous, DLT-based platforms like Polymarket, ESMA warns of heightened potential for insider trading and market manipulation — concerns that mirror longstanding worries about anonymous trading in traditional derivatives markets, but amplified by the difficulty of identifying who is actually placing a given trade.

Both platforms have taken steps this year to address that. Kalshi added screening tools and a whistleblower feature, and it permanently banned former U.S. Representative George Santos after he traded a contract tied to his own attendance at the State of the Union — a wager on his own political circumstances that regulators and the platform apparently found difficult to defend. Santos separately paid more than $71,000 in fines connected to the episode. Polymarket, for its part, expanded its anti-manipulation rules to explicitly cover insider trading, spoofing, wash trading and front-running.

What It Means for the Market’s Next Phase

ESMA is careful to note that prediction markets remain limited in scale within the EU today — this is not a report about a runaway product overwhelming European retail investors. But the regulator’s attention arrives just as traditional finance is moving toward the same territory. Exchanges including Eurex, Euronext, CME Group, Cboe, ICE and Nasdaq are all showing growing interest in prediction-style products, meaning the eventual rulebook ESMA helps write will shape how established, regulated exchanges compete with upstart platforms rather than just settling questions about Polymarket and Kalshi alone.

That regulatory convergence is playing out against a broader backdrop of institutional money moving toward crypto-adjacent infrastructure, visible in moves like Nasdaq’s $100 million investment in Kraken’s parent company. It also echoes a pattern seen in Washington, where officials have pushed for clearer market-structure rules rather than ad hoc enforcement, as with Treasury Secretary Scott Bessent’s push to revive a stalled crypto market structure bill in the Senate.

For now, ESMA’s report is a diagnosis rather than an enforcement action. But it puts platforms on notice that regulators are actively deciding which legal box — securities law, crypto-asset law, or national gambling statute — event contracts belong in, and that decision will determine what compliance actually requires.

What to Watch

• Whether ESMA or individual national regulators follow the report with formal enforcement actions or guidance against specific platforms.
• Whether Polymarket, Kalshi or peers strengthen identity verification beyond simple geoblocking.
• How traditional exchanges structure prediction-style products differently to fit within existing MiFID II or MiCA frameworks.
• Whether EU member states move to classify event contracts explicitly as derivatives, gambling products, or a new hybrid category.

Source: The Block

This content is for informational purposes only and does not constitute financial or investment advice.