The European Securities and Markets Authority (ESMA) has identified prediction markets as a sector prone to inside trading and facing significant regulatory complexity. In its risk monitor, ESMA dedicated a chapter to these platforms, highlighting concerns that could lead to their classification as financial instruments or gambling, and noting that platform responses to issues are largely reactive.
ESMA pointed to three specific episodes of alleged inside trading or manipulation. Notably, new wallets reportedly made $1.2 million in the hours preceding a February strike on Iran. By May, analysis by Bubblemaps traced nine linked accounts to $2.4 million in Iran-related bets that were successful 98% of the time. In another instance, a U.S. Army master sergeant was charged over $400,000 in profits from Polymarket, related to bets on the capture of Venezuelan president Nicolás Maduro. Furthermore, suspected tampering with weather sensors used to settle Polymarket contracts prompted Météo-France to file a police complaint in April.
Regulatory Classification Ambiguity
The regulator emphasized the ambiguity surrounding the classification of event contracts. ESMA stated these contracts can qualify as financial instruments under MiFID II, fall under MiCA, or be considered gambling under national law. When classified as financial instruments, they are treated as derivatives. National rules, mirroring ESMA’s intervention on binary options, prohibit their sale to retail investors. Uncertainty remains regarding why platforms like Kalshi and Polymarket restrict users in some EU countries but not all, despite both banning VPNs. Malta, however, is reportedly drafting a framework for prediction markets.
Market Volume Growth and User Dynamics
Volumes in these markets have surged considerably. ESMA’s data collection periods for Kalshi ended in November 2025 with quarterly volumes of $8.8 billion, and for Polymarket in January 2026 with quarterly volumes of $12 billion. By June, The Block reported their combined monthly volume at $44.8 billion, with Kalshi alone accounting for $31.5 billion. ESMA reported that sports constitute 73% of Kalshi’s volume, while Polymarket divides its volume across politics, sports, and crypto.
Further analysis cited by ESMA indicates a concentration of gains among a small number of users. A Wall Street Journal finding suggested that 67% of Polymarket gains went to just 0.1% of accounts. A Bloomberg analysis indicated that most users lose money on these platforms. The practical effectiveness of VPN bans by these platforms remains uncertain.
Divergent US Regulatory Stance
In contrast to the EU’s cautious approach, Washington has taken a different course. The Commodity Futures Trading Commission (CFTC) has defended its jurisdiction and proposed barring war and assassination contracts. Both the CFTC and the Securities and Exchange Commission (SEC) are reportedly taking action against individuals involved in the crypto space.
Key uncertainties persist regarding the practical effectiveness of VPN bans and the reasons behind the selective application of user restrictions across EU member states. The exact nature and outcome of the CFTC and SEC’s actions concerning crypto persons also remain unclear.
Why This Matters
The materials describe a narrow update: ESMA has identified prediction markets as being prone to inside trading and has highlighted regulatory challenges, including potential classification as financial instruments or gambling. The practical effectiveness of VPN bans by Kalshi and Polymarket.
Broader Context
Source materials place the factual news in this context: ESMA’s risk monitor gives the prediction market sector its own chapter.
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