The European Securities and Markets Authority (ESMA) has devoted a section of its latest risk monitor to prediction markets, citing insider trading, market manipulation and potential harm to retail investors.

The regulator said prediction markets have gained little traction in the European Union because rules governing binary options prohibit selling event contracts to retail investors. U.S. regulators, by contrast, have taken the opposite approach, debating which contracts should be permitted rather than whether prediction markets should be allowed at all.

“Prediction markets are ‘rife with inside trading,’” ESMA said in the risk monitor, which gives the sector a dedicated chapter.

The report cites three incidents. New wallets generated $1.2 million in profits in the hours before February’s strike on Iran, according to a Forbes report. By May, Bubblemaps had traced nine linked accounts to $2.4 million in Iran-related bets that won 98% of the time, as previously reported by Decrypt.

A U.S. Army master sergeant was charged over more than $400,000 in Polymarket profits tied to the capture of Venezuelan President Nicolás Maduro, according to NPR. In April, suspected tampering with weather sensors used to settle Polymarket contracts prompted Météo-France to file a police complaint, The Guardian reported.

ESMA said platform responses are “largely reactive,” beginning only after profits have been taken. Neal Kumar, Polymarket’s chief legal officer, drew the opposite conclusion from the Maduro case, arguing: “It’s not anonymous—you will be found just like this guy.”

Why prediction markets have seen limited adoption in Europe

ESMA said prediction markets have not gained significant traction in the EU because of regulation rather than a lack of user interest. Event contracts may qualify as financial instruments under MiFID II, fall under MiCA, or be treated as gambling under national law. When they are considered financial instruments, they are classified as derivatives, and national rules reflecting ESMA’s intervention on binary options prohibit selling them to retail investors altogether.

Kalshi and Polymarket restrict users in some EU countries but not in all of them. “It is unclear why all EU Member States are not included,” ESMA said. Both platforms prohibit the use of VPNs, although the regulator said their “practical effectiveness” remains uncertain. Malta is the only country currently drafting a framework, according to ESMA.

Trading volumes have increased sharply since the regulator collected its data. ESMA’s chart ends in November 2025 for Kalshi and January 2026 for Polymarket, showing quarterly volumes of $8.8 billion and $12 billion, respectively. By June, The Block reported that their combined monthly volume had reached $44.8 billion, with Kalshi accounting for $31.5 billion as the World Cup attracted bettors.

ESMA reported that sports represented 73% of Kalshi’s volume, while Polymarket’s activity was divided among politics, sports and crypto. The regulator also cited a Wall Street Journal finding that 67% of Polymarket gains went to 0.1% of accounts, as well as a Bloomberg analysis concluding that most users lose money.

Washington has followed a different regulatory path. The Commodity Futures Trading Commission has defended its jurisdiction against the states and proposed prohibiting contracts involving wars and assassinations. The CFTC and the Securities and Exchange Commission are also bringing crypto perpetual futures onshore. The debate in the United States is therefore focused on which contracts are acceptable. At a CFTC roundtable in August, CME Group’s Terry Duffy and Kalshi’s Luana Lopes Lara clashed over the risk of manipulation.