ESMA Targets Prediction Markets: Polymarket and Kalshi Face EU Scrutiny Over Authorization

Europe's top securities watchdog has cast doubt on the legal standing of the world's biggest prediction-market platforms, stating that they don't hold the licenses generally needed to operate in the bloc, and questioning whether the geographic blocks they've put in place actually work.

ESMA Flags a Licensing Gap for Prediction Markets

In a report released Thursday, the Paris-headquartered European Securities and Markets Authority explained that event contracts can be governed by several different regulatory regimes depending on how they're built. Some may count as financial instruments under MiFID II, blockchain-based versions that don't meet that bar could instead fall under MiCA, and others might simply be treated as gambling products under individual countries' laws.

"As a result, the marketing and sale of event contracts in the EU generally requires an EU authorization, which the largest prediction market platforms currently do not hold," the regulator stated.

Why Event Contracts Could Count as Banned Derivatives

Where a contract does qualify as a financial instrument, ESMA said it would typically be treated as a derivative, meaning it would fall under national restrictions on binary options that already bar marketing, distributing or selling such products to everyday retail investors.

Geographic Blocks Draw Scrutiny Over VPN Workarounds

Both Polymarket and Kalshi currently block users from placing orders in some EU countries, but not all of them, according to the regulator. ESMA pressed the question of why certain member states were left off each platform's restricted list, and pointed out that these geo-blocks do little to stop determined users from simply routing around them with a VPN.

Insider Trading and Manipulation Risks on DLT Platforms

The regulator also raised red flags around insider trading and market manipulation on prediction markets generally, singling out blockchain-based platforms like Polymarket, where thin identity checks and pseudonymous accounts can make it harder to spot suspicious trading patterns.

How Kalshi and Polymarket Have Responded to Insider-Trading Concerns

Neither platform has ignored the issue entirely. Earlier this year, Kalshi rolled out new screening tools and a whistleblower program, while Polymarket broadened its internal rules against insider trading, spoofing, wash trading and front-running. Kalshi went further in one high-profile case, permanently banning former U.S. Rep. George Santos after he traded a contract tied to his own attendance at the State of the Union and was later fined more than $71,000.

Even so, ESMA characterized these platform-level safeguards as largely reactive, adding that prediction markets carry additional structural risks tied to how contracts get resolved, where their underlying data comes from, and how smart contracts execute.

A Wave of National Bans Already Underway Across Europe

ESMA's warning didn't arrive in a vacuum, several EU countries and other jurisdictions have already moved unilaterally against these platforms well before Thursday's report. France ordered internet providers to cut off access to Polymarket in July, joining earlier restrictions imposed by Switzerland, Poland, Belgium, Portugal, Singapore and Brazil.

Spain's Consumer Rights Ministry went even further back in May, using ISP-level DNS and network blocks to temporarily ban both Kalshi and Polymarket over their lack of gambling licenses.

A Small Market for Now, But Wall Street Is Watching Closely

Despite the regulatory heat, ESMA noted that prediction markets still represent a relatively small slice of activity within the EU.

That said, interest from major established exchanges is growing fast, Eurex, Euronext, CME Group, Cboe, ICE and Nasdaq have all shown increasing appetite for prediction-style products and the infrastructure needed to support them, suggesting the asset class is being taken seriously by traditional finance even as its legal footing in Europe remains unsettled.

Reading Between the Lines

ESMA's report isn't breaking new legal ground so much as formalizing a pattern already underway. France, Spain, Switzerland, Poland, Belgium and Portugal had each acted against Polymarket or Kalshi months before this risk report landed, suggesting EU-wide clarity is playing catch-up with individual member states rather than leading them.

For these platforms, the real risk isn't one sweeping EU ruling, it's the current patchwork of national enforcement, which leaves them exposed to a ban in any single jurisdiction while a unified framework is still being sorted out.