The European Securities and Markets Authority has warned that major prediction-market platforms generally lack the authorization required to market and sell event contracts across the European Union, placing services such as Polymarket and Kalshi under closer regulatory scrutiny.
In a report published Thursday, ESMA said event contracts may fall within several legal frameworks depending on how they are structured. Those frameworks can include the EU’s Markets in Financial Instruments Directive II, known as MiFID II; the Markets in Crypto-Assets Regulation, or MiCA; and national gambling laws.
The regulator’s assessment creates a difficult operating environment for prediction platforms seeking European users. Where an event contract meets the definition of a financial instrument, ESMA said it would generally be treated as a derivative. That classification could subject the contract to national product-intervention rules that prohibit the marketing, distribution and sale of binary options to retail traders.
Esma questions country-by-country access restrictions
ESMA said Polymarket and Kalshi use geographic restrictions in some EU member states, but do not block access throughout the bloc. The agency questioned why platforms would restrict users in selected jurisdictions while leaving residents of other member states able to access their services.
That issue goes beyond a platform’s terms of use. EU financial-services rules often depend on where a product is marketed, offered or sold, rather than only on the location of the company operating the website. A platform that makes event contracts available to EU-based retail users can therefore face different regulatory obligations depending on the product’s legal classification and the member state involved.
The regulator also raised doubts about the practical value of geo-blocking when users can mask their locations through virtual private networks. VPNs can make it harder for platforms to determine where a user is located, particularly where onboarding procedures do not require robust identity checks or verification of residence.
ESMA’s focus on access controls signals that simply restricting a few national domains or filtering certain internet addresses may not satisfy regulators if EU residents can still reach trading markets through alternative routes. Platforms may face pressure to show that their restrictions work in practice, rather than merely exist as a technical or contractual policy.
Derivative rules could limit retail access
Prediction markets allow users to trade contracts linked to the outcome of future events, ranging from elections and economic data releases to sports, corporate decisions and public appearances. The buyer’s return typically depends on whether a stated event occurs, producing a payout structure that can resemble a binary option.
ESMA said a financial-instrument classification would generally place these products within the derivatives category. In the EU, national authorities have previously adopted intervention measures restricting binary options for retail clients because of their all-or-nothing payoff structures and the risks associated with products that can be difficult for consumers to assess.
The report does not state that every event contract is automatically a derivative. Instead, it stresses that the legal treatment depends on a contract’s specific characteristics. That leaves platforms facing a contract-by-contract and jurisdiction-by-jurisdiction assessment, especially when their markets cover financial indicators, interest-rate decisions, corporate actions or other events closely connected to traditional markets.
MiCA may also become relevant where a platform uses crypto-assets or blockchain-based settlement mechanisms, while gambling rules could apply to products treated as betting arrangements under national law. The overlapping regimes create limited room for a uniform EU-wide approach by platforms that have developed primarily around US regulatory structures.
Surveillance concerns extend beyond market access
ESMA also highlighted market-integrity risks, including insider trading and manipulation. The agency paid particular attention to distributed-ledger-based prediction markets, where pseudonymous participation and limited identity verification can complicate efforts to identify suspicious trading.
A prediction contract can be especially sensitive to non-public information. A person with advance knowledge of an election development, regulatory action, corporate announcement or public figure’s plans could potentially trade before the information becomes widely known. The same structure can create opportunities for spoofing, wash trading and front-running, practices that may distort prices or create a misleading impression of market demand.
Kalshi has introduced screening tools and a whistleblower feature, according to ESMA. Polymarket has expanded its rules to cover insider trading, spoofing, wash trading and front-running. ESMA said those controls remain largely reactive, suggesting that platform rules and after-the-fact enforcement may offer less protection than systems designed to prevent suspicious activity before trades are executed.
The regulator cited Kalshi’s permanent ban of former US Representative George Santos after trading connected to a contract on his attendance at the State of the Union address. Santos was also ordered to pay a fine exceeding $71,000, ESMA said. The episode illustrates the type of conflict-of-interest and information-access questions that can arise when event participants, public officials or people close to an outcome can trade related contracts.
Resolution disputes add another layer of risk
The report also identified risks around contract resolution, underlying data sources and smart-contract execution. Prediction-market users need a clear answer to a basic question: who decides whether an event happened, and on what evidence?
That question becomes more difficult when events are ambiguous, reports conflict, outcomes change after initial announcements, or a contract’s wording leaves room for interpretation. A market tied to an election, court decision or economic release can turn on technical definitions that are not obvious when the contract is first traded.
Blockchain-based systems can add further complexity. Smart contracts can automatically settle a market once they receive data from a designated source, but automation does not eliminate disputes over whether the data source was correct, timely or appropriate. ESMA’s concern is that errors or contested resolutions may be harder to reverse once settlement has been executed on-chain.
European interest is growing despite limited scale
ESMA said prediction markets remain relatively limited in scale within the EU. Yet it pointed to growing interest in prediction-style products and supporting infrastructure among established market operators including Eurex, Euronext, CME Group, Cboe, ICE and Nasdaq.
That interest could bring more professionally structured event-linked products into view, while also forcing sharper distinctions between regulated market products and platforms that offer retail users direct access to speculative event contracts.
The immediate challenge for Polymarket, Kalshi and similar services is regulatory reach. ESMA’s report places authorization, retail-product restrictions, location controls and market surveillance in the same frame, making partial geo-blocking a less convincing answer for platforms serving a fragmented but closely regulated European market.
For a deeper dive into compliant crypto forecasting, explore how 2026 will reshape prediction markets.
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