On September 10, local time, the European Securities and Markets Authority (ESMA) highlighted gaps in European Union (EU) authorization and investor protection issues in prediction markets in its second risk monitoring report of 2026. Prediction markets allow people to buy and sell contracts whose payouts depend on the outcomes of future events, such as elections. Discussing major platforms outside the EU, including Polymarket and Kalshi, the report explained that marketing or selling event contracts in the EU generally requires EU authorization. It described Kalshi as regulated by the U.S. Commodity Futures Trading Commission (CFTC) as a designated contract market, while characterizing Polymarket as a partially decentralized platform that combines on-chain trading and settlement with centralized market operations. The report noted that the largest prediction market platforms, including these two, currently lack EU authorization. Although Polymarket and Kalshi block orders from users in some EU countries, they do not restrict users in every member state. The report also assessed the effectiveness of geographic restrictions as uncertain, given that access can be circumvented using a virtual private network (VPN).
The report considered the applicable rules to depend on the underlying subject and structure of an event contract. The Markets in Financial Instruments Directive (MiFID II) may apply if the contract qualifies as a financial instrument, the Markets in Crypto-Assets Regulation (MiCA) may apply if it is a crypto-asset based on distributed ledger technology but not a financial instrument, and national gambling rules may apply if it has the characteristics of gambling. The report explained that event contracts qualifying as financial instruments are generally classified as derivatives and fall under national product intervention measures concerning binary options, under which marketing, distribution, and sale to retail investors are prohibited. In addition to insider trading and market manipulation, ESMA identified risks arising from ambiguous definitions and determinations of event outcomes, errors or manipulation in external data, opaque platform resolution procedures, and delayed or failed payouts and settlement. The report acknowledged that prediction market prices may have informational and analytical value by showing real-time updates to expectations about future events. However, it assessed platforms without EU authorization as offering retail investors a speculative gambling environment without the safeguards available for regulated financial products. It concluded that continued monitoring is necessary in light of market developments and emerging risks, even though prediction markets remain limited in size within the EU. It did not announce new regulatory measures.