In recent years, prediction markets—where users can bet on the outcomes of political elections, economic events, and even weather changes—have exploded in popularity. However, this rapid growth has drawn the attention of strict regulatory authorities. The European Securities and Markets Authority (ESMA) issued a stern warning: the operations of the largest platforms in this space—the decentralized Polymarket and the fiat-based Kalshi—raise serious concerns under European law.
The regulator highlights a legal vacuum, noting that neither platform possesses the necessary licenses to operate in the European Union, while their attempts to independently restrict user access appear inconsistent and ineffective.
The Illusion of Compliance: A Peculiar Geography of Restrictions
One of ESMA’s primary criticisms is the selective geo-blocking policies enforced by these platforms. The regulator is openly puzzled by the criteria used by the companies to decide which EU citizens are allowed to trade and which are not.
For instance, Polymarket has blocked access to users from Germany, France, Italy, and the Netherlands. Meanwhile, Kalshi’s terms of service prohibit transactions for residents of Belgium, Bulgaria, Hungary, Ireland, Italy, Poland, Portugal, and France. However, the absence of a country from Kalshi’s banned list does not give its citizens a green light: the company shifts the burden onto users, requiring them to comply with local laws. Furthermore, restrictions on trading often fail to block access to other features of the websites.
ESMA also views the technical enforcement of these restrictions with skepticism. While Polymarket formally prohibits the use of VPNs to bypass blocks, European officials point out that a rule written on paper does not guarantee compliance in practice, especially on crypto platforms with baseline anonymity.
Finance, Crypto, or Gambling? The Labyrinths of European Law
The fundamental issue with prediction markets lies in defining their legal status. In its July clarification, ESMA emphasized that the marketing term “event contract” carries no weight—regulators will evaluate the underlying economic nature of the product. Depending on the contract’s architecture, three distinct regulatory regimes may apply in the EU:
- MiFID II (Traditional Finance): If a contract’s outcome is tied to financial indicators, it can be classified as a derivative financial instrument—specifically, a binary option (offering only two outcomes: “yes” or “no”). The sale and marketing of binary options to retail investors in the EU are strictly banned at the national level (replacing ESMA’s temporary 2018 measures). Even if a platform chooses to work exclusively with institutional and professional clients, it still requires a full brokerage license. Paying interest on user deposits does not alter the binary nature of the asset.
- MiCA (Crypto-Assets): If a contract is structured as a digital token on a blockchain but lacks the characteristics of a traditional financial instrument, it falls under the new European rules governing crypto-asset markets.
- Gambling Legislation: In many jurisdictions, event betting is categorized as gambling rather than investing. This framework can be applied by national authorities alongside financial regulation.
National Regulators Go on the Offensive
Without waiting for a pan-European resolution, individual EU member states have already launched a crackdown on prediction markets. Spain and France are leading the charge, taking firm enforcement action based on gambling laws.
In Spain, the local regulator launched a sweeping investigation into Polymarket and Kalshi over allegations of operating unauthorized gambling services. Pending the outcome of the inquiry, authorities ordered their websites to be blocked. The agency reiterated core requirements: any licensed operator must enforce strict Know Your Customer (KYC) procedures to prevent minors and individuals with gambling addictions from participating. On decentralized platforms, such controls are frequently absent.
The situation in France proved even more revealing. The National Gaming Authority (ANJ) discovered that Polymarket’s self-imposed restrictions were largely ineffective. French residents bypassed blocks en masse, with approximately 205,000 unique visitors accessing the site from the country in June alone. In response, on July 16, the ANJ took decisive action, requiring internet service providers to block access to Polymarket at the infrastructure level.
The Dark Side of Decentralization: Insiders and Data Tampering
Beyond licensing issues, ESMA is sounding the alarm over high risks facing market participants. On blockchain platforms, where identity verification (KYC) is minimal or non-existent, the creation of multiple accounts thrives. This makes tracking insider trading and market manipulation nearly impossible. The regulator’s report highlights two high-profile cases:
- The Insider Trading Case: An American serviceman, Gannon Ken Van Dyke, allegedly used classified intelligence regarding a planned military operation against Venezuelan President Nicolás Maduro to place bets on Polymarket, netting over $400,000. Although the platform flagged the suspicious activity and cooperated with the U.S. Department of Justice, the case demonstrated how prediction markets can be exploited to monetize secret state or corporate data.
- Manipulating “Oracles”: In April, two Polymarket accounts made $37,000 betting on local temperatures at Paris Charles de Gaulle Airport. It was later revealed that the anomalous readings dictating the contract outcome stemmed not from actual weather, but from suspected physical tampering with weather sensors. The national meteorological service, Météo-France, filed a police report, leading the Paris Prosecutor’s Office to open a criminal investigation. This incident exposed the vulnerability of smart contracts to physical intervention in underlying data sources.
Additionally, the regulator pointed to frequent issues in determining contract outcomes, noting ambiguous terms, opaque resolution procedures, and payout delays that lead to direct financial losses for traders.
Attempts at Legitimacy and the Regulator’s Verdict
Recognizing that Europe is too significant a market to lose, platforms are attempting to shift from a “Wild West” approach to active lobbying and diplomacy. Kalshi co-founder Luana Lopes Lara stated back in the summer that the company was engaged in direct discussions with international regulators with an eye toward European expansion. Polymarket took an institutional route, joining the influential Blockchain for Europe association in September, with Legal Director Neal Kumar publicly pledging proactive, open engagement with EU lawmakers.
Despite its harsh criticism, ESMA acknowledges that prediction markets are not inherently evil. In its report, the agency notes their undeniable value as information aggregators. The odds on these platforms, driven by the “wisdom of the crowd,” often prove to be more accurate indicators of societal, political, and economic expectations than traditional public opinion polls.
The ultimate question remains whether these platforms can adapt their innovative models to meet the rigorous demands of European compliance, or if they will remain permanently banished to a legal gray area accessible only through workarounds.
