EU Regulator Warns of Prediction Market Manipulation Risks

The European Securities and Markets Authority (ESMA) is becoming increasingly worried about prediction markets. The regulator is concerned that the fast-growing sector remains exposed to insider trading, market manipulation, and weak supervision. While prediction markets do not have a stable foothold in Europe, their international expansion makes EU regulators worried about whether existing rules can keep up with the risks. Recent Incidents Undermined Confidence in the Sector In its latest Trends, Risks and Vulnerabilities report, ESMA examined the soaring popularity of prediction contracts where users can trade on the outcome of future events. Such markets can provide useful information regarding public sentiment on political, economic, and social developments. However, the European regulator warns that the sector’s structure can make misconduct more challenging to detect. ESMA focused on a string of recent incidents. Newly created accounts reportedly generated approximately $1.2 million in profits just before the February 2026 military operation against Iran. In a separate instance, a US soldier faced criminal charges over allegations that he used classified information regarding the capture of Venezuelan leader Nicolás Maduro to place lucrative bets on Polymarket. A growing number of incidents illustrates that prediction markets are rife with inside trading. ESMA report According to ESMA, platforms can freeze accounts and investigate suspicious activity. However, such enforcement measures often happen after an event is concluded and profits have already been made. In the US, the Commodity Futures Trading Commission (CFTC) investigates potential abuse. However, the watchdog often lacks the manpower to look into every signal, and cases can pile up for months. Retail Consumers May Face Significant Risk The EU market remains much smaller compared to the USA. ESMA noted that European rules severely restrict the marketing and scale of prediction contracts. However, these limitations may be insufficient. While both Kalshi and Polymarket, the world’s leading prediction market platforms, prohibit users from certain EU countries, determined users can use VPNs to circumvent these restrictions. Malta has already announced that it would explore whether prediction markets could receive a dedicated regulatory framework. In 2026, Malta’s government noted that the sector had potential for innovation and rapid growth, provided that it is tightly regulated. If Malta proceeds with this plan, it could become the first EU member state with a dedicated prediction market framework. Recent developments suggest increasing institutional interest, growing integration with crypto-asset ecosystems, and expanding retail participation globally. Continued monitoring is warranted. ESMA report Despite the expected benefits, ESMA remains wary, warning that prediction markets could be especially risky for retail traders. The authority cited a recent Wall Street Journal analysis indicating that just 0.1% of users, often those with access to algorithms and AI tools, accounted for 67% of profits. Influencers, gamified interfaces, and emotional reactions to events can make these products even more harmful.