ESMA Flags Insider-Trading and Manipulation Threats in Prediction Markets

The European Securities and Markets Authority (ESMA) has carved out a dedicated section on prediction markets in its latest risk-monitoring report, warning that the sector carries elevated risks of insider dealing and market manipulation, CoinDesk reported. ESMA said prediction-market platforms have yet to build a large-scale market in the European Union. The watchdog attributed this less to weak demand and more to existing rules that create high barriers for retail participation. The report points to several incidents to illustrate the risk profile. In February, hours before Iran was attacked, a cluster of newly created wallets placed bets ahead of the news and earned about $1.2 million. By May, on-chain analytics firm Bubblemaps identified nine linked accounts that collectively made roughly $2.4 million from Iran-related bets, with a 98% win rate. In another case, a U.S. Army sergeant major was charged after allegedly earning more than $400,000 on Polymarket tied to rumors that Venezuelan President Nicolás Maduro had been arrested. ESMA also cited an April incident involving Polymarket weather contracts, where data sensors used for settlement were suspected of being tampered with. France's national meteorological agency, Météo-France, filed a police report. The regulator said platform enforcement tends to be reactive, typically coming after profits have already been realized. ESMA described a pattern in which unusual trading occurs first, followed by investigations, access restrictions, or cooperation with authorities. Polymarket Chief Legal Officer Neal Kumar offered a different view in the Maduro-related case, arguing that these markets are not truly anonymous and that violators can ultimately be identified and held accountable. ESMA attributed the EU's limited market development to regulatory complexity. Depending on design and jurisdiction, event contracts may be treated as financial instruments under MiFID II, fall under MiCA, or be classified as gambling in certain member states. Where treated as financial instruments, they are typically considered derivatives and, under national rules aligned with ESMA's binary-options intervention, are generally prohibited from being sold to retail investors. Kalshi and Polymarket currently restrict access in some EU countries, but not across all member states. ESMA said it is unclear why the restrictions do not cover the entire bloc. Both platforms ban VPN use, though regulators question how effective such measures are in practice. ESMA noted that Malta is currently the only member state drafting a dedicated framework. Trading volumes, meanwhile, continue to climb. ESMA's volume figures were drawn from earlier periods, with Kalshi's chart ending in November 2025 and Polymarket's in January 2026, when quarterly trading volumes were about $8.8 billion and $12 billion, respectively. By June this year, The Block reported combined monthly volume of $44.8 billion across the two platforms, with Kalshi alone at $31.5 billion, boosted by World Cup-related betting. ESMA said sports contracts represented 73% of Kalshi's volume, while Polymarket activity was spread across politics, sports, and crypto-related topics. Citing research from The Wall Street Journal and Bloomberg, ESMA added that Polymarket profits appear highly concentrated: 67% of profits were earned by just 0.1% of accounts, while most users overall were losing money. As a point of comparison, ESMA noted that U.S. regulators are taking a more active approach. The U.S. Commodity Futures Trading Commission (CFTC) is discussing the legal boundaries of event contracts, with the debate shifting from whether they should be allowed to which types are more vulnerable to manipulation.