Key Highlights
- ESMA warned that prediction markets like Polymarket and Kalshi are “rife with insider trading.”
- Several cases, including Iran-related bets and a Maduro operation, raised concerns about traders using private information to make profits.
- Despite strict EU rules, prediction markets are growing fast, with Polymarket and Kalshi recording billions of dollars in trading volume.
Prediction markets are facing fresh scrutiny after the European Securities and Markets Authority (ESMA) warned that the growing sector is “rife with insider trading.”
In its recent risk report published on Thursday, September 10, the EU watchdog said these platforms create risks for investors because people with private information may use it to make money before others know what is happening.
ESMA said prediction markets have raised concerns about investor protection and fair trading. These platforms allow people to place bets on future events, including sports, elections, wars, and asset prices.
While prediction markets have grown rapidly in the US, ESMA said they have not gained significant traction in the EU, partly because European rules restrict the marketing and sale of event contracts.
Suspicious bets raise fresh concerns
The warning comes after several cases raised questions about how some traders are using these platforms.
ESMA pointed to a series of bets linked to the war in Iran. Newly created wallets made about $1.2 million from bets placed only hours before a February strike on Iran, according to Global Gaming Insider.
By May, blockchain investigation firm Bubblemaps had traced nine linked accounts that made about $2.4 million from Iran-related Polymarket bets. The accounts reportedly won 98% of the time, adding to concerns over how some traders may have known what was coming.
Another case involved a US Army master sergeant who was charged over more than $400,000 in Polymarket profits connected to the operation to capture Venezuelan President Nicolás Maduro. Gannon Ken Van Dyke, who was involved in the raid, pleaded not guilty to the charges.
ESMA also mentioned an unusual case involving weather contracts. In April, suspected tampering with weather sensors used to settle Polymarket contracts led Météo-France to file a police complaint. The concern was that changing the sensor data could affect the result of bets on the weather.
According to ESMA, platform responses to such cases are “largely reactive,” meaning action often starts after suspicious profits have already been made. Polymarket’s chief legal officer, Neal Kumar, gave a different view after the Maduro case, saying, “It’s not anonymous—you will be found just like this guy.”
The regulator also warned that prediction markets can be risky for ordinary users. It said their game-like design, emotional nature and promotion on social media could expose inexperienced traders to financial losses, addictive behavior and more experienced players.
Europe takes a stricter approach
Europe’s rules help explain why prediction markets have not grown as quickly there. Depending on the type of contract, they can fall under financial-market rules, crypto rules or gambling laws. Some contracts may also be treated as derivatives, while national rules can prevent them from being sold to retail investors.
Polymarket and Kalshi already restrict users in some EU countries. Both platforms also ban VPN use to get around location limits, although ESMA questioned how effective those restrictions are across the region.
Prediction markets continue to grow
At the same time, prediction-market activity has continued to expand rapidly. ESMA’s data showed quarterly volumes of $8.8 billion for Kalshi and $12 billion for Polymarket. By June, their combined monthly volume had reached $44.8 billion, according to The Block.
The US has taken a different path, with regulators focusing more on which types of prediction contracts should be allowed. In Europe, ESMA says the growing number of insider-trading cases means these markets will need continued monitoring.
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