Prediction markets are "rife with insider trading" and expose investors to serious risks of losses and exploitation, according to the EU's main market watchdog, the European Securities and Markets Authority (ESMA), in its twice-yearly risk report. ESMA said fast-growing platforms like Polymarket and Kalshi raise investor protection and market integrity concerns, requiring continued monitoring. While popular in the US for betting on events like elections and oil prices, such sites remain prohibited in much of Europe due to regulatory restrictions.

ESMA warned that retail investors accessing unauthorised platforms face speculative gambling environments lacking investment protection, with gamified structures and social media promotion increasing risks of financial loss, addictive behaviour, and exploitation by sophisticated traders. Market manipulation and insider trading risks are said to "reach new levels" on these markets, especially those with limited identity verification like Polymarket. ESMA cited a growing number of incidents, including a US soldier charged in April for placing Polymarket wagers on a Venezuela raid mission, profiting from insider knowledge.

The soldier, Gannon Ken Van Dyke, pleaded not guilty. ESMA's negative stance contrasts with the US, where authorities have approved new financial products based on prediction-style contracts. In Europe, Polymarket and Kalshi remain largely unauthorised, though users may access them via VPNs.

Malta is exploring a regulatory framework, and both firms claim to restrict users in some EU states. Polymarket joined the Blockchain for Europe trade association, with chief legal officer Neal Kumar stating commitment to engaging with EU policymakers. Kalshi, now the largest prediction market by volume after overtaking Polymarket, is working to replicate its US-regulated model overseas.