ESMA has raised concerns about Polymarket and Kalshi's legitimacy in Europe due to licensing issues and selective user access.
The European Securities and Markets Authority (ESMA) has expressed doubts about the legality of Polymarket and Kalshi, highlighting that neither platform possesses the required licenses to offer event outcome contracts in the European Union.
Both platforms have limited access to users from specific EU countries, which has led to scrutiny from regulators. ESMA pointed out, "It is unclear why not all EU member states are included in the list of jurisdictions with limited access."
Polymarket restricts trading for users in Germany, France, Italy, and the Netherlands, while Kalshi prohibits trading in several EU nations, including Belgium, Bulgaria, Hungary, Ireland, Italy, Poland, Portugal, and France. However, Kalshi clarifies that residents from non-restricted countries must still adhere to local laws, meaning access is not guaranteed.
Additionally, ESMA questioned the efficacy of these restrictions, noting that while Polymarket attempts to block users from circumventing barriers through VPNs, enforcement of such measures remains uncertain.
European Regulatory Landscape
The regulations applicable depend on the nature of the contracts offered. In a statement, ESMA outlined three potential frameworks: MiFID II for financial instruments, MiCA for crypto assets, and national gambling laws if the contracts are classified as wagers. The classification is crucial, as contracts deemed financial instruments are subject to strict marketing and sales regulations, particularly concerning retail clients.
Rebranding contracts as "event contracts" does not exempt them from these regulations. Furthermore, accruing interest on deposits does not change the fundamental nature of these contracts, which rely solely on event outcomes.
Country-Specific Actions
Countries like Spain and France have already taken measures against prediction markets under gambling laws. In May, Spain initiated an investigation into both platforms for operating without the necessary licenses and ordered their sites to be blocked during the inquiry. The Spanish regulator emphasized the importance of identity verification for licensed operators.
In France, despite Polymarket's restrictions, users managed to access the platform, prompting the National Gambling Authority to order a complete block at the ISP level on July 16, following reports of over 205,000 unique visitors in June.
Both companies remain keen on entering the European market. Kalshi co-founder Luana Lopez Lara indicated ongoing talks with regulators and plans for expansion, while Polymarket announced its membership in the Blockchain for Europe association in September, expressing a desire to engage constructively with EU lawmakers.
Potential Risks Highlighted by ESMA
ESMA has also identified several risks associated with these platforms. Issues such as inadequate identity verification and the possibility of multiple accounts complicate the detection of insider trading and market manipulation. A notable case involved U.S. serviceman Gannon Ken Van Dyke, who allegedly profited from insider information on Polymarket.
Moreover, there are concerns about data integrity affecting betting outcomes. In April, suspicious activities related to bets on weather conditions at Paris Charles de Gaulle Airport led to investigations over potential sensor tampering. ESMA noted that ambiguous contract terms and opaque processes could expose users to significant risks.
Despite these challenges, ESMA acknowledged the potential advantages of prediction markets, suggesting they could provide valuable insights into public expectations regarding various events. Meanwhile, scrutiny continues, with the New York City Council examining the marketing practices of Polymarket and Kalshi for potential misleading tactics and influencer payments aimed at younger audiences.
