The European Securities and Markets Authority (ESMA) has raised concerns regarding the legitimacy of Polymarket and Kalshi, noting that neither platform has obtained the necessary licenses typically required for offering event outcome contracts within the European Union.

Both platforms restrict access to users from only certain EU countries, prompting regulators to question this selective approach:

"It is unclear why not all EU member states are included in the list of jurisdictions with limited access."

Polymarket has imposed trading restrictions on users from Germany, France, Italy, and the Netherlands. Meanwhile, Kalshi's user agreement lists several EU countries, including Belgium, Bulgaria, Hungary, Ireland, Italy, Poland, Portugal, and France, where trading is prohibited.

It is important to note that just because a country is not listed in Kalshi's restrictions does not mean its residents can trade freely, as the company insists on compliance with local laws. However, these trading limitations do not automatically apply to other platform features.

ESMA also questioned the practical effectiveness of these restrictions. Although Polymarket prohibits users from circumventing blocks via VPN, the enforcement of such rules is not guaranteed.

Regulatory Framework in Europe

The applicable regulations depend on the nature of the contract and the event it pertains to. In a statement from July 3, ESMA outlined three potential regulatory frameworks:

  • MiFID II — regulations for financial instruments;
  • MiCA — regulations for crypto assets, if the contract is structured as a token and does not fall under financial instruments;
  • national gambling laws — applicable if the contract is deemed a wager, which may coexist with financial regulations.

A fixed payout for a correct prediction does not inherently classify a contract as a financial instrument. What matters is the asset or indicator linked to the outcome and whether such a contract is recognized under MiFID II.

If a contract is classified as a financial instrument and falls under binary option regulations, it cannot be marketed or sold to retail clients. These prohibitions are enforced at the country level within the EU, replacing temporary measures from ESMA in 2018.

Simply rebranding as an "event contract" does not circumvent these restrictions, as regulators assess the product's structure. Additionally, accruing interest or rewards on deposited funds does not alter its binary nature: the payout depends solely on whether the event occurs.

Even platforms dealing exclusively with professional clients require MiFID II authorization if they offer financial instruments.

Restrictions Imposed by EU Countries

Spain and France have already taken action against prediction markets based on gambling legislation.

In May, the Spanish regulator initiated an investigation into Polymarket and Kalshi for allegedly operating without the necessary licenses, leading to a directive to block their sites until the inquiry concludes.

The agency reminded that licensed operators must verify customer identities and prevent underage individuals and those banned from gambling from participating.

In France, Polymarket's own restrictions did not entirely block access to the platform. According to the National Gambling Authority (ANJ), users found ways to bypass the block, with around 205,000 unique visitors from the country in June. Consequently, on July 16, the agency ordered the blocking of Polymarket at the internet service provider level.

Despite these challenges, both companies remain interested in the European market. According to the Financial Times, Kalshi co-founder Luana Lopez Lara mentioned in July ongoing discussions with international regulators and plans for expansion in Europe.

On September 9, Polymarket announced its membership in the Blockchain for Europe industry association. The company’s legal counsel, Neil Kumar, expressed a willingness to engage proactively and transparently with European lawmakers.

Risks Identified by ESMA

Beyond licensing issues, ESMA examined risks for market participants. On blockchain platforms like Polymarket, limited identity verification and the ability to use multiple accounts complicate the detection of insider trading and market manipulation.

The report highlighted the case of U.S. Army serviceman Gannon Ken Van Dyke, who allegedly used insider information about an operation to capture Nicolás Maduro, reportedly earning over $400,000 on Polymarket.

The platform stated that it detected suspicious trading, reported it to the U.S. Department of Justice, and cooperated with the investigation. The serviceman denies the charges.

Another risk involves interference with data that determines the outcome of bets. In April, two accounts on Polymarket raised suspicions of manipulation after they profited $37,000 from bets on the temperature at Paris Charles de Gaulle Airport, linked to anomalous readings from weather sensors.

The Météo-France meteorological service filed a police report. According to ANJ, the Paris prosecutor's office opened an investigation on May 4 over suspected sensor tampering.

Issues also arise regarding the determination of trading outcomes. ESMA pointed out ambiguous contract terms, opaque outcome determination processes, and payout delays—all of which pose risks of losses for users.

Nonetheless, the regulator acknowledged the potential benefits of prediction markets, noting that their quotes can help gauge participants' expectations regarding political, economic, and social events.

In August, it was reported that the New York City Council began scrutinizing the marketing practices of Polymarket and Kalshi. Lawmakers were concerned about alleged misleading advertising, undisclosed influencer payments, and promotion of betting among youth.