Markets Are Defying a Darkening Economy. Europe’s Regulator Sees Trouble Ahead

A fast-growing corner of online betting has caught the attention of Europe’s securities regulator, and the numbers help explain why.

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Prediction markets have moved far beyond their niche origins. Contracts allowing users to put money behind the outcome of elections, sporting events, cryptocurrency prices, economic indicators and world events are attracting billions of dollars in trading. Traditional financial institutions are moving closer to the sector too.

For the iGaming industry, the development creates an awkward regulatory question: when does betting on an event stop being gambling and start becoming a financial product?

The European Securities and Markets Authority has now put that question squarely into its latest assessment of financial-market risks.

ESMA’s September risk monitor dedicates an in-depth section to prediction markets, examining a sector where gambling, trading, cryptocurrency and social media increasingly overlap. Its assessment points to rapid global expansion but also warns that European operators and consumers face a very different regulatory environment from the one emerging in the United States.

Sports Betting Is Already Driving Prediction-Market Volumes

The clearest connection with iGaming can be seen in the trading data.

On Kalshi, sports-related contracts accounted for 73% of the trading activity identified in the data examined by ESMA. Polymarket had a broader mix: politics represented 29%, sports 19% and cryptocurrency-related markets 15%.

That distinction matters because prediction markets are frequently presented as a new financial technology rather than an extension of conventional wagering.

From the consumer’s perspective, the boundary can be considerably less obvious.

A contract asking whether a team will win, whether a political candidate will take office or whether a particular event will happen offers a proposition that can look remarkably similar to a wager. Yet depending on its design and jurisdiction, the product might instead sit within securities, derivatives or crypto regulation.

ESMA identifies major operators including Polymarket and Kalshi, alongside PredictIt, Robinhood, Pariflow, DraftKings and FanDuel. All of the platforms cited in its analysis are based outside the EU.

The inclusion of established US betting companies such as DraftKings and FanDuel is particularly significant for the gambling sector. Prediction markets are no longer developing separately from mainstream betting businesses.

Billions of Dollars Have Moved Into Event Contracts

Growth accelerated sharply following the 2024 US presidential election.

By the fourth quarter of 2025, quarterly trading volume had reached approximately $8.8 billion on Kalshi and $12 billion on Polymarket, ESMA found, with expansion continuing into 2026.

The surge has drawn in companies well beyond betting and crypto.

Traditional exchange and financial-infrastructure businesses have been investing in the sector, forming data partnerships and developing their own prediction-style products.

Intercontinental Exchange committed as much as $2 billion to Polymarket and became the exclusive global distributor of its event-driven data. Cboe launched products linked to the closing level of the S&P 500 in June 2026, while Nasdaq received US regulatory approval for prediction-market options linked to the Nasdaq-100 and its micro counterpart.

CME Group has also expanded event contracts tied to asset prices and macroeconomic indicators.

This is where the distinction between betting and finance becomes particularly difficult to maintain.

A platform can offer a contract on a sporting result. Another contract can concern an election. The next might settle against an economic statistic or stock-market level.

The mechanism may look similar even when the regulatory treatment is completely different.

Europe Has Drawn a Much Harder Line

Prediction markets have yet to establish the same foothold in Europe.

ESMA believes regulation is one reason.

An event contract offered in the EU can potentially fall into one of several regimes. Depending on how it is structured, it could qualify as a financial instrument under MiFID II, come within MiCA where distributed-ledger technology is involved, or be treated as gambling under the national law of an individual member state.

For companies trying to expand across Europe, that creates a difficult regulatory map.

There is another complication.

When an event contract qualifies as a financial instrument, ESMA says it would generally be treated as a derivative. That can bring it within national restrictions governing binary options, whose marketing, distribution and sale to retail investors are prohibited under product-intervention measures.

The practical result is significant for prediction-market businesses looking at Europe.

The largest platforms currently do not hold the EU authorisations that would generally be required to market and sell these products.

This is not simply another licensing market waiting to open.

Some versions of the product could encounter financial rules specifically designed to keep comparable instruments away from retail customers.

Gambling Law Is Only Part of the Problem

The unusual structure of prediction markets also means gambling regulators are not necessarily the only authorities with an interest.

A sports contract could resemble a traditional betting product. An event contract referencing a financial asset could move into derivatives regulation. A blockchain-based version could create questions under European crypto rules.

The same platform can potentially operate across those boundaries.

That creates a regulatory challenge quite different from conventional online sportsbooks and casinos, where the nature of the underlying activity is generally well established.

ESMA also points to an inconsistency in geographic restrictions currently imposed by major prediction-market operators.

Polymarket and Kalshi prohibit users in some EU countries from placing orders, but not all member states appear on their restricted-jurisdiction lists.

The regulator questions why those restrictions do not extend throughout the bloc given the possible application of MiFID II, MiCA, national gambling laws and European restrictions concerning binary options.

Even blocking jurisdictions may not settle the matter.

Users can attempt to reach offshore prediction platforms through VPNs. The platforms prohibit such circumvention and can block users they detect, but ESMA considers the practical effectiveness of geographic restrictions uncertain.

For gambling regulators already accustomed to dealing with offshore operators, affiliate traffic and attempts to circumvent geoblocking, that problem will sound familiar.

Malta Is Testing a Different Approach

One EU jurisdiction is already considering whether prediction markets deserve their own regulatory treatment.

Malta became the first member state to publicly explore a dedicated framework for the sector in March 2026.

The Maltese government has identified prediction markets as a rapidly developing international business with potential for innovation, provided an appropriate legislative structure can be established.

For an economy with a substantial online-gambling industry, the move deserves attention.

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A dedicated regime could potentially provide greater certainty over where prediction markets sit between gambling and financial services. But any national initiative would still have to operate within the wider framework of EU financial law.

That makes Malta an early test of how much room individual gambling jurisdictions actually have to accommodate the sector.

ESMA Sees Something That Looks a Lot Like Gambling

For all the financial terminology surrounding prediction markets, ESMA’s consumer-risk assessment returns repeatedly to characteristics familiar to gambling regulation.

The regulator identifies gamification, emotionally driven participation and social-media promotion as factors that can expose inexperienced consumers to substantial losses and potentially addictive behaviour.

The concern becomes more pronounced when EU users access platforms without the investor protections attached to authorised financial products.

There is also a structural imbalance between casual participants and sophisticated traders.

Prediction markets increasingly attract professional firms, algorithmic traders and participants using advanced data analysis. ESMA cites external research indicating that profits can be extraordinarily concentrated.

One analysis examined by the regulator found that 67% of profits on Polymarket went to just 0.1% of accounts. Separate research cited by ESMA concluded that most users of the platform lost money.

For the iGaming industry, this is an important part of the debate.

Traditional gambling regulation has spent years developing requirements around consumer protection, responsible gambling, advertising, affordability in some jurisdictions and the treatment of vulnerable players.

Prediction markets can recreate some of the same consumer behaviour while presenting themselves through the language and interface of trading.

Insider Information Creates an Unusual Integrity Problem

There is another difference from conventional sports betting.

People can sometimes know the outcome — or information highly relevant to it — before everyone else.

ESMA points to several recent cases illustrating the problem.

Around the February 2026 US-Israeli strike on Iran, newly created cryptocurrency wallets reportedly made about $1.2 million shortly before the military operation became public.

A separate case involved a US soldier criminally charged over allegations that classified information was used to place profitable Polymarket wagers before an operation involving Nicolás Maduro.

These cases remain subject to the underlying investigations and legal processes, but they illustrate the unusual integrity problem created when almost any real-world event can become something people trade.

Sportsbooks have long dealt with match-fixing, courtsiding and misuse of privileged sporting information.

Prediction markets potentially extend that integrity problem into politics, military operations, government decisions, economic announcements and other events where confidential knowledge may have immediate monetary value.

Even the Data Determining a Winning Bet Can Become a Target

Prediction markets also depend on somebody deciding what actually happened.

That sounds straightforward until money is attached to the answer.

Contracts need reliable data sources and clear resolution procedures to determine which positions receive payouts. Ambiguous wording, faulty information or disputes over the outcome can therefore become financially consequential.

In April 2026, suspected interference with weather sensors used in settling Polymarket weather contracts led French national weather service Météo-France to file a police complaint.

The episode demonstrates a vulnerability that could become increasingly relevant as the range of events available for wagering expands.

Manipulating the market does not necessarily require manipulating traders. In some circumstances, attacking the information source used to determine the result could be enough.

Blockchain-based markets introduce further complications because transactions executed through smart contracts may be irreversible. External data feeds and oracles become another potential point of failure or manipulation.

AI Could Tilt the Market Further Toward Professional Players

Artificial intelligence is adding another dimension.

ESMA sees the possibility that AI-generated signals, automated bots and algorithmic strategies could deepen information advantages already enjoyed by sophisticated participants.

Prediction markets are particularly suited to automated trading. Prices move as information arrives, while contracts can incorporate enormous amounts of political, economic, sporting and social data.

Professional traders equipped with automated systems can react differently from a retail user responding to a viral post on social media.

AI-generated misinformation creates the opposite risk.

False information circulating online could influence what traders believe an event is worth, at least temporarily. Coordinated campaigns could potentially affect market sentiment and perceived probabilities even when the underlying event has not changed.

The combination of social media, gambling-like consumer behaviour, cryptocurrency infrastructure and automated trading makes prediction markets difficult to fit neatly inside any existing regulatory category.

Prediction Markets Are Moving Toward Mainstream Finance

ESMA does not dismiss the industry altogether.

Prediction-market prices can provide useful, continuously updated information about expectations surrounding political, economic and social events. As liquidity improves, the data can become useful for forecasting and sentiment analysis.

Financial-information companies have noticed.

Prediction-market data are increasingly available through professional services including Bloomberg and LSEG Workspace, while Kalshi has reportedly been developing an interface aimed at professional traders.

That institutionalisation may prove as important as the growth in consumer betting.

Prediction markets are simultaneously moving toward sportsbooks, cryptocurrency platforms and Wall Street.

Europe now has to decide which part of that identity matters most when determining how the products should be regulated.

For the iGaming sector, that decision could determine whether prediction markets become a major new betting vertical in Europe or remain largely an offshore product accessible to European consumers only around the edges of existing regulation.

ESMA’s assessment suggests the EU is not preparing to treat them simply as another innovation in online gambling. In Europe, the decisive question may be what the contract actually is — a wager, a crypto asset, a derivative, or some combination that crosses several regulatory boundaries at once.

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