The EU regulator warns that prediction markets can create market integrity risks as sophisticated and retail participants compete on event outcomes.
The European Securities and Markets Authority (ESMA) has warned of insider trading, market manipulation, and retail investor protection risks associated with prediction markets. In its latest TRV Risk Monitor, the EU regulator said these risks can be particularly difficult to detect on DLT-based platforms, where pseudonymous participation and multiple accounts can complicate the identification of abusive activity.
Prediction markets have gained limited traction in the EU compared with the US, ESMA said, partly because rules on binary options prevent the marketing, distribution, and sale of certain event contracts to retail investors. Depending on their characteristics, prediction market contracts can fall within the EU financial regulatory framework, including MiFID II and MiCA, while some activities may also be subject to national gambling rules.
ESMA cited several recent incidents to illustrate these risks, including newly created wallets that generated $1.2 million in profits shortly before the February 2026 strike on Iran, and a US Army master sergeant charged over profits from bets on the capture of Venezuelan President Nicolás Maduro. It also referred to suspected tampering with weather sensors used to settle prediction market contracts, which led Météo-France to file a police complaint.
The regulator also identified risks linked to unclear contract outcomes, unreliable or manipulated information used for settlement, and unequal access to information between retail and sophisticated participants. It noted that prediction markets are increasingly connected with crypto-assets, decentralised finance, AI, and social media, while platform responses to suspected abuse are often reactive.
ESMA said the regulatory framework can address such risks only where the relevant contracts fall within the scope of financial regulation.
Why does it matter?
Prediction markets sit at an increasingly important intersection between financial markets, digital platforms, and the real-time information economy. Their treatment could help shape how policymakers distinguish between financial innovation, gambling, and other forms of event-based trading as these markets become more technologically sophisticated. The issue also raises a wider question for regulators: how can existing frameworks keep pace with new forms of market participation without creating gaps where emerging risks are difficult to address?
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