The European Securities and Markets Authority said in a new risk monitor that prediction markets are “rife with inside trading,” citing several recent cases involving geopolitical and weather-related contracts and warning that platform responses have largely come only after profits were realized.

ESMA’s report pointed to three episodes. In one, new wallets reportedly generated $1.2 million shortly before a February strike on Iran. In another, by May, Bubblemaps had traced nine accounts linked to $2.4 million in Iran-related bets that won 98% of the time. ESMA also cited a U.S. Army master sergeant who was charged over more than $400,000 in Polymarket profits tied to the capture of Venezuelan President Nicolás Maduro.

The regulator also referenced an April incident involving weather contracts on Polymarket, where suspected tampering with weather sensors led Météo-France to file a police complaint. Across the cases it highlighted, ESMA said platform action was “largely reactive,” with interventions coming after gains had already been made.

Polymarket’s chief legal officer pushed back on the idea that platform anonymity protects abusive traders, pointing to the Maduro-related case as evidence that users can still be identified. ESMA’s broader concern, however, centered on whether current market oversight is adequate when participants may trade on non-public information or exploit weaknesses in underlying data sources.

ESMA said prediction markets have not gained traction in the EU because of regulatory hurdles. Event contracts may fall under financial-instrument rules in MiFID II or under national gambling laws, depending on the structure and jurisdiction. The authority also noted that Polymarket and Kalshi restrict users in certain EU countries, while the basis for those exclusions remains unclear.

The report comes as trading activity in the sector has expanded sharply. ESMA noted that volumes have surged since its data collection period, and also said gains on Polymarket appear highly concentrated, with 67% of profits going to 0.1% of accounts while most users reportedly lose money.

Why It Matters

ESMA’s warning adds a European regulatory dimension to a market segment that has grown faster than its compliance framework. The issue is no longer limited to whether prediction markets are novel trading venues or gambling products, but whether they can operate credibly when contracts may be vulnerable to informed trading, data-source manipulation and uneven enforcement standards.

For crypto-linked platforms, the report raises a broader market-structure question: rapid volume growth may attract more scrutiny if transparency alone is not seen as enough to deter abuse. That could affect how exchanges, regulators and users evaluate prediction markets as they move closer to mainstream financial infrastructure.