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Key Takeaways
- ESMA said Polymarket and Kalshi generally lack the authorization required to market and sell event contracts to EU users, though it named no specific enforcement action.
- Both platforms restrict trading in some EU states but not others, and ESMA questioned whether they can effectively enforce bans on VPN-based access.
- ESMA separately warned that AI-driven technology valuations could trigger a sell-off that spreads into crypto, noting Bitcoin fell 35% in the first half of 2026.
The European Securities and Markets Authority warned Thursday that major prediction market platforms, including Polymarket and Kalshi, generally lack the authorization required to legally market and sell event contracts to users in the European Union.
The warning appeared in a risk report the regulator released the same day, alongside a separate warning that heavy artificial-intelligence spending is inflating technology valuations in ways that could eventually trigger crypto selling.
ESMA Warns Platforms Lack Required Authorization
ESMA’s report states directly that marketing and selling event contracts in the EU generally requires authorization the largest prediction market platforms currently do not hold.
Prediction markets let users trade contracts tied to future events, spanning elections, sports outcomes, cryptocurrency prices and broader economic data, with contracts typically paying a fixed amount if a specified outcome occurs and nothing otherwise.
The regulator’s warning does not name a specific enforcement action against either platform. Instead, it flags a structural gap between how these platforms currently operate across the EU and the authorization framework ESMA says generally applies to this kind of product.
Inconsistent Restrictions And Enforcement Questions
Both Polymarket and Kalshi restrict trading from some EU member states but leave others off their restricted-jurisdiction lists, according to ESMA. The regulator said it is unclear why all EU member states are not included among the restricted jurisdictions, citing risks tied to unauthorized services and potential breaches of existing retail trading restrictions.
ESMA also questioned whether the platforms can effectively enforce bans on virtual private networks, which can be used to mask a user’s actual location and route around geographic restrictions.
Several European countries have already moved to block prediction market platforms directly rather than rely on the platforms’ own geographic restrictions.
France ordered the country’s internet service providers to block access to Polymarket in July, following earlier blocks in Switzerland, Poland, Singapore, Belgium, Portugal and Spain, among other jurisdictions.
Legal Classification Depends On Contract Structure
How a given event contract is regulated in the EU depends heavily on its structure, according to the report.
Contracts can qualify as financial instruments under EU securities rules. They can fall under the bloc’s Markets in Crypto-Assets framework if built on distributed ledger technology and not otherwise classified as financial instruments. Alternatively, they can be treated as gambling products under individual member states’ national law.
Where a contract qualifies as a financial instrument, it generally falls under existing national bans on marketing, distributing and selling binary options to retail investors, ESMA said.
The regulator noted that the EU’s market abuse rules can only address misconduct in event contracts that fall within the bloc’s financial regulatory perimeter in the first place. This means contracts classified outside that perimeter, such as those treated purely as gambling products, may not be covered by those protections at all.
Regulator Separately Flags AI Valuation Risk To Crypto
In a separate section of the same report, ESMA warned that large technology companies are borrowing heavily to fund AI spending, pushing valuations higher and raising the risk of a broader AI-driven asset bubble.
The regulator said that if AI investments disappoint or debt pressures trigger a technology stock sell-off, large investors could sell riskier, more liquid holdings, including crypto assets, to raise cash quickly.
Bank for International Settlements head Pablo Hernandez addressed a similar theme in a Thursday speech, though he stopped short of directly predicting an AI bubble. He compared the current AI investment boom to the dot-com boom of the late 1990s, saying:
“All drew in more capital than eventual returns could justify.”
Bitcoin And Ether Funds Already Show Strain
ESMA said crypto assets are more exposed to a potential technology-sector shock than in past market cycles, pointing to spot Bitcoin ETFs, bank-issued tokens and institutional custody arrangements that have tied digital assets more closely to traditional finance.
The regulator noted that stocks recovered after the escalation of the U.S.-Iran conflict earlier this year, but crypto markets have not shown the same recovery.
Bitcoin fell 35% in the first half of 2026, while smaller tokens lost as much as 61% over the same period, according to ESMA. U.S. spot Bitcoin ETFs saw more than $5.5 billion in outflows, and spot ether funds lost nearly $2 billion. ESMA said a technology-sector sell-off could prompt further selling pressure across crypto markets given that closer linkage to traditional finance.
