ESMA flags prediction-market risks, but reserves “very high risk” label for securities and crypto

The European Securities and Markets Authority’s second 2026 risk report did not designate prediction markets as a “very high risk” market segment. That classification applied to securities markets and crypto-assets, where elevated valuations, particularly for US stocks, left markets exposed to a sharp correction.

The Sept. 10 report nevertheless gave prediction markets a dedicated in-depth assessment, “Prediction markets – relevance from a securities market perspective.”

The products generally offer a fixed payout, or none at all, according to a yes-or-no outcome. Global quarterly turnover on the two largest platforms reached $20.8 billion in the final quarter of 2025 and continued to grow in 2026. The major operators are based outside the EU.

ESMA warned that digital access, social-media promotion and gamified design can expose inexperienced users to losses, addictive behaviour and exploitation by more sophisticated traders. This matters in a market where more than 10 million retail investors, 18% of active retail investors, traded derivatives or structured products between 2022 and 2025, and almost all such products were classified as complex under MiFIR.

The authority also highlighted amplified risks of insider trading and manipulation. On distributed-ledger platforms with limited identity checks, pseudonymous participants can operate multiple accounts, making wash trading and coordinated manipulation harder to detect. Links with crypto-assets, decentralised finance, artificial-intelligence tools and social-media ecosystems can reduce the number of identifiable intermediaries, weakening accountability and oversight.

Contract design creates a separate risk. Ambiguous event definitions and opaque or discretionary dispute-resolution processes, especially in decentralised settings, can adversely affect investors when an outcome must be determined.

As reported in September, ESMA had separately said that major prediction-market platforms lacked the authorisation generally required to market and sell qualifying event contracts in the EU. Platform-level geographic restrictions do not necessarily prevent EU access through virtual private networks.

There is no single EU classification for prediction markets. Whether a contract falls under MiFID II, MiCA or national gambling law depends on its characteristics and decisions by national regulators. A contract tied to an equity index or an interest rate is more likely to be a financial instrument, while one based on an election result or sports game is not likely to qualify on that basis.

ESMA’s July statement said binary-outcome, binary-payout event contracts are likely to be derivatives where their underlying is among the categories specified in MiFID II. National binary-options intervention measures operate in every EU member state, barring the marketing, distribution or sale to retail clients of event contracts that qualify as financial instruments. A product’s label, including “event contract,” does not determine its legal treatment.

Other contracts may instead be bets governed by national gambling law or, if tokenised without qualifying as financial instruments, crypto-assets under MiCA. If treated as gambling, approval may be needed country by country. Malta is exploring a dedicated statutory framework, while France, Hungary, the Netherlands, Portugal and Romania have moved to prohibit prediction markets.

The national differences are pronounced. The UK regulator has drawn financial and certain climate-related event contracts into its remit, leaving political and sports outcomes to the Gambling Commission. In Germany, the state gambling authority treats prediction-market bets as gambling; only sports and horse-racing bets are licensable, while derivative contracts can still face the retail binary-options ban.