The European Securities and Markets Authority (ESMA) has warned that the expansion of prediction markets is increasing the risk of insider trading and market manipulation.
In its risk assessment, the EU financial regulator said a number of incidents indicated that prediction markets were vulnerable to trading based on non-public information.
Users can take positions on real-world outcomes including elections, sports and armed conflicts. ESMA said the use of cryptoassets on such platforms can make it harder to identify and prevent insider trading, wash trading and coordinated manipulation.
The regulator also highlighted increasing institutional interest in the sector, with exchanges, investment funds and other financial-market infrastructure businesses seeking commercial partnerships with prediction-market operators.
The comments formed part of a broader assessment of risks across European financial markets. ESMA described operational risks as very high and increasing, citing cyber threats and the ability of artificial intelligence to identify and exploit technological vulnerabilities.
The authority also repeated concerns that shocks in crypto markets could spread into the wider financial system as connections between digital assets and traditional finance increase.
Tokenised equities remain negligible when compared with global stock markets, according to ESMA, although adoption is growing and may affect market structures.
Separately, Chair Verena Ross warned of a widening gap between elevated asset valuations and a weakening economic outlook. She cited geopolitical tensions, conflict in the Middle East and higher energy prices as factors that could contribute to an abrupt market correction.
For prediction-market businesses and prospective institutional partners, ESMA’s findings add to questions concerning product classification, market surveillance and the controls required to identify conflicts of interest and suspicious trading.
ESMA previously advised prediction-market operators to assess whether their event contracts fall within EU restrictions on binary options. Depending on their structure, the products may be treated as financial instruments or as bets under national gambling laws.
Event contracts classified as financial instruments in the EU may be subject to existing national restrictions covering binary options
