Prediction Markets Under Fire: Why the Financial Loophole for Betting Is Closing Fast

The world of online betting is currently navigating a massive transition, with prediction markets being hit the hardest. For several years, platforms like Polymarket and Kalshi have attempted to dress up as pure financial exchanges to bypass strict gambling regulations. However, the regulatory environment is rapidly shifting against these hybrid products. European authorities are increasingly viewing these platforms as simple conduits for illegal gambling, devoid of the necessary consumer protections required by law.

Historically, the business model relied on a clever legal framing: selling bets on election outcomes or sports events as binary financial derivatives. According to this logic, a user betting on a team's victory is purchasing a financial instrument that pays out upon the occurrence of a specified event. But experts warn that this facade is failing. If no real economic risk is being hedged, the product is nothing more than gambling fueled by human curiosity. The gray zone that allowed these platforms to flourish is turning into a regulatory minefield.

Numbers and facts

In January 2026, Portugal's regulatory move against Polymarket sent shockwaves through the industry. The decision was significant because it was made independently of Brussels, reaffirming national sovereignty in gambling law enforcement. Shortly after, in July, the European Securities and Markets Authority (ESMA) weighed in. The agency publicly stated that binary event contracts qualify as financial instruments under the MiFID II framework. This is a critical development because this specific category of instruments was already banned for retail investors across the EU in 2018.

Roman Baranovskyi highlights that the core difference between an exchange and a bookmaker lies in the revenue model:

"A house that profits when the player loses belongs under bookmaker rules, and a venue that earns the same fee whoever wins looks a lot more like an exchange." - Roman Baranovskyi, Head of iGaming and investment practice at SBSB Fintech Lawyers

Background

The issue is further complicated by the use of cryptocurrencies. Many users prefer these platforms for their perceived anonymity, but this is exactly where regulators are focusing their fire. Under the Markets in Crypto-Assets (MiCA) regulation, platforms are now forced to implement rigorous KYC (Know Your Customer) protocols. Failure to identify users leads to exclusion from the legal market. Baranovskyi also points out that market integrity is a major concern. When prices are manipulated to influence public perception of election chances, it becomes a matter of state security. Portugal, for instance, responded to suspicious trading spikes occurring just two hours before election results were announced.

Settlement integrity is another pillar of the discussion. While licensed platforms like Kalshi act as their own settlement authority under direct supervision, on-chain platforms rely on decentralized validators. These outsiders must stake their own capital to verify outcomes. If a validator attempts to lie about a result, their stake is burned immediately by the protocol. While this provides technical security, it does not exempt the provider from gambling license requirements if the subject matter involves sports or politics.

Why it matters for German players

For German players, the situation is clear but restrictive. The Interstate Treaty on Gambling 2021 (GlüStV 2021) does not permit betting on political or social events. Therefore, using platforms like Polymarket is illegal within Germany. The Gemeinsame Glücksspielbehörde der Länder (GGL) maintains a strict whitelist, and only operators on this list are legally allowed to offer services to German residents. Unlicensed platforms face aggressive enforcement, including IP blocking and payment processing restrictions.

Players using these international markets also forfeit all protection offered by German law. There is no 1,000 EUR monthly deposit limit via the LUGAS system, no access to the OASIS self-exclusion database, and no 1 EUR stake limit for virtual slots. In case of disputes or withdrawal issues, German courts cannot assist users who chose to play on these unregulated sites. The GGL remains committed to channeling players toward the legal market where player safety is guaranteed.

What it means for GGL-licensed casinos

Licensed German operators stand to benefit from this crackdown. The unfair competition from pseudo-financial platforms is being neutralized by the ESMA stance and national rulings. The regulatory arbitrage that allowed offshore companies to run without compliance costs or taxes is ending. If prediction markets wish to survive in the EU, they must either pivot to pure finance without sporting content or acquire the same expensive licenses that GGL-compliant casinos already hold. This levels the playing field and reaffirms the value of high safety standards in the regulated German market.