Prediction markets were supposed to be the killer app that made crypto legible to normies—bet on elections, sports, geopolitics, and get paid in stablecoins when you're right. Instead, they're becoming a case study in how quickly regulatory arbitrage can collapse. Spain's gambling regulator, the Dirección General de Ordenación del Juego, has added Polymarket and Kalshi to its blacklist of unauthorized operators, joining Indonesia, France, and a growing roster of jurisdictions that have decided these platforms look less like financial innovation and more like offshore bookmakers.
The Spanish action is administrative rather than dramatic: the platforms' domains will be blocked for local users, and payment processors will be warned against facilitating transactions. But the cumulative effect matters. Polymarket processed over $3 billion in volume during the 2024 U.S. election cycle and has been growing steadily since, particularly around geopolitical events like the Iran negotiations. Each national ban chips away at the liquidity that makes prediction markets useful in the first place.
The regulatory logic
Spain's position is straightforward: if you're taking bets from Spanish residents on future events and paying out based on outcomes, you're running a gambling operation, and you need a license. Polymarket, domiciled in no particular jurisdiction and accessible via VPN, has neither sought nor obtained such a license anywhere in the EU. Kalshi, which holds CFTC approval in the United States, has no equivalent authorization in Europe. The Spanish regulator isn't making a philosophical argument about information markets or price discovery—it's applying existing gambling law to a new product category.
This is the same logic that drove France's ANJ to block Polymarket last year and Indonesia's communications ministry to do the same earlier this month. The platforms have argued, with some justification, that prediction markets are economically distinct from sports betting: they aggregate information, they're used by traders and researchers, they don't primarily serve recreational gamblers. But that argument requires a regulator willing to create a new category, and most aren't.
The liquidity problem
Prediction markets exhibit strong network effects. The more participants, the tighter the spreads, the more accurate the prices, the more useful the signal. Polymarket's edge over legacy prediction platforms like PredictIt came from its global reach and crypto-native infrastructure—anyone with a wallet could participate. As jurisdictions peel off, that advantage erodes. A prediction market that only Americans can use is less interesting than one the whole world can use, and a prediction market that requires VPN gymnastics attracts a narrower, more sophisticated user base that may be more prone to manipulation.
Hyperliquid, the perpetual futures exchange that has been absorbing capital fleeing centralized venues, doesn't face quite the same problem: derivatives trading has a more established regulatory pathway, even if most jurisdictions haven't figured out how to apply it to decentralized protocols. Prediction markets sit in a genuinely novel category, and novelty is not a regulator's friend.
Our take
The prediction market thesis was always that better information aggregation would create its own constituency—that governments and institutions would eventually want access to the signal these platforms produce. That may still happen, but the timeline just got longer. Spain's ban is a reminder that crypto's regulatory moat is shallower than enthusiasts believe: if your product looks like gambling, you'll be regulated like gambling, regardless of how many white papers you publish about Hayek and information markets. Polymarket's best path forward is probably to seek licensing in a major jurisdiction and accept the compliance costs. The alternative is a slow retreat into the VPN-accessible grey zone, where liquidity goes to die.
