The UK's financial regulator has been in talks with trading platforms about relaxing the ban on prediction markets, according to The Times. The Financial Conduct Authority (FCA) is in discussions about lifting the block on platforms like Kalshi and Polymarket to allow investors to trade on the platforms.

Currently, there is a ban in place for retail investors because prediction markets are considered binary options. They are essentially wagers on whether an event will happen or not. This ban has been in place since 2019, amid concerns that customers could incur heavy losses with such an all-or-nothing prospect.

One of the reasons for this new consideration is the fact that UK consumers have been using prediction markets overseas anyway. Any UK customer with a VPN potentially can access sites like Polymarket.

Speaking to the Times, a city source said: “It’s like most prohibitions — they are largely ineffective. The concerning thing is that regulators who have an obligation to prevent consumer harm are by their actions effectively driving consumers to operators with no regulatory standards at all.”

Embracing prediction markets is not easy

Legalising prediction markets in the UK would not be easy. At the time of writing, the operators would need to obtain a gambling licence. This is because in the United Kingdom, prediction markets are very much considered a form of gambling, not a financial product. Earlier this year, the UK Gambling Commission confirmed that prediction markets fall under the banner of betting intermediary.

Secondly, the FCA would have to overturn their 2019 binary options ban. The ban was put in place because of the high risk of loss, because of the all-or-nothing nature of binary wagers. A move which is estimated to have saved retail investors millions and prevented fraud.

Despite their popularity in the United States, it is not quite clear why prediction markets are even necessary in the United Kingdom. Sportsbooks are abundant in the UK, and a lot of the novelty markets and political markets that have made prediction markets so popular are precisely the sort of things that have always been available on platforms like Betfair. Given that a lot of the liquidity in prediction markets appears to be from people attempting to gamble on sports legally in the U.S., they appear to fix a problem that doesn't need solving in the UK.

The UK is watching prediction markets with interest

But where the United States goes culturally, countries like the United Kingdom tend to follow. Prediction markets made headlines this year when billions were wagered on the World Cup. Something that has always been available to UK residents, yet the sheer scale of the wagers and prediction markets still went viral.

There is also likely pressure from larger investors in the United Kingdom, we are seeing the opportunities that American investors have where prediction markets are concerned. Last month, it was announced that brokers Canto Fitzgerald were investing in prediction markets for their Wall Street customers.

However, there will be a lot of pressure not to embrace prediction markets in the way that Americans have. Just over the pond, The Gambling Regulatory Authority of Ireland has pressured Polymarket to geo-block their own services to Irish customers.