Advocacy for Crypto Perpetual Futures
Prominent cryptocurrency firms are advocating for the adoption of crypto perpetual futures contracts by U.S. regulators, emphasizing their transformative potential in the derivatives market when appropriately regulated. The concept of perpetual futures was initially proposed in 1992 by Robert Shiller, a renowned economist and Nobel Prize winner, to facilitate the trading of illiquid assets through contracts that have no expiration date, settling daily based on price indices between long and short positions.
What started as a theoretical proposal has now found a solid foothold in the cryptocurrency space, with estimates suggesting that perpetual contracts make up 93% of all crypto derivatives trading.
Regulatory Assessment by the CFTC
The Commodity Futures Trading Commission (CFTC) is assessing the adequacy of existing regulations to manage the risks associated with perpetual derivatives, considering their rapid rise in popularity within crypto markets and potential applications in more traditional asset classes. This evaluation follows the CFTC’s request for public commentary, which has garnered responses from leading industry figures.
“Perpetual contracts represent a significant advancement in crypto financial instruments, and proper U.S. regulations could help harness an enormous offshore market that has been thriving.”
For instance, Coinbase emphasized that perpetuals account for more than 90% of the total volume of crypto futures, indicating that they have eclipsed even spot trading activity. The exchange asserted that the straightforward nature of perpetual futures allows retail investors to engage with leveraged exposure more easily.
Embracing Decentralized Trading Protocols
Investment firm Paradigm has advocated for the embrace of decentralized trading protocols in the regulation of perpetuals, arguing that while registered entities are vital for market integrity, they represent only a fraction of the broader landscape. Paradigm has also suggested establishing a specialized advisory committee to explore the implications of decentralized finance (DeFi) perpetuals.
Additionally, Hyperliquid Labs has highlighted three main benefits of decentralized perpetual contracts:
- Transparency: All transactional activities are recorded on the blockchain for public access.
- Collaborative Development: The open architecture of blockchains can foster the development of new protocols, enhancing product and market innovation.
- Self-Custody Mechanisms: Traders can manage collateral directly, mitigating risks associated with traditional exchanges.
Liquidity and Volume Advantages
From a volume perspective, OKX pointed out that the liquidity benefits of perpetual contracts can lead to a consolidated trading volume compared to traditional futures, which often spread activity across multiple expiration dates. By eliminating expiry cycles, perpetual futures can attract higher liquidity, providing vital hedging opportunities for options traders and arbitrage opportunities for basis traders.
These developments come as the CFTC is preparing to enable the trading of crypto perpetuals imminently, according to statements from outgoing Commissioner Summer Mersinger.
