Paradigm Advocates for Regulatory Framework for DeFi Perpetuals
Paradigm, a cryptocurrency investment firm, is advocating for the U.S. Commodity Futures Trading Commission (CFTC) to establish a thorough regulatory framework aimed at decentralized finance (DeFi) perpetual derivatives. The firm argues that the current focus of regulatory proposals is overly concentrated on centralized entities, failing to address the burgeoning space of DeFi.
Importance of DeFi Perpetuals
In response to the CFTC’s call for public input on perpetual derivatives—contracts that do not expire and represent a large portion of crypto trading—Paradigm pointed out that while the CFTC’s attention has primarily been on traditional exchanges, the real innovation lies within DeFi. DeFi perpetuals are essentially non-expiring futures contracts that utilize smart contracts on blockchain frameworks for automated execution.
According to Paradigm, these onchain contracts offer crucial benefits like:
- Heightened transparency: Trade data and funding rates are available for public verification.
- Increased composability: Allows easy integration with other decentralized finance tools such as lending protocols.
- User control: Unlike traditional platforms, users maintain direct control over their own assets, significantly reducing the risk associated with intermediaries.
Growth Projections and Regulatory Challenges
Paradigm highlighted that by 2025, perpetual contracts are expected to represent a whopping 93% of the global crypto derivatives market. Despite their growing importance, the DeFi perpetual market currently navigates a complex regulatory landscape in the U.S. The existing guidelines from the CFTC, which are tailored for conventional financial markets, do not accommodate the unique characteristics of decentralized finance.
Previous regulatory actions have inconsistently categorized DeFi perpetuals as swaps, generating a sense of uncertainty and hindering growth in this sector.
Establishment of a Perpetuals Special Advisory Committee
To remedy this, Paradigm is calling for the establishment of a Perpetuals Special Advisory Committee (PSAC) by the CFTC within a span of 90 days. This advisory group would consist of specialized professionals tasked with proposing constructive changes towards a more modern and tech-neutral regulatory framework for DeFi perpetuals.
Critical topics for the committee would include:
- Considering a public interest exemption from traditional exchange registration requirements for DeFi platforms.
- Developing a customized compliance strategy that aligns with decentralized frameworks.
- Drafting clear guidelines that facilitate safe participation from retail investors.
Conclusion
Paradigm believes that fostering an environment conducive to DeFi perpetuals complements a recent executive order that encourages innovation within the digital asset space. The firm argues that to maintain its position as a leader in the rapidly changing derivatives market, the U.S. must ensure regulatory clarity and actively exploit the opportunities presented by decentralized finance technologies.
