RESOLVING THE LEDGER
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It’s highly unusual for the largest derivatives exchange operator in the U.S., the CME Group, to be at war with its regulator, the Commodity Futures Trading Commission (CFTC) — but that's now happening in a situation brought about by the agency's decision to allow blockchain-based perpetual future products.
Last month, the CME sued the CFTC and its chairman, Mike Selig, challenging his decision to let the prediction markets platform Kalshi and cryptocurrency exchange Coinbase (COIN) list crypto perps , decentralized derivative contracts that allow users to speculate on the price of an asset with leverage and no expiration date.
Now, both sides await federal court action that could have significant influence on how the U.S. approaches the rapidly growing arena, with non-U.S. perps volume reportedly growing to $60 trillion in volume last year.
CME claims the agency is mislabeling the products, and therefore misapplying the law. Futures need an end date, and the products known as perps are designed for traders to be able to take a financial position on an asset's future without any deadlines. The lawsuit argues these perps are harmful to its long-dated futures products and alleges that the CFTC's sudden embrace of them did not consider the ramifications.
Mounting tension between the two entities ramped up around the start of Iran conflict, which saw interest spike in perpetual contracts on oil prices traded 24/7 on off-shore decentralized finance (DeFi) exchanges like Hyperliquid, as well as blockchain prediction markets hosting trades tied to the oil markets.
Those on the side of the CFTC’s reforming agenda in this highly politicized schism are voicing frustration, if not outrage.
“It is unbelievably unusual to see the largest exchange in America attacking its own regulator, where the regulator is basically saying everybody who's registered, including the CME, can offer these types of products, and the CME says no one should be allowed to offer them,” said Jake Chervinsky, CEO of Hyperliquid Policy Center (HPC) in an interview.
HPC is a Washington, D.C.-based non-profit focused on creating compliant DeFi in the U.S, heavily focused on perps and on-chain financial infrastructure, and backed by a $28 million initiative from the Hyper Foundation.
Not long after CME filed suit, this disagreement took another turn, when the exchange made a bid to fast-track 24/7 trading for crude oil futures but was blocked by the CFTC . CME Group's attempted 24/7 West Texas Intermediate (WTI) crude oil contract is a traditional expiring futures product rather than a crypto-style perpetual swap. The CME had cited investors’ desire to manage their positions “whenever news breaks.”
Representatives of the CFTC declined to comment. At the time, CFTC Chair Mike Selig said on X that "CME's decision to disregard the Commission's effort to undertake a reasoned analysis of the critical issues at stake is wholly inappropriate."
CME, which played a significant role in getting bitcoin futures listed and was helpful in getting crypto accepted and adopted in the U.S., has a deep influence over commodities that the exchange has successfully wielded in Washington D.C. over the years, thanks in large part to its outspoken chairman, Terry Duffy.
"The definition of a swap is pretty clear," he said in an interview with CoinDesk. "When two parties exchange payments to each other, that is deemed a swap," he said. “When you're dealing in swaps contracts, that comes with obligations to maintain five-day margin and register with the CFTC as a participant in the swaps market.”
As such, the CFTC did not follow the protocol which is effectively the law of the land, Duffy claimed, adding a complaint that the CFTC may not be prepared to enforce its emerging perps policy properly, such as blocking non-U.S. traders from trading on Kalshi or other CFTC-regulated platforms. "What are you doing to police U.S. participants from not participating in something that it's illegal for them to do?" Duffy asked.
"I've not seen an answer to that yet, but yet they're holding up my 24/7 contract of self certification," he said.
Duffy had tangled with opponents in the digital-assets space before, once debating then-FTX CEO Sam Bankman-Fried on the industry's efforts to cut out intermediaries months before Bankman-Fried's company collapsed and he was imprisoned on a conviction tied to fraud.
During the CME’s recent Q2 earnings call , Duffy addressed the growing market presence of perpetual futures, stating that institutional clients do not use perpetuals for hedging. He said that CME has “the full technical and operational capabilities to launch perpetual futures” but “have not heard demand from our customers for these products.” Duffy went on to describe competitors’ perp markets as “an incubator system that I'm not paying for.”
When it comes to the way futures contracts work on traditional commodities, the structure differs from crypto, according to Liz Davis, partner and co-chair of the financial services practice at the law firm Davis Wright Tremaine.
“These perpetual contracts that started out in the crypto space are a different type of product than, say, pork bellies or crude oil,” Davis said in an interview. “There’s an underlying tension with these new types of products being offered on traditional commodities. Here you have delivery issues, and it really isn’t traded 24/7, because you have monthly contracts that you roll from month to month.”
Davis said there’s a lot to consider in a market in which the commodities the perps are tied to can be limited to trading only five days a week and set to only change hands within certain hours, as opposed to being always on.
“You just need to think through the various issues in terms of marginal liquidity and custody over the weekend; staffing and resources; your surveillance now needs to go over to the weekends and holidays, etc.,” she said.
Duffy's crypto perps stance is viewed by cr...
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