Why a Single Word Will Decide Who Can Trade Perps in the U.S.

Transcript

The CME is actually suing its regulator in the CFTC about perps that were approved for Kalshi. And what's at, you know, kind of the center of this all is how they should be defined. Um, CME contends that these threaten their long-dated futures. They think that actually perps should be defined as swaps. It's a whole, I know this sort of gets into the weeds, but I think there is something important at the heart of this. So, um, Jake, why don't we start with you? Do you want to describe like what the conflict is about and, you know, why you think that definition is important?

>> Sure. So, wow, okay. That's a little loud. There we go. Um, so the the key question really comes down to who will get access to this type of financial instrument in the US. And the classification of a perpetual contract as either a swap or a future dictates whether it is only an institutional product as swaps are generally speaking, to oversimplify a little bit, primarily an institutional product that cannot trade on a registered designated contract market, whereas futures are a product that can be traded by a DCM for a retail audience. And so, we can talk more about the benefits of perpetuals, but my view and the view of the Hyperliquid Policy

Center is that they are an extraordinarily useful tool and a better derivative in many cases for many users than dated futures or options and should be available to the broadest number of people, end users, and hedgers and speculators in the US. And for that reason, they should be classified as futures. Furthermore, if you sort of run the legal analysis on whether they should be classified one way or another, they they do really, fall more into the bucket of futures. But, this is the the key issue here is who will have access to this innovative financial product here in the US.

>> And Tiffany, can you give more insight into, you know, what those definitions mean and why it is that or or which one you think it probably falls into more. >> So, I'm I'm not going to get into controversy, um but I'll I'll give a a couple of a couple of thoughts. So, first, I think we think about perpetual futures and just how they are. If you think about the definitions of swaps and futures, they have really had characteristics of both, but I think the future is a better category for them. One, because they're they're standardized, they're not um they're not bilateral contracts like most swaps are. And I think two, like the pricing mechanism is more similar to futures. But, we're at the situation in

part because of the regulation by enforcement environment we had years ago. And so, what happened was there were five different CFTC enforcement actions where you had in the enforcement context, the CFTC took the position that perps were swaps. And because of that, some people in the industry sort of started to believe that view. And so, for the first time, when you actually have not the enforcement arm, but a policy-setting division of the CFTC establishing how to view perps, they actually call it a future. And so, to the extent there was any type of um confusion in the market, that's part of it. And so, that's again another example of what happens when you have regulation by enforcement, you don't actually have the policy divisions establishing how to categorize these different products.

>> Cathy, what about you? What's your opinion? >> I mean, I'm obviously in the futures camp. Um but I I think the difference in that I think that's something that CME seems to be missing the point on or refuses to even see is where we're talking about something very different than what what they're used to. And when you are talking about something more smart contract-based, for me, I look at that as more being more venue-focused than um something that is more bilateral that you would see in swaps. And I think we are at a great time where we have this technology, where we have smart contract technology, where you're able to deal with uh autonomous code, and you it's it's much

more accessible to so many different people at this point, and you don't have to be at a sophisticated um participant um governed by some agencies rules at this point. And so, hopefully it's more of leaning more towards democratization of having access to these financial products, and then maybe just looking at how those products are being accessible to the public as opposed to trying to figure out what has historically been done in the past. Um are there intermediaries? Who is taking the the liability for for these types of products? I I think with the advent of where things are going, especially from

a a spot trading perspective for crypto, um there are a number of prop accounts that are blowing up right now. You have um they're trading for their own account. Yeah, you don't have counterparties, you don't have other users, you're not um risking other users' money at this point. Uh you're just risking your own. And so, I think it's a different emphasis and just something different that we all should be thinking about. >> Yeah, so let's talk about that because this is a sort of like, you know, this moment where we have this entity that is very dominant in the space, CME, and there's this new technology that does

things a completely different way. And I saw Tiffany nodding her head when Kathy was talking about just the differences between on-chain trading, you know, what does it mean when you're trading um with a smart contract verse or on a smart contract versus with intermediaries? and you know, we've had these existing regulations that have applied in a completely different environment. So I'm so curious to hear how you think regulations should accommodate this new technology that really just does things in a completely different way from how the regulations have from the from the setup that the regulations have applied to as far and either one of you.

>> So yeah, I it's a it's a great question and I you know, unfortunately if if you all had seen the plan for this panel before this week we we were going to be accompanied by someone from the CME and I was very excited to hear their answer to this question. So we'll have to to do the best that we can having this conversation without them. But I think in the first instance, it is important to separate the perpetual future a financial instrument a new type of derivative as Kathy was saying from the venue where it trades. And at this moment the CFTC has authorized the trading of perpetual futures and has classified them as futures for centralized exchanges. And the CFTC did that a couple of months ago in two

orders directed toward coinbase and call sheet allowing them to trade for the first time a true perpetual contract with Bitcoin as the underlying asset. And that has frankly nothing to do with whether that perpetual will be traded on chain or using any new type of technology. And the CME unfortunately disagreed even with that authorization an authorization that would have allowed it the CME itself to offer that exact same product and filed a lawsuit against the CFTC saying both that the process that they used to come to that determination was flawed and also that the determination itself was substantively incorrect that perpetuals are swaps rather than

futures. And so I think we first have to overcome this initial question. What is the classification of the derivative itself and then separate from that we have to ask the question, once we have that classification, where will those contracts and every other type of derivative, dated futures and options and others, where will they be allowed to trade? And so, it's sort of a multi-step process of figuring out, can we have perps in the US? And then, what kind of technology can we use in order to to have them trading live with a a retail or institutional audience?

>> Yeah, I mean, I'll add so the second part, like the second question there, the Commodities Exchange Act, um which is distinct from the securities regulations, sort of uh assumes that for swaps and futures are traded on exchanges. And so, um we think about Project Crypto, which uh each year Atkins of SEC announced in later on Chair Selig sort of uh agreed to sort of sign on to that and thinking about markets moving on chain, that sort of understands that with on-chain markets, you don't necessarily need an intermediary. And so, we were thinking about how these markets can actually work. We have to look at what the regulations say and see whether or not they need to be sometimes exempt or sometimes um

revised to reflect the reality of these markets because what has happened, we're starting to see this with some of the regulations from the SEC, if you take a regulation that's not fit for purpose, you sort of put it on a new novel product uh product, and it results in there not being a good fit from a compliance perspective. It's both overinclusive in that it requires um certain compliance parameters that don't make sense and underinclusive because it's not asking the right risk-based, smart contract-based types of questions. And so, I agree with Jake that it's going to be a two-step, multi-prong uh analysis into the questions to look at, but I think we are actually moving towards on-chain markets, but we're just we're in the very, very beginning stages

of getting to that reality. >> Yeah, I don't mean, I really wish the CME were here, um but we can have fun without them. Um I I do think it's my hot take is it's a little bit cowardice that they couldn't show up and and and jam with us on this topic. Um, I don't think we were particularly spicy on our prep call, but I do think there is a you know, a fundamental difference with the way techno this technology is making new products up here, how people are thinking about how we interact with new products and how we interact with other users or investors in this

space. And I think it's a little short-sighted of the CME to even try to hold on to their current position based on things that have been going on with less than stellar technology to begin with. Um, and so we should be looking forward. You just kind of piece of Unchained. I'm host [music] Laura Shin and the full conversation is in the description below. We go live every Monday and Thursday. >> [music] >> Subscribe so you never miss it. $540 million That's how much concentrated liquidity sat idle in a given week in the first half of this year.

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