CFTC: Perps are Legal Now
Coinbase announced that it would be launching perpetual futures last week, stunning some onlookers.
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Does Coinbase Know Something the Rest of Crypto Doesn’t?
Last Thursday, at the Coinbase State of Crypto Summit, Head of Consumer Products Max Branzburg announced a series of new offerings coming to the US. But one product in particular caught attendees' eye: what Branzburg called “CFTC-compliant perpetual futures” coming “soon” to the United States.
User demand for perps is high: according to Branzburg’s own presentation, derivatives represent “75% of global crypto trading volume,” and most of that is in perpetual futures. But the products aren’t widely accessible to American users. The products allow traders to speculate on crypto prices without holding the tokens, with leverage and a floating basis. But most companies that would offer them (and many which do, overseas) have hesitated — ostensibly, because the regulatory requirements for offering them are unclear. At least, that’s what many industry watchers assumed.
It is true that Coinbase has been teasing “perpetual-style” futures since March, but this very public, unalloyed “perpetual futures” announcement was different. Many sources I spoke with were especially surprised because they weren’t certain that perpetual futures contracts were even legal in the United States.
During the previous administration, the CFTC (Commodity Futures Trading Commission for our crypto-newbies) doggedly pursued firms supporting perpetual futures, bringing enforcement actions against Kraken, KuCoin, bZerox, and Binance for substantially similar products. Those products were unregistered, but even among firms registered with the CFTC it has long been uncertain whether these so-called “perps” would be allowed.
Case in point, just this April the CFTC put out a request for comment on perpetual derivatives, asking industries to explain what types of perpetual derivatives should be offered, who would use them, and what the potential risks and rewards of offering them would be. Numerous organizations responded, including key industry groups the Blockchain Association and The Digital Chamber. Yet neither of these groups went so far as to argue that, without agency actions, perps were then-legal to offer. Together this strongly suggests that, at best, this area was still a gray area as of April.
The CFTC hasn’t made any formal announcement or finding since then, so Coinbase’s Thursday announcement raised an obvious question: what do they know that the rest of the crypto industry doesn’t?
It turns out a lot, because apparently these contracts are legal now.
Bitnomial’s Regulatory Unlock
To unravel this mystery, it helps to go back to April. The CFTC released its request for comment on April 21, suggesting that as of that date, ambiguity remained regarding the laws application to perps. But then an industry participant launched CFTC-regulated perps.
On April 23, Bitnomial, a CFTC-regulated designated contract market (DCM), self-certified the first ever legal perpetual futures market: Bitcoin US Dollar Centi Perpetual Futures Contract.
It helps to understand the self-certification to understand the gravity of this action. Under CFTC rule 17 CFR § 40.2, DCMs are entitled to self-certify a compliant derivative product by transmitting a packet of information to the CFTC. Then the onus moves to CFTC to decide whether or not it wants to seek a stay, during which it can challenge the contract. This is the process that the previous administration used in January to try to prevent Crypto.com from offering sports-based prediction markets. If the CFTC does nothing, the contracts go live, and in effect this gives them the agency's legal blessing.
Translation: by letting Bitnomial list the first perpetual futures contract, the CFTC was saying the contract was legal.
Luke Hoersten is Founder and CEO of Bitnomial, and we spoke earlier this week on this issue to understand what was going on behind the scenes. According to Hoersten, before self-certifying, Bitnomial had been in talks with the CFTC going back to the before times of 2022 — before FTX collapsed.
He said he was confused by many in the industry’s belief that perps were illegal. “One theory I’ve had is that the SEC and the Securities and Exchange Act are prescriptive, and you have to follow exactly what they’ve said, where the Commodity Exchange Act is principles based,” he explained. Maybe industry players just didn’t understand this difference. But with the CFTC, “the onus is on us as the regulated organizations to basically justify and prove our points.” Asked for comment, a spokesperson for the CFTC did not disagree.
Bitnomial’s view, according to Hoersten as well as Matthew Kluchenek, a partner at the law firm Katten who advised Bitnomial on its perpetual futures contracts, is that there is a fundamental difference between perpetual swaps, which truly have no expiration date, and perpetual futures, which have an expiration date far in the future. Perpetual swaps are in a legitimate legal gray area, they said, but perpetual futures are not. This view tracks with some CFTC comment letters that have also drawn the distinction.
Ultimately, Bitnomial absorbed all this and decided that they were just comfortable moving forward. “There were policy issues which we solved with the regulators and the CFTC deeply involved.” So they did.
Self-certification is just the way the agency works, Hoersten told me. And the CFTC agrees. Earlier this month, Acting CFTC Chair Caroline Pham told the crowd at the Piper Sandler Global Exchange and Trading Conference: “Because our regulations are flexible, the CFTC is typically not focused on writing new regulations,” she said. “Instead, the CFTC is focused on how current regulations should best apply to actual proposals that have been submitted to us in a few innovative, but complex areas.”
And now, it seems, this flexibility has opened a new market.
At the same event where Coinbase announced that perpetual futures were “up next,” Acting Chair Pham called the belief that perps were not “live” in the United States “fake news.”
“We’re not waiting for perps to go live, they’ve been live. They’ve been live on Bitnomial,” she said. “They worked with the CFTC and our staff for over a year on what was the methodology, what was the pricing, what was the funding.”
Well, that solves it.
The Plot Thickens
Or does it?
After all, despite Acting Chair Pham’s statements, my research has not been able to find a single other “perp” style contract — future or swap — self-certified before or after Bitnomial. Coinbase has a DCM, Coinbase Derivatives Exchange. If they really believed that the barriers to certification were gone, why wait?
Hoersten has one theory. Though he said that he wasn’t directly familiar with Coinbase’s conversations with the CFTC, he assumed that, like Bitnomial before it, Coinbase is probably in close communication with the agency.
Describing the process, he went on, “[y]ou get something concrete, in agreement with the CFTC, and you get it to a point where you can certify it legally and you believe you’ve ticked all the boxes and so does the CFTC. Even though you can see some of the filings we’ve made, there’s a lot behind the scenes that [Coinbase] can’t see and others can’t see that can be very difficult to replicate.”
A spokesperson for the CFTC assumed the same, though they also said that they are not privy to conversations between specific companies and the agency.
“That doesn’t necessarily need to happen, but that’s best practice,” the CFTC spokesperson explained, “nobody ever wants to catch the regulator off guard with something kind of new and breaking the mold.” Another staffer at the CFTC echoed the same reasoning, noting that Coinbase likely wouldn’t have made the announcement at a conference with Acting Chair Pham present if it was a surprise to her.
The CFTC spokesperson added that “other firms are working with the CFTC and intend to self-certify perpetuals this year.”
Coinbase has not submitted the formal paperwork to self-certify a perpetual futures contract, as Bitnomial ultimately did. It also has not listed a redacted draft, as it would be required to do, on its own website. During his on-stage announcement, Branzburg did not provide a date by which Coinbase would launch the product.
So Coinbase may still be in the, if I may, “talking stages” of this relationship. Next week or next month, though, inviting the acting chair of a presiding regulatory agency to speak at your product launch certainly sends a message.
Is This a Regulatory Moat?
It is within the realm of possibility, of course, that incoming CFTC Chair Brian Quintenz could take a completely different tack and release guidance, or embark on a formal rulemaking process, that clarifies the perp self-certification standards.
Two lobbyists who spoke to Brogan Law assumed that he would, if for no other reason than that perpetual futures and, separately, prediction markets, are the most obvious topics to address right now.1 “Regulators don’t go into a job to do nothing,” one quipped.
From the outside, many assumed that Coinbase made its announcement about perpetual futures now because it had some inside information that Quintenz would be “on-side” when he came in. After all, Quintenz was at a16z until February 24 of this year, and Coinbase is one of the VC’s biggest portfolio companies. I didn’t find any evidence of this particular link, though.
But if we assume that perpetual futures are, technically, legal, but that it takes close cooperation with the CFTC to actually launch them, then it raises the question of whether the CFTC has implicitly created a regulatory moat. In this environment, the CFTC is “picking winners and losers,” one lobbyist stressed. “Rule of law is awesome, and everyone should be subject to the same rulebook. Ad hoc approvals of individual products is not the way to go.”
A CFTC spokesperson pushed back on this critique. “While it’s not a requirement to engage with the CFTC prior to self-certifying new products, it has been a longstanding practice and is generally helpful in ensuring a smooth product launch, especially on novel products. Staff are available to assist firms in this process. The growing number of self-certified products from firms of all sizes suggests that engaging with the CFTC is not prohibitive to bringing products to market.”
For Hoersten, this is neither good nor bad; it’s just “the way it is.” Any perpetual futures products, including the forthcoming ones that Coinbase announced last week, require the offering company to prove itself to the CFTC as adequately resourced, structured, and qualified. And nothing is a done deal until the formal paperwork is filed, he said, whether a company has made a formal announcement or not.
That includes Coinbase, announcing that it will (not might, not could) be launching “CFTC-regulated” perpetual futures last Thursday. “You can say that with regulators in the room,” Hoersten said. “That doesn’t mean it’s definitive, or true, or there won’t be more modifications.”
But still, it is hard to avoid the obvious coda. With Bitnomial’s market live, Acting Chair Pham arguing that perps are legal in public, and Coinbase in the wings, the time might be ripe for a competitor to front-run the launch. After all, any DCM can self-certify these markets, and these signals are unambiguous. Many regulated participants, Crypto.com, MIAX (formerly LedgerX), Cboe, heck even Kalshi, have the ability to engage immediately. Now that the cat is out of the bag, will one of them pounce?
A Quick Note on Taxation
I know everyone’s thinking of stablecoins as the top legislative priority right now. But if you’re looking for instant gratification, allow me to make a suggestion: focus on taxes.
As I scooped in my own newsletter last week, Senator Lummis is looking to wedge numerous crypto tax provisions into the Big Beautiful Bill, a budget bill that has most of Congress’ attention right now. There’s a long list of topics covered in her proposals, from those covering airdrops to taxes on foreigners (Cahill Tax Partner Jason Schwartz published a detailed breakdown here).
But the Big Beautiful Bill, of course, isn’t about crypto. It’s a budget bill2, and that means that the overall cost is a big concern. The Congressional Budget Office (CBO) “scores” different provisions by evaluating the financial burden of each. And the CBO said that the version of the Big Beautiful Bill that passed through the House earlier this month as adding $2.4 trillion to the federal deficit over the next 10 years — and that is way too big a number for many Republican members of Congress and some of Trump’s closest advisors (I’m assuming I don’t have to remind you of the beef between Elon Musk and Trump over this very issue).
Lummis’ provisions, according to Coinbase Vice President of Policy Kara Calvert have been “scored” as a big revenue raiser, bringing in several billion dollars. That’s due primarily to a portion which would extend wash sales rules to crypto, preventing traders from reporting a loss on crypto if they buy substantially similar assets within a month, and a ‘mark to market’ provision, which allows traders to value their assets at a set point each tax year, according to a different source who declined to be named while discussing a leaked text.
Calvert was excited to talk about the bill because she said Coinbase had been working on tax reform for crypto for “years.” Lummis’ proposals, she said, are “common sense” and tax issues, generally, haven’t gotten enough attention, so Coinbase is “strongly, strongly supportive.” “I think [tax] is the most underreported issue right now. Tax clarity is just as important for Americans, and maybe more so, than the regulatory clarity we need for intermediaries,” Calvert said.
However, Calvert did note a couple areas Lummis’ proposals did not address that are worth some attention. For example, she pointed out that Lummis’ proposal does not address the Corporate Alternative Minimum Tax (CAMT) created by the Inflation Reduction Act in 2022. This tax sets a 15% minimum tax for large corporations that earn more than $1 billion as calculated in reports to investors in financial statements — not the sum total after deductions and credits which lower taxable income when reported to the IRS. Industry critics say this doesn’t work well for crypto firms because it forces them to include unrealized crypto gains, which can be shaky given how much cryptocurrency fluctuates.
She also noted that as of right now, individual stablecoin transactions must be reported for gains and losses to the IRS, which imposes a pretty significant regulatory burden if stablecoins see this big boom in usage as expected for everyday payments. It also seems kind of silly, from a practical perspective, since stablecoins by definition keep a stable price and thus do not see gains and losses.
This rule could, theoretically, be addressed by the IRS on its own through a rule change, but they would probably be more responsive to a little push from legislation. Lummis’ proposals include a de minimis rule on cryptocurrency transactions like those in bitcoin and ether, but does not address reporting requirements for stablecoins.
Schwartz says that this stablecoin provision is more important, however. “Let’s be real, no one's buying groceries with Bitcoin or ETH right now,” he said. “This de minimis rule is arguably helpful, but it really fails to capture the most important thing, which is stablecoin payments.”
That’s just one of Schwartz’ criticisms, which he details in his blog linked above. Some of these criticisms include a skepticism of the wash sales rule, which he says unfairly punish crypto users swapping their currency for assets like NFTs, and a lack of clarity for small-time crypto investors who do not get to benefit from the mark-to-market provision.
Schwartz says he’s not alone. Though he declined to name names, Schwartz said a significant portion of the industry is skeptical of Lummis’ proposals, thinking they’re rushed and not quite clear enough or comprehensive enough for prime time. Because of this he said he thought Lummis’ provisions wouldn’t make it into the Big Beautiful Bill.
We’ll know whether he’s right in short order. Trump is pressuring Congress to pass the Big Beautiful Bill by August, which gives the Senate until July 4 to pass their version. And lawmakers seem intent on meeting this deadline.
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Especially if a market structure bill doesn’t pass. And my sources are increasingly pessimistic its prospects. Decrypt’s recent reporting here is informative.
Even though it is burdened by a million different political priorities. It’s hard to pass a bill — but because budget bills are necessary in order to keep the federal government running, they’re virtually guaranteed to pass at some point soon in some form. That’s why you see a lot of Senators tacking on what feels like random issues — because the odds of getting them passed in the context of a budget bill can be easier and quicker than trying to pass them as a stand-alone bill.