The CFTC and perpetual motion
plus: BTC market structural weakness, and what are perps again?
“I prefer true but imperfect knowledge, even if it leaves much undetermined and unpredictable, to a pretence of exact knowledge that is likely to be false.” ― Friedrich Hayek ||
Hi everyone, I hope you’re all doing well! Today I dive into Friday’s big announcements from the CFTC, exciting stuff for us market structure nerds. Below, I do my best to explain why it matters, within newsletter limitations of time and space – let me know if you have any questions, though, either responding to this email, or hop into the chat on Substack.
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The CFTC and perpetual motion
Term of the day: perpetual futures
Markets: structural weakness
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WHAT I’M WATCHING:
The CFTC and perpetual motion
A stack of announcements from the CFTC last week add up to arguably the biggest change in derivatives markets since the structural reforms after the 2008 financial crisis. And, they were made possible by blockchain technology and crypto asset innovation, a clear example of how crypto is slowly changing traditional markets for the better.
In brief, on Friday the CFTC:
1) Published a staff advisory outlining expectations for any registered entity that wants to offer 24/7 trading and settlement of derivatives contracts. This is not blanket approval – case-by-case review is still needed – but it removes a layer of uncertainty while opening the door to more concrete conversations with the derivatives market regulator.
2) Issued an order approving Kalshi’s application to trade BTC perpetual futures, launching the first US perpetual futures market. (This is a big deal, more on why and what perpetual futures even are below.)
3) Issued an interpretation and no-action position allowing Coinbase to offer its US users access to offshore crypto asset perpetual contracts traded on Deribit (the Dubai-based derivatives platform it acquired last year), and can post crypto assets and stablecoins as collateral.
4) Published a policy statement to reassure regulators and market participants that it wasn’t flinging open the gates to crypto innovation, approval for perpetual futures contracts based on anything that isn’t BTC would be on a case-by-case basis.
In sum, perpetual futures for BTC can now come onshore in the US, under the supervision of the CFTC. And US-based clients of Coinbase can access a much wider range of perpetuals offshore.
These options will prove popular, of that there is no doubt. From nothing just over 10 years ago, perpetual futures traded almost $90 trillion in volume last year, making them one of the fastest-growing financial products ever.
The big deal is not just that traders get access to new types of derivatives – and perpetual futures are indeed different. It’s that perpetual futures markets work better than traditional futures markets for most use cases. For now, they will only be available for a range of crypto assets for US-based traders (and only for BTC on Kalshi) – but with time, confidence in the mechanism will deepen and they will spread to other asset classes. Zooming out, these approvals open the door to a much deeper transformation of US capital markets.
To see why perpetual futures are a better product than traditional futures, I first have to explain what they are for those of you not steeped in crypto market nuts and bolts.
