If you have been in the cryptocurrency world for a few years, perpetual futures trading is probably nothing new. High leverage, high risk, and high returns have become the focus of global investors. However, in mainland China, such transactions are currently classified as "gambling" by some judicial authorities and linked to the "crime of opening a casino", causing widespread controversy. At the same time, around the world, countries' regulatory frameworks for cryptocurrency contract trading are showing a trend of diversification.
In the process of defending the exchange's perpetual contract involving gambling, Mankiw's criminal lawyer Deng Xiaoyu compared the regulatory landscape of major countries and regions around the world. In this article, we will talk about the true face of perpetual contracts and the logic behind them, and dismantle the "casino" controversy in mainland China - is it financial innovation or online casino? Let's talk about it.
Is contract trading an “online casino”?
In mainland China, some judicial decisions have characterized cryptocurrency perpetual contract trading as "gambling behavior." The specific reasons have been disclosed in a previous article (Why are virtual currency exchange contracts suspected of opening a casino?). Many judicial authorities believe that:
The rise and fall of virtual currency is characterized by irregularity, randomness and contingency.
Exchanges amplify speculative risks through high leverage and are highly risky.
According to current policy regulations, "virtual currency perpetual contract trading" is an illegal financial activity. Although the defense counsel will argue that perpetual contracts are similar to futures contract trading, the court insists that this model is obviously different from futures trading - there is no agreed delivery time, it is a perpetual contract, the trading time is 7x24 hours, the leverage is extremely high, and there is no physical or cash delivery. The trading model of players through the exchange is essentially the same as gambling behavior of "betting on the size and winning or losing". Therefore, it can be identified as "opening a casino".
The "current policy regulations" mentioned by the judicial authorities here are mainly the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the central bank and ten other departments in September 2021, which clearly stipulates that virtual currency-related business activities are illegal financial activities, including virtual currency derivatives trading. This provides a basis for judicial practice. But is it possible to be hasty to label complex perpetual contract transactions as "casinos"? Let's discuss a few questions:
1. The nature of cryptocurrency is somewhat vague
Mainland China has not yet formed a clear framework for the legal attributes of cryptocurrency. Relevant regulations, such as (Notice on Preventing Bitcoin Risks) (Notice on Preventing Token Issuance and Financing Risks) and the 2021 Notice, only emphasize that virtual currency does not have legal tender and currency status and prohibits its circulation as currency, but is it a commodity? Securities? Or something else? There is no classification system yet.
In contrast, the international regulatory framework is more detailed. The U.S. Commodity Futures Trading Commission (CFTC) has long defined Bitcoin and Ethereum as "commodities" and regulated derivatives as futures; the EU's (Markets in Crypto Assets Regulation) (MiCA) is more direct, framing crypto assets and derivatives as financial products. Such clear rules leave room for innovation, while the vague characterization in mainland China may restrict the development of the industry and be out of touch with global trends.
2. What is the difference between perpetual contracts and futures?
Perpetual contracts are derivatives unique to the cryptocurrency market, which evolved from traditional futures and are highly similar to traditional futures in terms of function: both allow investors to predict asset price trends through leverage and settle the difference when closing a position or when it expires. It sounds high-end, but it is actually the "crypto version" of futures. Traditional futures allow players to use leverage to guess price increases and decreases, and perpetual contracts are similar, except that the trading time is adjusted from the traditional T+1 to perpetual (7x24).
High leverage is gambling? This logic is untenable. In the financial market, leverage is commonplace. Perpetual contracts are a move of traditional futures to the cryptocurrency world, not a “buy and leave” approach like in mahjong. To think it is a “gambling tool” may be to ignore the financial logic behind it.
3. Are prices irregular?
Some opinions emphasize that the price fluctuations of virtual currencies are "irregular, random, and accidental" and use this as the basis for determining whether it is gambling. This view is in significant conflict with global market analysis. But in fact, mainstream cryptocurrencies such as Bitcoin are no longer just a one-man show in the currency circle, and they are becoming increasingly deeply tied to the global financial market. Prices are driven by multiple factors, including macroeconomics, supply and demand, technological developments, and geopolitics.
In January last year, Nasdaq also published an article (Understanding the Correlation between Bitcoin and the Nasdaq 100 Index), pointing out that the long-term correlation coefficient between Bitcoin and the Nasdaq is as high as 0.805. The Fed's interest rate hikes, institutional ETF purchases, and geopolitical disturbances can all affect the price of Bitcoin. Players who trade perpetual contracts need to rely on technical analysis, fundamental research, and risk control strategies, not blind guessing. To describe price fluctuations as "purely random" may not see the maturity and complexity of the cryptocurrency industry.
Global regulatory landscape: the “legal” path for crypto contracts
Regulators in mainland China consider perpetual contracts to be gambling, but other parts of the world do not think so. This is not only a matter of legal provisions, but also concerns the logic behind the underlying identification of virtual assets.
The EU, the US, Hong Kong, Dubai, Singapore, and the UK all have their own regulatory approaches, but the consensus is that perpetual contracts are financial derivatives, not gambling. Whether they are legal or not depends on whether they abide by the rules, not on whether the leverage is high or the price volatility is large.
EU: “Compliance Pass” for Financial Derivatives
The EU will introduce the (Markets in Crypto-Assets Directive) (MiCA) in 2023, which sets the tone for the discussion: perpetual contracts are "crypto-asset derivatives" and are treated the same as stock and bond derivatives, and are regulated by the (Markets in Financial Instruments Directive) (MiFID II). Want to play? You need to get a MiCA license, have sufficient capital, control risks, and make transactions transparent.
*Mica original text
Translated, it says: “Some crypto-assets, in particular those that meet the definition of financial instruments in Directive 2014/65/EU of the European Parliament and of the Council, fall within the scope of application of existing EU financial services legislative acts. Therefore, a full set of EU rules already apply to issuers of such crypto-assets and companies engaged in activities related to such crypto-assets.”
MiCA clearly states that all crypto assets and related services that meet the definition of financial instruments in MiFID II are not subject to MiCA, but are subject to (Directive 2014/65/EU), that is, (Markets in Financial Instruments Directive) (MiFID II), which defines financial instruments. The EU regulatory framework treats cryptocurrency derivatives (as long as they are identified as financial instruments) the same as traditional derivatives.
It looks complicated but is actually very clear. To put it bluntly, the EU did not consider perpetual contracts as "gambling" because of their high leverage, but issued them an ID card of "financial instruments". This set of rules encourages innovation while not allowing chaos, which can be called a textbook balance.
The United States: Separate management, each doing their own job
The US has a clear attitude towards perpetual contracts: it is a derivative, no different from futures and swaps. Bitcoin and Ethereum are identified as "commodities" by the CFTC, and perpetual contracts based on them are under the jurisdiction of the CFTC and follow the (Commodity Exchange Act); if it involves "security" crypto assets, it is under the jurisdiction of the SEC.
Commodity Futures Trading Commission (CFTC): Responsible for regulating derivatives of cryptocurrencies that are considered "commodities" (such as Bitcoin and Ethereum). Perpetual contracts based on these assets are considered commodity derivatives and are essentially the same as traditional futures options. They are usually considered "swap" or "futures" and must comply with the Commodity Exchange Act (CEA).
Securities and Exchange Commission (SEC): If a cryptocurrency is deemed a "security," its derivatives (such as perpetual contracts based on that asset) are regulated by the SEC and must comply with the (Securities Act) and (Securities Exchange Act).
In 2021, the CFTC fined BitMEX $100 million because the platform provided high-leverage perpetual contracts to American users without registration. The CFTC law enforcement boss clearly stated in the case, "...... the registration requirements and core consumer protections Congress established for our traditional derivatives market apply equally in the growing digital asset market." This is to say: "The rules of the traditional derivatives market still apply to the crypto market." This resounding statement shows that no one in the United States dares to deny the financial attributes of perpetual contracts.
Dubai: Innovation and compliance
The Securities and Commodities Authority (SCA) regulates virtual assets in the same way as securities
SCA is the basis of the regulatory framework for investment-related crypto-asset activities in the UAE. SCA defines virtual assets as digitally tradable representations of value used for investment purposes, excluding legal tender, securities and other digital currencies.
In recent years, the SCA has gradually revised and improved its regulatory boundaries. In November 2020, it issued the (Regulations on Virtual Asset Activities) at the federal level, covering services such as initial coin offerings (ICOs), exchanges, platform markets, custody services, and derivatives. Its main regulatory requirements include:
(1) Virtual asset business providers must be registered in the UAE or in a financial free zone;
(2) Virtual asset service providers must obtain approval from the SCA.
Dubai Virtual Asset Regulatory Authority (VARA)
Dubai's Virtual Asset Regulatory Authority (VARA) issued the "Regulations on Virtual Assets and Related Activities" in 2023, which directly manages perpetual contracts as "virtual asset derivatives" in the same way as foreign exchange and stock derivatives. Want to play? You must get a VARA exchange license, and risk disclosure and investor protection are essential.
Perpetual contracts are classified as virtual asset derivatives, similar to foreign exchange and stock derivatives in traditional financial markets.
The exchange needs to obtain a VASP license for VARA exchange services, which includes VA derivatives.
For example, Deribit’s entity in Dubai obtained a trading service license from VARA last year, covering spot and derivatives. Dubai’s approach is very good at striking a balance: it welcomes innovation while not allowing the market to become a playground for “wild growth”.
Singapore: Strict access
Singapore is open to cryptocurrencies, but the rules are very strict. The Monetary Authority of Singapore (MAS) divides cryptocurrencies into utility, security, and payment tokens, and perpetual contracts are managed by "licensed exchanges." The margin of cryptocurrency derivatives on licensed exchanges is strictly regulated. If you want to conduct contract trading, you need to become a financial exchange approved by MAS to operate cryptocurrency derivatives and apply for DPT operating rights.
According to the MAS official website, there are only four licensed exchanges in Singapore, including SGX Derivates, APEX, ICE Futures, etc. They are the only ones that can operate cryptocurrency derivatives. Strict access ensures market order and investor protection.
Interestingly, traditional exchanges in Singapore have begun to test the waters of crypto perpetual futures for institutional and professional investors. What does this mean? Perpetual contracts are also serious financial derivatives in Singapore's eyes, not speculative toys. This also indicates that traditional exchanges are accelerating their layout in the digital asset field to meet the growing demand of institutional investors for cryptocurrency exposure.
UK: Retail investors are not allowed to enter, but big investors can do whatever they want
Let's look at the UK. The Financial Conduct Authority (FCA) of the UK has banned retail investors from using crypto derivatives, including perpetual contracts, since 2021, but has opened the door to professional investors. The FCA calls it a "high-risk financial instrument" and requires exchanges to register and operate in compliance. We can see that in the UK, where management is more stringent, perpetual contracts are also considered financial derivatives. Whether they are legal or not depends on whether you are a "qualified player", and the tool itself is not "gambling".
Hong Kong: Testing the waters of derivatives, small steps and fast progress
Hong Kong will begin to implement the (virtual asset trading platform licensing system) in June 2023, and will allow retail investors to invest in cryptocurrencies, but derivatives are still on the sidelines. According to the latest media news, Liang Hanjing, head of financial finance and fintech at the Hong Kong Investment Promotion Agency, said in an interview that although Hong Kong currently only allows spot trading, the government has begun to study the regulation of derivatives business. The COO of the exchange HashKey has also said that once the policy is relaxed, it will apply for a license.
Hong Kong's approach is very smart: first manage the spot market, then slowly test the waters of derivatives, neither being too aggressive nor too outdated. In the future of perpetual contracts in Hong Kong, it is estimated that they will also be positioned as financial instruments and will not be considered "gambling."
Attorney Mankiw's Summary
We can see that the global regulatory style is generally consistent: perpetual contracts are financial derivatives, in the same family as futures and options. The EU issues them a "compliance pass", the US uses traditional derivatives rules, Hong Kong, Dubai, and Singapore encourage innovation while tightening the reins, and the UK manages them in layers according to the level of investors, using licenses, risk warnings, and leverage restrictions to keep the market in an orderly manner.
The situation in mainland China is quite different. Some courts have deemed perpetual contracts as "gambling", perhaps overlooking their financial attributes. Saying that prices are "irregular" is also inconsistent with global market data - Bitcoin prices have long been linked to the Nasdaq and the Fed's policies. This one-size-fits-all regulation may have made financial technology less dynamic in China, and slightly conservative compared to the global innovation trend.
Criminal lawyer Mankiw wrote this article to call on all parties to refer to global experience and re-examine the nature of perpetual contracts in consideration of Hong Kong's policy trends. For example, they can learn from the EU MiCA's tiered supervision and treat perpetual contracts as financial instruments; or refer to the US CFTC's commodity derivatives model to set leverage limits and protect investors. On the other hand, we also hope to correct the name of perpetual contracts. We believe that it is indeed wrong to conduct exchanges (perpetual contracts) under the strict supervision of the mainland, but in essence, it is a problem of not having a license, which can be completely evaluated as an illegal business crime. On the other hand, if perpetual contracts are considered gambling, then tens of thousands of contract transactions will already need to accept administrative penalties for participating in gambling, which is obviously not conducive to social governance.
/ END.
Authors: Deng Xiaoyu, Zheng Hongde