Perpetual contracts are financial derivatives, belonging to the same family as futures and options.

Written by: Deng Xiaoyu

If you have been in the cryptocurrency space for a few years, trading perpetual contracts (Perpetual Futures) is probably not a new concept. The characteristics of high leverage, high risk, and high returns have become the focus of global investors. However, in mainland China, such trading has been classified by some judicial authorities as "gambling," linking it to the "crime of operating a casino," which has sparked widespread controversy. Meanwhile, globally, countries are showing a trend of diversification in the regulatory framework for cryptocurrency contract trading.

Criminal lawyer Deng Xiaoyu, while defending exchanges involved in perpetual contracts and gambling, compares the regulatory landscape of major countries and regions worldwide. In this article, we will discuss the true nature of perpetual contracts and the logic behind them to dissect the "casino" controversy in mainland China—whether it is financial innovation or an online casino. Let's have a chat about it.

Is contract trading a "network casino"?

In mainland China, some judicial rulings have classified cryptocurrency perpetual contract trading as "gambling behavior." The specific reasons were disclosed in a previous article titled "Why are cryptocurrency exchange contract trading and commission rebates suspected of operating a casino?" Many judicial authorities believe that:

• The price fluctuations of virtual currencies are characterized by irregularity, randomness, and chance.

• Exchanges amplify speculative risks through high leverage, which is highly risky.

According to current policy regulations, "virtual currency perpetual contract trading" is considered illegal financial activity. Although defenders may argue that perpetual contracts are activities similar to futures contract trading, the courts insist that this model is clearly different from futures trading—it has no agreed delivery time, is perpetual, operates 24/7, has extremely high leverage, and does not involve physical or cash delivery. Players engaging in this trading model through exchanges are essentially engaging in gambling behavior akin to "betting on outcomes." Therefore, it can be classified as "operating a casino."

The judicial authorities refer to "current policy regulations," primarily the notice issued in September 2021 by the central bank and ten other departments titled "Notice on Further Preventing and Dealing with Risks of Virtual Currency Trading Speculation," which clearly states that activities related to virtual currencies are illegal financial activities, including virtual currency derivative trading. This provides a basis for judicial practice. However, is it hasty to lump the complex perpetual contract trading into the category of "casinos"? Let's consider a few questions:

1. The classification of cryptocurrency is somewhat vague

Mainland China has yet to establish a clear framework for the legal attributes of cryptocurrencies. Relevant regulations, such as the "Notice on Preventing Bitcoin Risks," the "Announcement on Preventing Token Issuance Financing Risks," and the 2021 notice, only emphasize that virtual currencies do not possess legal tender status and are prohibited from circulating as currency. But are they commodities? Securities? Or something else? There is still no classification system.

In contrast, international regulatory frameworks are more detailed. The U.S. Commodity Futures Trading Commission (CFTC) has long classified Bitcoin and Ethereum as "commodities," with derivatives regulated as futures; the European Union's "Markets in Crypto-Assets Regulation" (MiCA) directly treats crypto assets and derivatives as financial products. These clear rules leave room for innovation, while the vague classification in mainland China may limit industry development and create a disconnect with global trends.

2. What is the difference between perpetual contracts and futures?

Perpetual contracts are unique derivatives in the cryptocurrency market, evolved from traditional futures, and are highly similar in function: both allow investors to leverage predictions on asset price movements and settle the price difference upon closing or expiration. It sounds sophisticated, but it is essentially a "crypto version" of futures. Traditional futures allow players to use leverage to guess price movements, and perpetual contracts are quite similar, except that they adjust the trading time from the traditional T+1 to perpetual existence (24/7).

Is high leverage synonymous with gambling? This logic does not hold. In financial markets, leverage is quite common; perpetual contracts simply bring the traditional futures gameplay into the crypto space, not a "buy and hold" strategy at a gambling table. To consider it a "gambling tool" may overlook the financial logic behind it.

3. Price is completely random?

Some viewpoints emphasize that the price of virtual currencies "fluctuates with irregularity, randomness, and chance," using this as a basis for gambling classification. This viewpoint significantly conflicts with global market analysis. However, in reality, mainstream cryptocurrencies like Bitcoin are no longer a solo act in the crypto space; they are increasingly tied to the global financial market. Prices are driven by multiple factors, including macroeconomics, supply and demand, technological developments, and geopolitical events.

In January last year, Nasdaq published an article titled "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. Factors such as Federal Reserve interest rate hikes, institutional purchases of ETFs, and geopolitical events can all influence Bitcoin prices. Players engaging in perpetual contracts need to rely on technical analysis, fundamental research, and risk control strategies, not mere guessing. To label price fluctuations as "purely random" may overlook the maturity and complexity of the crypto space.

Global regulatory landscape: The "legitimate" path for crypto contracts

While mainland China’s regulators view perpetual contracts as gambling, other parts of the world do not share this perspective. This is not only a matter of legal provisions but also concerns the underlying recognition of virtual assets.

The European Union, the United States, Hong Kong, Dubai, Singapore, and the United Kingdom each have their own regulatory approaches, but the consensus is: perpetual contracts are financial derivatives, not gambling activities. Whether they are legal depends on compliance with regulations, not on how high the leverage is or how much the price fluctuates.

European Union: The "compliance passport" for financial derivatives

In 2023, the EU introduced the "Markets in Crypto-Assets Regulation" (MiCA), which sets the tone for the discussion: perpetual contracts are "crypto asset derivatives," treated the same as derivatives of stocks and bonds, and are regulated under the "Markets in Financial Instruments Directive" (MiFID II). Want to participate? You need to obtain MiCA permission, have sufficient capital, control risks, and ensure transparency in trading.

*Original MiCA

Translated, it states: "Some crypto assets, particularly those that meet the definition of financial instruments in the directive of the European Parliament and Council '2014/65/EU,' fall within the scope of existing EU financial services legislation. Therefore, a complete set of EU rules already applies to issuers of such crypto assets and companies engaged in activities related to such crypto assets."

MiCA clearly states that any crypto asset and its related services that meet the definition of financial instruments in MiFID II are not subject to MiCA constraints but are governed by the "2014/65/EU Directive," which is the "Markets in Financial Instruments Directive" (MiFID II), where financial instruments are defined. The EU regulatory framework treats cryptocurrency derivatives (as long as they are recognized as financial instruments) equally with traditional derivatives.

What seems complex is actually quite clear. In simple terms, the EU does not consider perpetual contracts to be "gambling" simply because of high leverage; instead, it has issued them a "financial instrument" identification card. This set of rules encourages innovation while preventing chaos, representing a textbook balance.

United States: Divided regulation, each with its own responsibilities

The U.S. has a clear stance on perpetual contracts: they are derivatives, no different from futures and swaps. Bitcoin and Ethereum are recognized as "commodities" by the CFTC, and their perpetual contracts fall under CFTC regulation, following the "Commodity Exchange Act"; if they involve "securities" type crypto assets, then they fall under SEC regulation.

• Commodity Futures Trading Commission (CFTC): Responsible for regulating derivatives of cryptocurrencies recognized as "commodities" (such as Bitcoin and Ethereum). Perpetual contracts based on these assets are considered commodity derivatives, with no essential difference from traditional futures and options. They are typically viewed as "swaps" or "futures" and must comply with the "Commodity Exchange Act" (CEA).

• Securities and Exchange Commission (SEC): If a certain cryptocurrency is recognized as 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 the "Securities Exchange Act."

In 2021, the CFTC took action against BitMEX, imposing a $100 million fine because the platform provided high-leverage perpetual contracts to U.S. users without registration. The CFTC enforcement official in this case clearly stated, "…… the registration requirements and core consumer protections Congress established for our traditional derivatives market apply equally in the growing digital asset market." This means: "The rules of the traditional derivatives market also apply to the crypto market." This statement is firm and indicates that the financial attributes of perpetual contracts are not denied in the U.S.

Dubai: Balancing innovation and compliance

Securities and Commodities Authority (SCA) regulates virtual assets based on securities

The SCA is the foundational regulatory framework for investment-related crypto asset activities in the UAE. The SCA defines virtual assets as value representations used for investment purposes that can be traded digitally, excluding legal tender, securities, and other digital currencies.

In recent years, the SCA has gradually revised and improved regulatory boundaries, issuing the "Virtual Asset Activities Regulation" at the federal level in November 2020, covering initial coin offerings (ICOs), exchanges, platform markets, custody services, and derivatives. The main regulatory requirements include:

(1) Virtual asset business providers must be registered and established within the UAE or in financial free zones;

(2) Virtual asset service providers must obtain approval and licensing from the SCA.

Dubai Virtual Assets Regulatory Authority (VARA)

In 2023, Dubai's Virtual Assets Regulatory Authority (VARA) issued the "Virtual Assets and Related Activities Regulation," directly managing perpetual contracts as "virtual asset derivatives," similar to foreign exchange and stock derivatives. Want to participate? You need to obtain a VARA exchange license, with risk disclosure and investor protection being non-negotiable.

• Perpetual contracts are classified as virtual asset derivatives, similar to foreign exchange and stock derivatives in traditional financial markets.

• Exchanges must obtain a VARA exchange service VASP license, which includes VA derivatives.

For example, Deribit obtained a VARA trading service license in Dubai last year, covering both spot and derivatives. Dubai's approach strikes a balance: it welcomes innovation while preventing the market from becoming a "wild growth" playground.

Singapore: Strict Access

Singapore has an open attitude towards cryptocurrencies, but the rules are strict. The Monetary Authority of Singapore (MAS) categorizes cryptocurrencies into utility tokens, security tokens, and payment tokens, with perpetual contracts falling under the jurisdiction of "licensed exchanges." The margin for cryptocurrency derivatives at licensed exchanges is subject to strict regulation. To engage in contract trading, one must become a financial exchange approved by MAS to operate cryptocurrency derivatives and apply for DPT operating rights.

Currently, there are only four licensed exchanges in Singapore, including the Singapore Exchange Derivatives Market (SGX Derivatives), Asia Pacific Exchange (APEX), and Intercontinental Exchange Futures (ICE Futures), which are the only ones allowed to operate cryptocurrency derivatives. The strict access ensures market order and investor protection.

Interestingly, traditional exchanges in Singapore have begun to experiment with crypto perpetual futures aimed at institutional and professional investors. What does this indicate? In Singapore's view, perpetual contracts are also legitimate financial derivatives, not speculative toys. This also marks that traditional exchanges are accelerating their layout in the digital asset field to meet the growing demand from institutional investors for exposure to cryptocurrencies.

United Kingdom: Retail Investors Stopped, Big Players Free

Let's take a look at the United Kingdom. The Financial Conduct Authority (FCA) has prohibited retail investors from engaging with crypto derivatives, including perpetual contracts, since 2021, but has opened the door to professional investors. The FCA refers to them as "high-risk financial instruments," requiring exchanges to register and operate in compliance. We can see that in the relatively strict regulatory environment of the UK, perpetual contracts are also considered financial derivatives; their legality depends on whether you are a "qualified player," not on the tools themselves being "gambling."

Hong Kong: Testing Derivatives, Small Steps

In June 2023, Hong Kong began implementing the "Licensing Regime for Virtual Asset Trading Platforms," allowing retail investors to invest in cryptocurrencies, but derivatives are still under observation. According to recent media reports, Liang Hanqing, the head of the Financial and FinTech Promotion Unit of the Hong Kong Invest Hong Kong, stated in an interview that although Hong Kong has currently only opened up spot trading, the government has already begun studying the regulation of derivative businesses. The COO of the exchange HashKey has also stated that once policies are relaxed, they will apply for a license.

Hong Kong's approach is quite clever: first manage the spot market well, then gradually test derivatives, avoiding both rashness and backwardness. The future of perpetual contracts in Hong Kong is likely to be positioned as financial instruments, not classified as "gambling."

Summary by Mankun Lawyer

We can see that the global regulatory landscape is generally consistent: perpetual contracts are financial derivatives, belonging to the same family as futures and options. The EU issues a "compliance passport," the U.S. applies traditional derivative rules, and Hong Kong, Dubai, and Singapore encourage innovation while tightening regulations. The UK manages based on investor levels, using licenses, risk warnings, and leverage limits to keep the market orderly.

In mainland China, the situation is somewhat different. Some courts have classified perpetual contracts as "gambling," perhaps overlooking their financial attributes. The assertion that prices are "irregular" also deviates from global market data—Bitcoin prices have long been linked to the Nasdaq and Federal Reserve policies. This one-size-fits-all regulation may reduce the vitality of fintech in China, appearing somewhat conservative compared to global innovation trends.

Mankun Criminal Lawyer writes this article to call on all parties to reference global experiences and reconsider the classification of perpetual contracts in light of Hong Kong's policy trends. For example, adopting the EU's MiCA tiered regulation to treat perpetual contracts as financial instruments; or following the U.S. CFTC's commodity derivative model, setting leverage limits and protecting investors. On the other hand, it is hoped to clarify the nature of perpetual contracts. We believe that trading on exchanges (perpetual contracts) under strict regulation in mainland China should not be the case, but fundamentally, it is an issue of lacking a license, which can be evaluated as illegal operation. Conversely, if perpetual contracts are considered gambling, then tens of thousands of contract trades would already require administrative penalties for participating in gambling, which is clearly not conducive to social governance.

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