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Perpetual futures (“perps”) are a type of derivative contract that enables ongoing speculation on the future price of an underlying asset, such as cryptocurrency. Nobel Prize-winning economist Robert Shiller first theorized the concept of perps in 1991. While these financial instruments have been around for over 30 years, they gained significant popularity in the mid-2010s with the rise of crypto markets and are now one of the fastest-growing derivatives in the world.   

Characterized by their availability for high leverage, high risk-high reward trading, ease of exit from the futures contract, and relative complexity for beginners, perpetual futures, or perps, are one of the most liquid instruments and more fascinating concepts in crypto. But what is the difference between a perpetual future and a traditional normal future contract? I’m glad you asked.  

Traditional Futures  

• Traditional future contracts are derivative contracts and refer to a legal agreement to buy or sell a particular commodity or security at a predetermined price at a specific time in the future. The buyer is obligated to purchase and deliver/receive the asset when the future contract expires, and the seller is taking on the obligation to provide and deliver the underlying asset at the expiration date.   
• Futures allow an investor to speculate on an asset using leverage while also allowing hedging of the price movement of the assets to help prevent losses during unfavorable price changes.   
• They typically are represented in several industries, including commodities like livestock, energy, currencies, and even securities.  
• As opposed to forward contracts, futures are standardized and will always have the same terms of the agreement regardless of which parties are involved.   

It’s possible to make a profit by trading futures. Traders and fund managers use futures to bet on the price change of assets and hedge price jumps before they increase in value to sell later and make a profit.  

Perpetual Futures  

• Perpetual futures, or perps, are another type of derivative contract that allows traders to speculate on the future price of an asset without an expiration date or settlement strike price, allowing them to be held indefinitely. They can allow for greater leverage and may be more liquid than the spot cryptocurrency market, but they can also come at a greater risk.  
• Perpetual futures are adjusted through a funding rate mechanism to keep the contract price close to the underlying asset’s price because if the contract price fluctuates too far from the spot price, either the seller (the short) or the buyer (the long) will make a payment to the other, based on the difference between the contract price and the spot price. This difference is called the premium index.   
• When the funding rate is positive, and the contract price is higher than the spot price, it is called contango, and the long (buyer) pays the short (seller) the funding amount. When vice versa happens, and the funding rate is negative, the sellers (shorts) pay the buyers (longs). This is known as backwardation. These payments typically happen every 8 hours, when the contract “settles”.  
• The funding rate is based on a combination of the perpetual future’s price, the spot price, and an interest rate component, typically a function of market skew.   

(Monitoring the funding rate will be an important component of trading perpetual futures, as high positive rates will affect profits negatively for longs, and low positive rates will affect profits negatively for shorts. On the flip side, a negative rate will affect profits positively for shorts, and oppositely for longs.)  

What does this mean for crypto?  

In essence, this means that traders can speculate on the future values of cryptocurrencies and other assets without buying, selling, or taking custody of the underlying asset itself. First introduced to the cryptocurrency market by the BitMEX exchange in 2016, the daily trading volume of the overall perpetual futures market is estimated to be around $75-$100 billion and dominates equivalent spot markets by around 5 times, which makes them one of the most liquid instruments in crypto. Because of the volatility of these perpetual futures, mixed with the volatility of crypto itself, perps can be risky. Still, they can also garner huge returns for investors and act as a useful risk management tool for hedgers.  

Policy Outlook  

While perpetual futures are not explicitly illegal in the US, they lack regulatory clarity, and many exchanges restrict US customers’ access to markets because of this. Centralized exchanges, for instance, only allow perpetual futures trading for non-US customers in select jurisdictions. 

For more information, please contact: press@digitalchamber.org 

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On July 10, 2024, the Senate Agriculture Committee held a hearing entitled, “Oversight of Digital Commodities.” The hearing lasted approximately three hours and it was a consensus-driven hearing with a unified call from both sides of the aisle for more regulatory clarity in the digital commodity space.

Witnesses

CFTC Chair Rostin Benham [Testimony Link]

A detailed summary of the hearing is below. If you have any questions, please reach out to Mack LaBar, mackenzie@digitalchamber.org.

Summary: Democrats and Republicans found common ground in their desire to grant the Commodity Futures Trading Commission (CFTC) jurisdictional authority over digital commodity spot markets, but remain divided on how to grant that authority. Chair Benham consistently stated that an underfunded and underpowered CFTC remains a major issue for tackling digital commodity consumer protection issues, and a continuation in lack of resources would result in lost and unrecoverable money for investors after scams, hacks, etc. He highlighted the tools that CFTC uses to regulate currently including registering broker-dealers, exchanges, custodians and emphasized that the CFTC would not be “reinventing anything” if granted additional authority for the digital commodity space and would largely be using the same principles applied to traditional financial markets.

Overall Impression: This hearing was a strong message to the industry and public that there is bipartisan motivation to get a deal done for a Senate market structure bill. However, rough spots such as concerns over illicit finance, custodial and reserves requirements, levels of CFTC funding, how the SCOTUS’ Chevron reversal decision affects the CFTC’s jurisdictional authority, and consumer protections will need to be smoothed out.

Republican Position: Generally, Republicans agreed that the Commodity Futures Trading Commission (CFTC) should be granted regulatory authority over digital commodities. However, led by Committee Ranking Member John Boozman (R-AR), Republicans expressed alignment that they will not be supporting any bill [i.e., Chair Debbie Stabenow’s (D-MI) ‘market structure’ proposal] unless it has broad industry support.

Democratic Position: Democrats focused on consumer protection, illicit finance, CFTC funding levels and additional tools that the agency may need to regulate the digital commodity sector. Senators Stabenow (D-MI), Sherrod Brown (D-OH), Ben Ray Luján (D-NM) and Cory Booker (D-NJ) raised the number of digital asset-related cases the CFTC handles on limited resources, despite the fact the Commission “does not have the authority to regulate” the industry from Congress. Additional points addressed by Senator Lujan (D-NJ) related to the reporting process for suspicious financial activity and illicit financing with crypto exchanges, and his concerns with how these reports are stored and used by Treasury. Finally, Senator Booker (D-NJ) highlighted that a large stake of minority racial groups have invested in crypto to emphasize the urgency needed for bipartisan digital asset legislation that bolsters consumer protections.

Key Points

Chairwoman Stabenow’s Proposed Market Structure Legislation

Overview: Chairwoman Stabenow and Ranking Member Boozman each discussed their bipartisan efforts to introduce legislation granting the CFTC regulatory authority over digital commodities. Stabenow informed committee members that the text of the market structure bill would be distributed by the end of the week.

Stabenow additionally highlighted her three principles for digital asset legislation:
(1) safeguarding customer assets
(2) protecting retail customers
(3) ensuring adequate funding for the CFTC

Quote from Chairwoman Stabenow: “Our colleagues in the House have recognized that protecting customers and providing clear rules of the road is not a partisan issue and have passed crypto market structure legislation out of their Chamber. While our bill takes a somewhat different approach and focuses on filling the regulatory gap that exists for digital commodities, I am confident we can come together to pass legislation.”

Perspective: With many committee members and stakeholders yet to review Chair Stabenow’s proposal, and limited time left in the legislative calendar, the Chairwoman would have to act swiftly to get her bill passed before the end of this Congress.

CFTC Resources and Interagency Coordination
Overview and Quote from Boozman: Ranking Member Boozman highlighted concerns with interagency coordination between the SEC and CFTC, asking what the impact will be if “Congress puts the CFTC in the losing position of having to sue the SEC every time they disagree?” Boozman is referring to Chair Stabenow’s new legislation, which includes this framework. Chair Benham responded negatively, stating “Short answer, that would be a very difficult position and one that is practically unlikely”.

Perspective: Not only would the constant use of courts to settle interagency disagreements be a high cost to taxpayers, but it could stall the development of practical rulemaking.

Illicit Finance

Overview: Senator Luján expressed disapproval of how Suspicious Activity Reports (SARs) were reported and stored in relation to crimes involving money-laundering through crypto exchanges. Chair Benham agreed that this was an important point and highlighted reliance on data from regulated industry participants to understand illicit finance threats.

Quote from Sen. Lujan (D-NM): ” So, in the same way a SAR report is held at treasury, when a financial institution has been found of wrongdoing or laundering money for the cartel or someone else, the current system requires that financial institution to appoint somebody to be approved by treasury to be the watcher from inside. So let me ask, why is it important to have federal requirements to report suspicious activity to law enforcement?”

Perspective: Democratic sentiment on crypto has centered on illicit finance for some time, and even as crypto gains steam and becomes a major campaign issue for both presidential candidates, the illicit finance concerns such as money laundering have continued.

Tax Treatment of Mining Rewards

Overview: Senator Tommy Tuberville (R-AL) asked Chair Behnam how he believes mining rewards should be tasked. Tuberville asked whether Benham thought it was fair that mining rewards are taxed at point of acquisition and at point of sale. Benham acknowledge that he had not thought about this, but stated, “principally speaking, and the way you articulated the analogy, it doesn’t sound fair.”

Quote from Sen. Tuberville (R-AL): “If we’re going to encourage people to get involved in crypto, we need to address this problem as quickly as people are getting harassed.”

DeFi Regulation

Overview: Given the IRS has excluded DeFi from the newly finalized broker rules, Ranking Member Boozman urged Chair Behnam to focus on centralized exchanges rather than DeFi projects.

Response from Chair Behnam: “I’m a firm believer there is a regulatory nexus for DeFi but perhaps we have to take a unique look given the unique nature of it.”

Perspective: It is crucial that any regulation for DeFi be custom-built to accommodate its unique characteristics, rather than shoehorned into existing laws designed for existing entities. Lawabiding software developers should not be punished for simply publishing open-source software.

TDC experts are available for comment, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) has submitted a motion for leave to file an amicus brief in LEJILEX;CRYPTO FREEDOM ALLIANCE OF TEXAS V. SEC, in support of Plaintiffs’ Motion for Summary Judgment.

What did the Plaintiffs allege?

In the complaint, plaintiffs allege that they brought the action to seek declaratory and injunctive relief to:

• Prevent the SEC from unlawfully charging them and their members with violating the US securities laws based on the SEC’s “fundamentally mistaken view” of its regulatory power.
• End the SEC’s efforts to unlawfully extend its regulatory authority to cover nearly all digital assets.

LEJILEX’s Position

LEJILEX is requesting judicial relief to ensure it does not need to register with the SEC as a securities exchange, broker, or clearing agency. According to the complaint, LEJILEX faces a genuine threat that when its Legit.Exchange launches, the SEC will bring an enforcement action claiming that LEJILEX is operating an unregistered securities exchange, broker, or clearing agency. LEJILEX argues that it is impossible to register in these capacities because the SEC has not established any regulations providing for the registrations of digital asset platforms like Legit.Exchange.

What does our brief argue?

In our brief, The Digital Chamber highlights the fact that we have long called for the SEC to work cooperatively with the digital assets industry, other federal agencies, and Congress to develop rules that provide industry participants with fair notice of what the law requires and how they can comply. Rather than do so, however, the SEC has pursued regulation of essentially the entire crypto industry through enforcement actions, based on a dubious, far-reaching, and ahistorical interpretation of the statutory terms “security” and “investment contract” in an unprecedented effort to greatly expand its regulatory power under the securities laws.

The brief also examines how the SEC’s lack of clarity and contradictory stances, including regarding which digital assets are securities and within the SEC’s purview and which are commodities and within the CFTC’s purview, injure the digital asset industry and have caused both business and innovation to move offshore. It also sets out why the US securities laws are a poor fit for decentralized blockchains and how the numerous crypto companies that have sought registration or exclusions have faced SEC enforcement actions.

The brief also discusses that, while Congress is actively working on legislation to regulate the digital asset industry and blockchain technology, the SEC has usurped the Legislative Branch’s prerogative to regulate this new technology and industry in a responsible way that fosters innovation in the United States.

“By submitting this motion, we are taking a stand before the SEC’s anticipated overreach occurs. Our goal is to ensure that the SEC does not unlawfully expand its regulatory authority over the entire digital asset industry,” said Perianne Boring, Founder and CEO of The Digital Chamber. “We are hopeful that the Court will consider the arguments laid out in our brief, and we will continue to fight against the SEC’s overreach.”

TDC is represented in this matter by Baker Hostetler. We appreciate the contributions to this initiative by the Baker Hostetler team and other members of The Digital Chamber.

Read the full amicus brief here. TDC experts are available for comment, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) has filed an amicus brief in the case of Custodia Bank, Inc. v. Federal Reserve Board of Governors, No. 24-8024, currently before the United States Court of Appeals for the Tenth Circuit. This case challenges the decision by the Federal Reserve Bank of Kansas City (FRBKC) to deny Custodia Bank’s application for a Federal Reserve master account. 

Why TDC Filed This Brief 

We filed this amicus brief to advocate for the fair treatment of state-chartered financial institutions, particularly those integrating digital assets with traditional banking systems. The decision to deny Custodia Bank a Federal Reserve master account threatens the innovative financial frameworks established by states like Wyoming. By filing this brief, we’re aiming to protect the burgeoning blockchain industry from regulatory overreach and ensure that lawful businesses are not unfairly penalized based on their involvement with cryptocurrency. 

Key Points of the Case 

1. Federalism and State Innovation: The denial by FRBKC undermines the dual banking system that allows states like Wyoming to charter innovative financial institutions such as special purpose depository institutions (SPDIs). Wyoming’s regulatory framework for SPDIs was designed to bridge the gap between digital assets and traditional financial systems, and was developed with significant input from various stakeholders, including FRBKC. This case threatens to nullify state efforts to innovate and regulate effectively within their jurisdictions. 

2. Constitutional Concerns: The district court’s interpretation raises serious constitutional issues, particularly concerning Article II. By allowing Federal Reserve Bank presidents unfettered discretion to deny master accounts, the decision undermines the constitutional framework for appointing and overseeing federal officials with significant authority. This challenges the principles of political accountability and democratic checks and balances enshrined in the Constitution. 

3. Impact on the Blockchain Industry: The decision to deny state-chartered banks access to the national banking system based solely on their involvement with cryptocurrency sets a troubling precedent. It poses a direct threat to the sustained growth of the blockchain industry by potentially allowing federal regulators to stifle industries they disfavor, regardless of their compliance with legal standards. 

Our Arguments 

Our brief emphasizes: 

• The necessity for clear statutory interpretation that respects the mandatory language of 12 U.S.C. §248a(c)(2), which requires Federal Reserve services to be available to nonmember depository institutions. 
• The importance of maintaining the balance of state and federal authority in banking regulation, which fosters innovation and consumer benefits.
• The constitutional requirement for political accountability in the exercise of significant discretionary power by federal officials. 

Next Steps 

We strongly believe that this case has profound implications for the digital asset and blockchain industry. Our amicus brief argues for the reversal of the district court’s decision to protect the rights of state-chartered banks and uphold fair access to essential banking services. 

Stay Informed 

We encourage all members to read the full amicus brief to understand the detailed arguments and potential impact of this case. You can access the brief here.

Acknowledgments 

We extend our heartfelt thanks to the law firm Clement & Murphy for their exceptional leadership in drafting this brief. We also thank our members who contributed their expertise and insights during the drafting process. Additionally, we appreciate the Global Blockchain Business Council for joining us in this crucial effort to ensure that innovation can thrive within the U.S. banking system and that the cryptocurrency industry is protected from unjust discrimination.  

Together, we are committed to fostering a regulatory environment that supports growth and innovation in the digital asset space. 

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) welcomes the IRS’s release of final regulations on digital asset reporting requirements. We are encouraged by the IRS’s responsiveness to public comments and their adoption of a phased implementation approach, which demonstrates a commitment to balancing regulatory needs with industry concerns. 

We applaud several key improvements in the final regulations: 

1. Custodial Focus: The IRS has wisely narrowed the initial focus to custodial brokers, allowing more time to address the complexities of non-custodial and decentralized platforms. 

2. Stablecoins: We appreciate the introduction of a $10,000 annual de minimis threshold for qualifying stablecoin sales and the option for aggregate reporting above this threshold. This approach significantly reduces unnecessary reporting burdens for many users. 

3. NFTs: The adoption of a $600 annual de minimis threshold for NFT sales and the option for aggregate reporting above this amount shows recognition of the unique nature of these assets. This aligns more closely with our recommendation for a nuanced approach to NFT reporting. 

4. Transaction Reporting: We are pleased that brokers will not be required to report wallet addresses and transaction IDs to the IRS, addressing some of our privacy concerns. 

While these changes represent significant progress, we believe there are still areas for further refinement: 

1. Digital Asset Middlemen: The definition remains broad, and we continue to advocate for a narrower focus on entities directly facilitating digital asset sales and exchanges. 

2. Future Guidance: As the IRS develops rules for non-custodial and decentralized platforms, we urge continued engagement with industry stakeholders to ensure practical and innovation-friendly approaches. 

TDC remains committed to working collaboratively with regulators to develop balanced approaches that promote tax compliance while fostering growth and innovation in the digital asset ecosystem. We look forward to ongoing dialogue as these regulations are implemented and future guidance is developed. 

For reference, please see TDC’s comments to the proposed rules from November 2023.  

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber (TDC) strongly opposes the SEC’s latest lawsuit against Consensys, the creator of the MetaMask crypto wallet. This action, targeting DEX routing and staking services, is another troubling example of the SEC’s overreach. 
 
DeFi platforms like MetaMask’s Swaps and Staking democratize finance, providing greater autonomy, efficiency, and access to financial services. They empower the unbanked and underbanked, promoting financial inclusion and accessibility. The SEC’s claim against Consensys misinterprets the technology and stifles progress that could benefit millions.
 
The SEC’s repeated enforcement actions, without clear rules, violate their investor protection mandate and create market uncertainty. With the recent end of Chevron deference, this regulatory ambiguity should not stand. 
 
We stand with Consensys and the wider community in advocating for fair regulation that fosters innovation, protects investors, and promotes financial inclusion. Enough is enough—it’s time for the SEC to stop attacking the digital asset industry and embrace the future of finance.

Press Release 

FOR IMMEDIATE RELEASE 

Washington, D.C. – [6/28/24] – Today marks a significant turning point in the regulatory landscape with the Supreme Court’s decision to strike down Chevron Deference. Chevron Deference allowed federal agencies considerable leeway in interpreting ambiguous statutes, it being overturned today establishes a new era of regulatory clarity and judicial oversight. 

The Digital Chamber (TDC) welcomes this decision as a monumental step toward fair and transparent regulation in the digital assets space. For years, the industry has grappled with inconsistent and overly broad interpretations by the Securities and Exchange Commission (SEC) as Congress debates the regulatory treatment of digital assets. The removal of Chevron Deference paves the way for a more balanced and judicially scrutinized approach to regulation. 

“This decision is a game-changer for the crypto industry,” said Cody Carbone, TDC Chief Policy Officer. “It promises a future where regulations are more predictable and grounded in clear legislative intent, rather than shifting interpretations by regulatory agencies and unelected policy leaders.” 

TDC is committed to providing resources and guidance to our members on navigating this new regulatory environment and working with Congress to create legislative clarity.  

We urge all stakeholders in the digital asset ecosystem to stay informed and engaged as we enter this new phase of regulatory oversight. 

For more information, please contact: press@digitalchamber.org 

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The Digital Chamber recently submitted crucial feedback on the IRS draft Form 1099-DA. The proposed Form 1099-DA for digital asset transactions, is designed for taxpayers to report gains and losses from digital assets. The current proposal requests excessive and potentially intrusive information. There must be a clear and streamlined reporting process to reduce audit risks.

What is happening:

1. The Current Draft Form 1099-DA: The Draft Form 1099-DA requests excessive information beyond what is necessary for tax reporting, including fields like sale transaction IDs and digital asset addresses, which raises privacy concerns.
2. Administrative Burdens: The current draft imposes administrative burdens on taxpayers and digital asset brokers, particularly smaller firms and startups, who must update systems to accommodate the new reporting requirements.
3. Recommendations for Final Form: The Digital Chamber has submitted recommendations to the Internal Revenue Service (IRS) to streamline the final version of Form 1099-DA by including only essential information needed for tax reporting purposes, with additional details retained by brokers for potential examination needs.

Why it is important:

1. Balancing Reporting Burdens: Streamlining the form helps digital asset brokers by reducing unnecessary reporting tasks and privacy concerns. It also makes sure that regulatory requirements are practical and cost-effective.
2. Accuracy and Audit Readiness: Accurate reporting and specifying different tax treatments for items like non-fungible tokens (NFTs) or Qualified Opportunity Fund interests on the final form can reduce audit issues and help the IRS maintain efficient processes.

The Digital Chamber’s Action:

1. The Digital Chamber is pushing the IRS to provide detailed instructions to ensure accurate reporting. The form should account for different tax treatments for assets like NFTs. It’s necessary to get this right to avoid audit issues.
2. TDC is working with the IRS and Treasury to shape fair rules that support both innovation and compliance.

View the full Comment Letter here.

For media inquiries, please contact press@digitalchamber.org. 

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The Digital Chamber, in partnership with Willkie Farr & Gallagher LLP, has released a joint white paper detailing why Filecoin (FIL) should not be regulated as an “investment contract” under U.S. federal securities laws. This comprehensive analysis aims to provide a clear argument against the classification of Filecoin as a security, advocating for a regulatory framework that supports innovation while ensuring investor protection. 

Why We’re Doing This: 

The SEC’s misguided attempts to label FIL as a security in certain actions highlight the urgent need for clear regulatory guidance. Such clarity can enhance industry confidence and facilitate the broader adoption of blockchain technologies, supporting their integration into mainstream applications and services. We specifically chose Filecoin for this analysis because it is so clearly not a security. This case serves as a broader illustration of the SEC’s failure to provide clarity, which is detrimental to the adoption of real-world uses for this technology. 

What’s Happening: 

1. Overview of Filecoin: Filecoin is a decentralized blockchain network designed for peer-to-peer cloud storage, offering economic incentives for reliable file storage since its public release in 2017 by Protocol Labs.
2. Key Components of Filecoin: FIL serves as the native cryptocurrency used within the Filecoin network, essential for purchasing cloud storage and participating in network operations without reliance on external currencies.
3. Storage and Retrieval Services: The network operates through providers who offer storage and retrieval services to users, facilitated by cryptographic proofs and structured through negotiated deals published on-chain.
4. Regulatory Framework: Under U.S. securities laws, assets like FIL could potentially be classified as securities under the “investment contract” definition established in SEC v. Howey, which determines whether transactions involve investments with profit expectations from others’ efforts. FIL should not be considered an investment contract due to its primary role being facilitating decentralized data storage and retrieval – this is a functional, non-speculative use that distinguishes it from assets that can be offered and sold as part of investment contracts. 

Why It Matters: 

1. Legal Clarity for Crypto Assets: Defining FIL’s regulatory status is crucial as it sets a precedent for how decentralized cryptocurrencies are treated under securities laws, impacting their market accessibility and operational compliance.
2. Impact on Innovation: If classified as a security, Filecoin and similar tokens might face regulatory hurdles that could stifle innovation and development within the blockchain and decentralized storage sectors.
3. Investor Protection vs. Market Access: The classification decision affects both investor protection and market access, balancing the need for regulatory oversight with fostering an environment conducive to technological advancement.
4. Global Implications: The outcome could influence global regulatory approaches to decentralized technologies, potentially shaping international standards for blockchain and cryptocurrency governance. 

For media inquiries, please contact press@digitalchamber.org. 

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