Tag: policy

The Digital Chamber applauds Congressman Timmons’ leadership and the announcement of the New Frontiers in Technology Act (NFT Act). This is the first bill in the US Congress directly addressing the legal and regulatory treatment of non-fungible tokens (NFTs).  

Following recent securities lawsuits against NFT companies such as Dapper Labs and DraftKings, and the Wells notice from the US Securities Exchange Commission against NFT exchange OpenSea, this critical legislation that ensures that consumptive-use NFTs, and their evolving use cases, are correctly designated as consumer goods, not financial products. 

Key Provisions  

1. Defines Non-Fungible Tokens: The bill defines NFTs as any asset which is of such quality or limited production that it can be independently valued; which is recorded cryptographically on a public distributed ledger; that is the digital equivalent of a tangible or intangible good; or that can be exclusively possessed and transferred person to person, without reliance on intermediaries. It excludes any note, stock, treasury stock, security, future, security-based swap, evidence of indebtedness, certificate of interest, or any financial instrument that would indicate the existence of an investment contract. 

2. Creates Protections for “Covered” Non-Fungible Tokens: The bill creates clarity for “covered non-fungible tokens,” defining them as any NFT with the primary purpose of being a work of art, musical composition, literary work, or other intellectual property; a collectible, merchandise, virtual land, or video game asset; an affinity, reward, or loyalty; or a right, license, or ticket. This coverage does not protect NFTs that are marketed by an issuer or promoter primarily as an investment opportunity or making actual or implied actions designed to increase the value of the token. 

3. NFT Study: Finally, the Act directs the Comptroller General of the United States, a role within the General Services Administration—and not, importantly, a financial regulatory body—to carry out a study of non-fungible digital assets within one year of the enactment of this bill. 

TDC Efforts 

The Digital Chamber has worked with digital asset champions across industry, Congress, and regulatory bodies, to advocate for common sense legislation that will end the predatory and out-of-jurisdiction enforcement actions of the SEC against the NFT industry. The Digital Chamber has consistently been at the forefront of groundbreaking policy and regulatory conversations that served to lay the groundwork for this bill, fighting for the NFT industry to thrive within the United States. 

Your Support is Crucial   

Help the digital asset industry flourish responsibly without the hindrance of misapplied securities regulation.  Contact your Representatives in Congress and voice your support for this important bill. By supporting this Act, you can ensure continued technological innovation, greater consumer protection, and a true home within the United States for blockchain technology. 

Amid growing concerns over the Securities Exchange Commission’s (SEC) latest overreach into the digital asset industry with their wells notice issuance to OpenSea, The Digital Chamber (TDC) is calling for legislation to clearly define certain NFTs as consumer products and exempt them from federal securities laws. This language should:  

• Clearly define that NFTs, which are created for the purpose of consumptive use, are not financial products. 

• Highlight that NFTs should not be classified as securities under the authority of the SEC, or as any other type of financial instruments.   

 
NFTs Are Consumer Goods, Not Financial Products 

In 2023, TDC conducted an in-depth study of the NFT ecosystem. In our Pixels to Policy report, we highlight a number of the most popular NFT applications, from digital art and collectibles to video games, to unique digital event experiences, and more. Many NFT applications are clearly not designed as investment contracts or financial tools for speculation, even if consumers occasionally sell NFTs for a profit, much like traditional collectibles or artwork. This secondary market feature does not make them financial products. 

These items should be classified as consumer goods, not securities. TDC is advocating for legislative clarity that reflects this distinction. 

The Importance of Protecting NFT Creators and Communities  

However, SEC Chair Gary Gensler’s regulation-by-enforcement approach has jeopardized the livelihoods of countless individuals who rely on NFTs to pursue their passions, connect with their communities, and sustain themselves by selling and trading digital goods and access rights within this thriving ecosystem.  

NFT companies providing these minting services and data transfer infrastructure have also endured a lack of legislative clarity and have suffered as a result. Recent securities lawsuits against DraftKings and Dapper Labs, along with a threat of an enforcement action against the NFT marketplace OpenSea, have not only put the industry at risk but also sent a troubling message to consumers: their rights are unjustly restricted by an agency acting beyond its authority. 

Call for Congressional Action 

Congress must act now to ensure that this burgeoning industry remains within the US, for the benefit of the US economy, and not move overseas to more favorable regulatory environments. The Digital Chamber strongly encourages Congress to clarify that Consumptive-Use NFTs are consumer goods and not financial products.  

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Update 9/16:

TDC is please to announce that the US Congress is directly addressing the legal and regulatory treatment of non-fungible tokens (NFTs). We applaud Congressman Timmons’ leadership and the announcement of the New Frontiers in Technology Act (NFT Act). Read more about this monumental legislation in the TDC Update here.

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What’s Happening:

The US Treasury officially withdrew a rule proposed in 2020 by FinCEN, the Financial Crimes Enforcement Network. The rule would have:  

• Subjected individuals using unhosted, or self-custodial, wallets to requirements that would ultimately ban peer-to-peer digital asset transactions, decentralized finance (DeFi), particular NFT platforms, and other decentralized or peer-to-peer activities.  
• Required self-hosted wallet users to collect and report on counterparty information for each transaction they participate in. 

The reporting requirements are technically impossible in most cases. Since blockchain wallet addresses are pseudonymous, users can trust the transactions and their counterparties without knowing or being able to learn personally identifiable information that this rule would have required for reporting purposes. This innovative design not only sets blockchains apart from traditional financial and data transfer technologies, but also makes it prohibitively difficult for users and developers to collect counterparty information outside of centralized platforms. Similar legislative and regulatory efforts to “ban” self-hosted wallets and non-centralized activities in other jurisdictions, such as the European Union, have also been unsuccessful in previous legislative efforts. However, with EU legislators discussing updates to their Markets in Crypto Assets (MiCA) Regulation, this issue may be renewed in that region.   

Background: 

TDC has been deeply involved in supporting the U.S. Treasury’s decision to withdraw the proposed rule on self-custodial wallets. We started by sending a detailed letter to Secretary Mnuchin, expressing our serious concerns about how the rule would impact digital asset innovation and individual privacy. Recognizing the urgency, we also launched a petition to stop the last-minute rulemaking, mobilizing support from both industry leaders and the general public. Our thorough analysis of the proposed rule highlighted potential negative effects on the digital assets sector, advocating for a more balanced regulatory approach. In our response to FinCEN’s Notice of Proposed Rulemaking (NPRM), we reiterated these concerns, arguing that the rule would unfairly burden users of self-hosted wallets without providing clear benefits. Through these concerted efforts, we played a key role in the Treasury’s decision to retract the proposal, underscoring our commitment to shaping fair and effective regulatory policies for digital assets. 

Why it Matters:  

The rule was part of a broader effort to apply the same Know-Your-Customer and Anti-Money-Laundering rules from traditional finance to crypto. While The Digital Chamber strongly supports efforts to eliminate fraud and illicit finance in crypto, the would-be application of this rule does not meet these policy goals. Instead, it would force virtually all crypto activity outside centralized exchange platforms to cease. Moreover, blockchain analytics reports continue to show that illicit finance and money laundering in crypto account for less than one percent of overall transaction activity (see TRM Illicit Crypto Economy report). The application of this rule would have had outsized harm to the industry in exchange for microscopic progress toward its policy objective, when measuring total transaction volume.  
 

Key Points:  

Counterparty reporting requirements are rigorously enforced in traditional finance and by centralized crypto platforms, where they serve their intended purpose. However, these requirements do not fully address the policy objectives they were designed for, as fraud and money laundering in traditional finance are in the trillions of dollars. In contrast, blockchain systems offer full transaction transparency, making it easier to trace and catch illicit activities. Traditional financial networks, on the other hand, often lack transparency; cash transactions, fraudulent accounts, scams, terrorist financing, and money laundering activities are not always visible to regulators and law enforcement. Applying the same regulations in traditional finance that do not fully meet intended policy objectives to crypto transactions and individual users is a suboptimal method of stopping crime and protecting consumers, at best.   
 

Our Perspective  

“The Digital Chamber strongly supports technical efforts, legislation, and rules that meet the critical policy objectives of combatting fraud and illicit transactions and protecting consumers. However, this rule would have brought large parts of the industry to a halt. We applaud the Department of the Treasury for recognizing that there are ways of achieving these policy objectives in the crypto ecosystem that will allow the industry to live on and innovate. It will become safer and more secure as it does so. We look forward to working with policymakers and industry to create these better-fitting policy and technical solutions.”  – Jonathan Rufrano, Policy Director, The Digital Chamber. 

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The Digital Chamber (TDC) unequivocally condemns the SEC’s latest overreach in issuing a Wells notice to OpenSea. The notice, which alleges that NFTs listed and sold on the platform are securities, represents a significant and troubling expansion of the SEC’s enforcement actions into the digital economy.

TDC has consistently advocated that certain NFTs, particularly those representing consumer products, are not securities nor financial products and should be outside of the SEC’s jurisdiction.[1]

The SEC’s current approach of regulating by enforcement, as evidenced by this Wells Notice, threatens to stifle innovation, disrupt vibrant markets, and undermine the economic opportunities that NFTs provide to creators and entrepreneurs.

We strongly urge the SEC to reconsider this enforcement-driven strategy and instead work collaboratively with Congress to develop clear and fair regulations that support innovation while protecting consumers. It is essential that regulatory efforts foster the growth of emerging technologies and creative industries rather than hinder them.

TDC remains committed to advocating for a regulatory environment that encourages innovation and secures the future of the digital economy without compromising investor protections. For more information on our efforts and the NFT Working Group visit here.

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[1] Read our response to Commissioner Peirce and Uyeda following their dissent in the Stoner Cats case here.

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August 20, 2024 – The Digital Chamber today filed an amicus brief in NVIDIA CORP. v. E. OHMAN J:OR FONDER AB, in support of NVIDIA’s motion for reversal of the judgment of the US Court of Appeals for the Ninth Circuit.  

Why is this case important? 

NVIDIA is the subject of a class action lawsuit in which plaintiffs allege that a significant portion of Nvidia’s gaming GPU sales were driven by purchases from cryptocurrency miners. Plaintiffs allege that NVIDIA’s CEO downplayed this in public statements and failed to disclose the potential impact of volatility in the cryptocurrency market, which later affected NVIDIA’s financial results. 

The plaintiffs’ case relies on “expert” opinion based on unsupported assumptions about the cryptocurrency industry, constructing a theory disconnected from the facts of NVIDIA’s business.   

This case revolves around the Private Securities Litigation Reform Act of 1995 (PSLRA) and two key PSLRA requirements: plaintiffs must allege with “particularity” facts that strongly suggest the defendant acted with scienter, and they must clearly state the facts supporting their belief that statements were misleading. 

Our amicus brief provides the Supreme Court with crucial context about the PLSRA. The Act was enacted to deter nuisance lawsuits that burdened high-growth, high-tech companies with costly discovery and extortionate settlements. Congress specifically aimed to protect these vulnerable sectors, like the cryptocurrency industry, from abusive securities litigation, due to their inherent volatility. We explain how the proper application of the PSLRA’s strict pleading standards should protect the entire cryptocurrency industry.   

Under the PSLRA, a complaint must clearly identify each statement claimed to be misleading, explain why it’s misleading, and provide detailed facts supporting that belief.  

This case shows how allowing speculative expert opinion to substitute for particularized factual allegations of securities fraud (in other words, clear and detailed facts about the securities fraud) creates the very problems Congress tried to solve with the PSRLA.   

In this case, the plaintiffs rely on non-evidence-based “expert opinions.” These opinions, based on general market research and unreliable or hidden assumptions, are NOT enough—undermining the purpose of the PSLRA. 

If the plaintiffs win, it will set a dangerous precedent, allowing speculative and unsupported claims to succeed in court. This could lead to a surge in frivolous lawsuits against companies in the cryptocurrency industry, stifling innovation by burdening them with costly litigation and discouraging investment. Ultimately, this would slow the growth of blockchain technology and undermine the very protections that the PSLRA was designed to provide for emerging, high-tech industries. 

“Today, TDC took its advocacy effort to the U.S. Supreme Court for the first time. We felt compelled to weigh in due to the grave risks of a potential increase in frivolous securities lawsuits based on nothing more than unfounded negative perceptions about the cryptocurrency industry and its high-growth business cycle,” said Perianne Boring, Founder and CEO of The Digital Chamber. “We are hopeful that the Supreme Court will consider the arguments laid out in our brief, and we will continue to support for fair and equivalent application of laws for the cryptocurrency industry.”  

TDC’s counsel on the brief, Joshua B. Simmons of Wiley Rein LLP, said that “it is a privilege and an honor to have the opportunity to represent TDC before the U.S. Supreme Court.  TDC is at the forefront of the cryptocurrency industry, and our firm understands well the intersection of technological innovation and policy. This brief reflects TDC’s key insights into this pivotal case.” 

TDC is represented in this matter by Frank Scaduto, Joshua B. Simmons, Kevin B. Muhlendorf, Krystal B. Swendsboe, Joel S. Nolette, and Christina V. Lucas of Wiley Rein LLP. We appreciate the contributions to this initiative by the Wiley team and other members of The Digital Chamber. 

**TDC experts are available for comment. Contact press@digitalchamber.org to schedule an interview** 

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The Digital Chamber (TDC) welcomes the conclusion of the long-standing legal battle between Ripple Labs and the U.S. Securities and Exchange Commission (SEC). As amicus curiae in this case, TDC advocated for regulatory clarity for digital asset businesses. 

Judge Torres has issued her ruling on remedies in the Ripple case with the following outcomes: 

• $0 disgorgement, as anticipated, due to the lack of demonstrated losses by the SEC. 
• $125 million in civil penalties for securities violations related to sales to institutions. 
• An injunction restraining Ripple from further violations of Section 5 of the Securities Act. 

This decision represents a small fraction of the damages initially sought by the SEC and highlights the flaws in the SEC’s regulation by enforcement approach. While this ruling brings some clarity to the market, it underscores the urgent need for Congress to pass comprehensive market structure legislation. 

We commend our member Ripple for fighting on behalf of the industry in court, setting a precedent that many smaller players could not, and helping to create a more coherent and predictable regulatory environment. 

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

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Dear Vice President Harris,

As you are poised to become the Democratic Presidential nominee, we write to urge you to take a forward-looking approach on digital assets and blockchain technology, an area that holds immense potential for innovation, economic growth, and financial inclusion.

Representing the emerging stance of the Democratic Party and the United States, leaders such as Senate Majority Leader Chuck Schumer, Speaker Emerita Nancy Pelosi, and a majority of House Democratic leadership have recently supported pro-digital asset legislation. However, there is a public perception that the party holds a negative viewpoint on digital assets, largely due to the Biden/Harris Administration’s notably cautious and at times hostile approach to these transformative technologies. We believe this previous hostility does not reflect the progressive and inclusive values of your Party. Your expected candidacy for President represents an opportunity to change that perception.

Over 50 million Americans have embraced digital assets, seeing them as a means to democratize finance, spur innovation, and create new economic opportunities. Data shows that digital assets are being adopted at higher rates among Black and Latino Americans and immigrant communities, key constituencies of the Democratic party compared to traditional financial products. These technologies are revolutionizing opportunities for these communities, reflecting its transformative potential.

Digital assets and blockchain technology are not merely financial instruments but represent a revolutionary shift that can enhance transparency, reduce fraud, and create a more inclusive financial system. We believe this technology is non-partisan and the Democratic Party should also champion these innovations to help reaffirm the U.S.’ position as the leader in the global digital economy.

We respectfully call on you to:

1. Advocate for the Inclusion of Pro-Digital Asset Language in the Party’s Platform: It is imperative that the party’s platform reflects the potential benefits of digital assets and blockchain technology.
2. Select a Vice-Presidential Candidate Sophisticated in Digital Asset Policy: Choose a running mate with a proven track record of engaging with digital asset technology and proposing pro-innovation policies, such as Colorado Governor Jared Polis.
3. Engage with Industry Leaders: We urge you to sit down with leaders in the digital asset and blockchain industry to discuss policies that support and nurture this technology.
Open dialogue with industry experts will provide valuable insights and help craft policies that encourage growth while ensuring consumer protection and financial stability.

The future of digital assets and blockchain technology is a critical issue that requires informed and progressive leadership. By embracing this technology, we can harness its potential to drive economic growth, foster innovation, and promote financial inclusion for all Americans. We are hopeful that with your leadership, the Democratic Party can pivot towards a more supportive stance on digital assets, aligning with the aspirations of millions of Americans who believe in the transformative power of this technology.

Thank you for considering our views. We are eager to support any efforts of yours to integrate digital assets into our nation’s economic framework.

Sincerely,

The Digital Chamber

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

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As the blockchain ecosystem continues to expand, the need for seamless communication between different networks becomes increasingly crucial. Blockchains today are not interoperable – they do not talk to each other and are siloed. It is like having different phone networks where iPhone users can only call other iPhone users, and Android users can only call other Android users. Multichain bridges have emerged as a powerful solution to this challenge, offering users the ability to transfer assets and data across multiple blockchain networks. Let’s dive into what multichain bridges are, their importance, risks, and the outlook for this technology. 

What are Multichain Bridges? 

Multichain bridges, also known as cross-chain or multi-asset bridges, are software protocols that enable the transfer of digital assets and information between two or more blockchain networks. Unlike single-chain bridges that connect only two specific blockchains, multichain bridges can facilitate transfers across multiple networks, creating a web of interconnected blockchains. Think of multichain bridges like international bank transfer systems. Just as these systems enable the transfer of money between banks in different countries with different currencies, multichain bridges allow digital assets and information to move between different blockchain networks. They handle the conversion and ensure the assets are securely transferred from one blockchain to another, similar to how bank transfer systems manage currency conversion and secure transactions. 

These bridges typically work by locking assets on one chain and minting equivalent tokens on another chain. When users want to move their assets back, the process is reversed – the equivalent tokens are burned (or destroyed), and the original assets are unlocked. For example, if a user wants to transfer USDC from the Ethereum blockchain to the Solana blockchain, the bridge will lock the USDC tokens on Ethereum and mint an equivalent amount of USDC on Solana. When the user wants to move their USDC back to Ethereum, the Solana USDC would be burned, and the original Ethereum USDC would be unlocked and returned to the user.  

Importance of Multichain Bridges 

Understanding how multichain bridges function is crucial to appreciating their broader impact. Let’s now explore their significance in the blockchain ecosystem.  

Multichain Bridges enable and extend several benefits and capabilities:  

• Enhanced Interoperability: Multichain bridges break down the silos between different blockchain ecosystems, allowing users to leverage the strengths of various networks. 
• Increased Liquidity: By enabling asset transfers across chains these bridges can improve liquidity in smaller or newer blockchain ecosystems and applications. 
• Expanded DeFi Opportunities: Users can access decentralized finance (DeFi) applications on multiple chains without having to fully exit their preferred network. 
• NFT Flexibility: Non-fungible tokens (NFTs) can be moved between chains, opening up new marketplaces and use cases. 
• Scalability Solutions: Multichain bridges can help alleviate congestion on popular networks by allowing users to conduct transactions on less crowded chains. 

Risks Associated with Multichain Bridges 

While multichain bridges offer significant benefits, they also come with inherent risks: 

• Smart Contract Vulnerabilities: The complex smart contracts that power these bridges can contain bugs or exploitable flaws. 
• Centralization Concerns: Some bridges rely on centralized components which can be points of failure or manipulation. 
• Economic Attacks: Bridges holding large amounts of assets are known as “honeypots” because a concentrated locus of value can be targeted for sophisticated cyberattacks. 
• Liquidity Risks: During periods of high volatility or demand bridges may face liquidity crunches. 
• Regulatory Uncertainty: Multichain bridges operate in a complex and evolving regulatory landscape, particularly in the United States. A primary regulatory consideration is their potential classification as money transmitters under federal and state laws. However, it is crucial to note that, according to FinCEN’s 2019 guidance, entities that do not accept and transmit convertible virtual currency are not considered money transmitters. Since most multichain bridges do not directly custody user funds but instead use smart contracts to facilitate cross-chain transactions, they may fall outside this definition of money transmitters. 

Nevertheless, the regulatory landscape remains uncertain. If bridges were to be classified as money transmitters despite the 2019 FinCEN guidance they could face significant compliance obligations, like registering with FinCEN as Money Services Businesses (MSBs), obtaining state-level money transmitter licenses, and implementing robust Anti-Money Laundering (AML) and Know Your Customer (KYC) programs. 

Cross-border transactions facilitated by multichain bridges also raise questions about jurisdictional authority and applicable laws. Ensuring compliance with sanctions imposed by the Office of Foreign Assets Control (OFAC) is particularly challenging in the pseudonymous environment of blockchain transactions. The decentralized nature of these systems also complicates the assignment of regulatory responsibility, as it is unclear whether developers, node operators, or governance token holders should be held accountable for compliance. 

As the technology continues to evolve regulators may require implementation of cross-chain asset tracking systems which presents significant technical challenges. While not strictly a regulatory issue the critical role of smart contracts in these bridges may lead to increased scrutiny of their security, potentially resulting in mandatory audit requirements. As multichain bridges gain prominence it is likely that regulatory frameworks will adapt to delineate more specific guidance that takes into account their unique technological characteristics and operational models. 

These concerns are not solely theoretical. On June 24^th, 2024, The Digital Chamber hosted a roundtable with Treasury Department representatives to discuss their 2024 NFT Risk Assessment report. During this meeting bridge vulnerabilities emerged as a significant point of concern given the history of hacks against them over the past several years. Industry attendees identified bridges as an attractive attack vector for bad actors primarily due to the value of assets they contain. This real-world discussion underscores the critical need for enhanced security measures and ongoing vigilance in the development and operation of multichain bridges. 

Outlook for Multichain Bridges 

Because of their utility the future of multichain bridges looks promising. Some of the drivers of, and potential vectors, for innovation include:  

• Increased Adoption: As the blockchain ecosystem continues to diversify, the demand for efficient multichain solutions is likely to grow. 
• Enhanced Security Measures: Ongoing research and development are focused on improving the security of these bridges, including decentralized security models and advanced cryptographic techniques. 
• Standardization Efforts: Industry-wide standards for multichain bridge protocols may emerge, leading to better interoperability and reduced risks. 
• Integration with Layer 2 Solutions: Multichain bridges are likely to play a crucial role in connecting various layer 2 scaling solutions, improving overall blockchain scalability. 
• Regulatory Adaptation: As the regulatory landscape evolves, multichain bridges may need to implement new compliance measures to operate across different jurisdictions. 

Conclusion 

Multichain bridges represent a significant step forward in blockchain interoperability. By enabling seamless asset and data transfers across multiple networks these bridges are breaking down barriers and creating a more connected blockchain ecosystem. While challenges remain, particularly related to security and regulatory compliance, the potential benefits of multichain bridges are driving continuous innovation in this space. 

As the technology matures we can expect to see more robust, secure, and user-friendly multichain solutions emerge, further enhancing the utility and accessibility of blockchain technology across various use cases and industries. To fully realize the potential of multichain bridges, ongoing collaboration between developers, regulators, and users will be essential. This cooperation will help ensure that the benefits of a connected blockchain ecosystem are maximized while minimizing the associated risks. 

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

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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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