Why CME Sued the CFTC Over the Kalshi Bitcoin Perp Approval

**Jessi Brooks** (0:00)
So why should crypto care, right? Like AI has been like the big dog for a while, now it's our turn, right? No, but crypto should care because although we've never been the public's favorite industry in my mind, you could say we're winning. Like institutions are here, look at what prediction markets are turning into. We don't need to be liked, maybe, but I don't really think that's true. And that's something I've been trying to carry through this episode, but also just generally, because the public is not just like a random mix of people in a different town or that our parents know. The public can be the jury. I think we've seen that happen in a lot of cases that end up at jury relating to crypto. I definitely saw it. The public can be the judge, like they can try and be objective, but everyone's affected by what they see. It's the prosecutor, the customer, et cetera, and the voter.

**Katherine Kirkpatrick Bos** (0:50)
Hi all, and welcome to DEX in the City, where the wallets are cold and the takes are hot. Before we get going, remember, we're lawyers, but we're not your lawyers. Nothing you hear on DEX in the City is legal or financial advice and it doesn't create an attorney-client relationship. For the fine print, as always, check unchainedcrypto.com.
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**Katherine Kirkpatrick Bos** (1:57)
We're back.
Last week, something quite crazy happened. We talk about crazy all the time. I mean, we work in crypto. This was extra crazy though because this was trad by crazy. What I'm talking about is CME doing the CFT.
Let me provide some background information to everyone as to why this is nuts. The Chicago Mercantile Exchange is one of the largest derivatives marketplaces in the world. It's based in Chicago, where Jessi and I are.
It was founded, I believe, in the 19th century. It is the OG of exchanges. It was actually founded as the Chicago Butter and Egg Board, fun fact, agricultural commodities. It really dominates Chicago and it dominates America in derivatives. You cannot talk about derivatives without talking about CME. You can't talk about the CFTC without talking about CME. Two crazy things happened first, the day before they sued the CFTC, Terry Duffy, who is the longtime CME CEO. Really, I don't think I remember a time where CME wasn't Terry Duffy. He's been there forever. He announced that he was stepping down. The next day, they sued the CFTC, and he's stepping down, I believe, in a year. The reason I point that out is because Terry is actually affectionately nicknamed the sixth commissioner because the big elephant in the room and the important context to this lawsuit is one, as far as I know, the CME has never sued the CFTC, its primary regulator. This is truly unprecedented. And one of the reasons they've never sued the CFTC is because they've had a fantastic relationship with the CFTC that they've cultivated. You know, a lot of people have their issues with CME as kind of the big dog and the elephant in every room. They've had a lot of influence, but appropriately so because they dominate the market with these products. So for them to sue the CFTC, it was a really shocking development.

**Vy Le** (4:15)
I will say, like, it's shocking just in general for a regulated entity to sue its regulator. Like that almost never happened. So this is shocking on multiple levels.

**Katherine Kirkpatrick Bos** (4:27)
Thank you for pointing that out, Vy, because I think if you've spent too much time in crypto, you think it's normal. It's really completely abnormal.
Like until crypto, this just didn't happen. So excellent point. So what happened here, right? Basically, the CME is furious that the CFTC approved a true perp. Okay, we've talked about this before. We've talked about this on a previous episode, but the CFTC opened the door to true perpetual futures, which are this absolutely massive product overseas. And when I say true perps, I mean contracts with no expiration date. They roll over permanently. And if you want to hear more about that, you can revisit previous episodes or a couple law of code podcasts that I've done that go into the nitty gritty of these products that we can pin in the show notes. So the CFTC approved this, crypto cheered, the market cheered, we've won this product onshore. And I should say they specifically approved a Kalshi Bitcoin product, narrowly tailored. And the CFTC was furious. And they basically said, no, this is not okay. And they sued the CFTC on two grounds, on two, and I'm summarizing this. But first they said that the CFTC is violating the Commodity Exchange Act because perks are not futures, they are swaps. So they should not be able to list on designated contract markets in the United States. And two, they said the CFTC acted arbitrarily and preciously by effectively the allegations that they're making in the complainers, they're saying the CFTC essentially copied Kalshi's own application verbatim, the CFTC ignored its own prior position saying that perks were swaps, and that they also provided no public comment period, and they turn it around in one day, which is very, very, very quick. So these arguments, this was basically like, this is not cool. They wanted or they want the CFTC to reverse course, and the biggest reason for this lawsuit is it's a competitive threat to their own business. And that's actually another important facet of this argument, is that you need to have competitive injury to have a lawsuit. Like you can't sue someone if there's no damages. CME is alleging that the CFTC's actions inflict textbook competitive injury on the CME, basically because by approving this, they're facing competition.