Why the Question Over How to Regulate Perps Has Turned Into a Fight

**Tiffany J. Smith** (0:00)
But I do kind of go back to first principles and think about both Dodd-Frank, which created swaps and even futures were created for totally different products. And so I do contain to worry about trying to strap on regulation that wasn't fit for purpose and sort of missing out on the risks here. The SEC recently put out, let's call it Red Crypto, and it talks about disclosures for crypto offerings that are submit to investment contracts. And what it does is very well is it asks questions that are sort of tailored to an actual crypto offering. We need something similar when it's talking about perps, making sure that we're not solely focusing on are they on an exchange, but thinking about what they actually do and how they're very good at. They're very fundamentally different from swaps, and they don't have the opacity and those types of issues we had during Dodd-Frank. But there could be other risks that we need to be on the lookout for and regulation needs to try to capture.

**Laura Shin** (0:53)
Hi, all. Today, we are replaying a panel I moderated on Wednesday at the RWA Summit in Brooklyn titled, Are Perps Poking the Regulator Bear or Showing the Art of the Possible? It featured Jake Chervinsky of the Hyperliquid Policy Center, Tiffany Smith of WilmerHale and Cathy Yoon of Temporal.
Originally, CME, the elephant in the room, which is perceived to be trying to do things that are anti-competitive to perps, was also supposed to be represented on the panel, but they backed out last minute.
The panel had some spicy things to say about that. Our discussion was extremely timely as the day before, news broke that Hyperliquid was in talks with Kraken parent company, Payward, to bring Hyperliquid onshore.
Without further ado, please enjoy this discussion. This episode is brought to you by 1inchAqua, the shared liquidity layer from 1inch. Back multiple liquidity positions with one wallet balance, and keep your tokens in your wallet until a swap fills. See how it works at 1inch.com/aqua.
Hi, everyone. Thanks so much for coming to our panel. Are perps poking the regulator bear or showing the art of the possible? I'm here with Cathy Yoon of Temporal, Tiffany Smith of WilmerHale, and Jake Chervinsky of the Hyperliquid Policy Center. And we have a really spicy discussion on tap for you all, because some of you may know that this is an area that's under a lot of contention at the moment. The CME is actually suing its regulator and the CFTC about perps that were approved for Kalshi. And what's at, you know, kind of the center of this all is how these should be defined. CME contends that these threaten their long-dated futures. They think that actually perps should be defined as swaps. It's a whole, I know this sort of gets in the weeds, but I think there is something important at the heart of this. So Jake, why don't we start with you? Do you want to describe like what the conflict is about? And, you know, why you think that definition is important?

**Jake Chervinsky** (3:04)
So the key question really comes down to who will get access to this type of financial instrument in the US. And the classification of a perpetual contract as either a swap or a future dictates whether it is only an institutional product, as swaps are generally speaking, to oversimplify a little bit, primarily an institutional product that cannot trade on a registered designated contract market, whereas futures are a product that can be traded by a DCM for a retail audience. And so we can talk more about the benefits of perpetuals, but my view and the view of the Hyperliquid Policy Center is that they are an extraordinarily useful tool and a better derivative in many cases for many users than dated futures or options, and should be available to the broadest number of people, end users and hedgers and speculators in the US. And for that reason, they should be classified as futures.
Furthermore, if you sort of run the legal analysis on whether they should be classified one way or another, they do really fall more into the bucket of futures. But this is the key issue here is who will have access to this innovative financial product here in the US.

**Laura Shin** (4:17)
And Tiffany, can you give more insight into what those definitions mean and why it is that or which one you think it probably falls into more?

**Tiffany J. Smith** (4:28)
So I'm not going to get into controversy, but I'll give a couple of thoughts.
So first, I think when you think about perpetual futures and just how they are, if you think about the definitions of swaps and futures, they have really had characteristics of both. But I think the future is a better category for them. One, because they're standardized, they're not bilateral contracts like most swaps are. And I think too, like the pricing mechanism is more similar to futures.