Regulators Plot New Frontier: Bringing Crypto Derivatives Home

The U.S. Securities and Exchange Commission (SEC) is reportedly considering measures to bring the trading of perpetual contracts for U.S. investors under domestic regulatory oversight, in collaboration with the Commodity Futures Trading Commission (CFTC). The potential onshoring initiative aims to address the regulatory challenges posed by the growing popularity of these financial instruments, which are currently traded largely offshore by U.S. retail and institutional investors. A formal announcement is expected in the coming months, though the exact scope and timeline remain under discussion within the agencies.

Perpetual contracts, which are derivative products that allow traders to take long or short positions without expiration dates and with leverage, have gained traction in both institutional and retail markets. Their rise is attributed to increased demand for flexible exposure to crypto assets and the absence of traditional futures contract structures. The SEC and CFTC have expressed concerns about investor protection, market integrity, and the lack of transparency in offshore platforms that offer these products. The proposed measures would seek to establish a regulatory framework for their domestic operation, ensuring compliance with U.S. financial standards and investor safeguards.

Currently, platforms such as Gemini have expanded their offerings in the European market, including Gemini Perpetuals under a MiFID II-compliant structure. These contracts, denominated in USDC and offering up to 100 times leverage, are available within a single interface that integrates spot and derivatives trading. The U.S. regulators’ potential onshoring initiative could signal a broader shift in the global derivatives landscape, positioning the U.S. to compete more effectively with European and Asian markets, where such products are more mature.

The move aligns with the SEC’s ongoing efforts to adapt to the evolving crypto and derivatives market. In recent years, the agency has emphasized the need for clear regulatory boundaries for digital assets and their associated products. With the CFTC’s involvement, the proposed framework would likely involve a joint supervisory approach, combining the expertise of both agencies to address the unique risks associated with leveraged crypto derivatives. This could also lead to enhanced enforcement actions against offshore platforms that operate without U.S. regulatory approval.

Industry observers suggest that the proposed onshoring of perpetual contracts could attract more institutional interest in the U.S. market by providing a compliant and transparent environment. However, the initiative may also introduce new compliance burdens for exchanges and traders. The outcome of the SEC and CFTC’s deliberations will likely influence the trajectory of U.S. crypto market development, investor participation, and the broader regulatory approach to digital assets.

Source: [1] Gemini launches new suite of products in Europe (https://www.finextra.com/pressarticle/106937/gemini-launches-new-suite-of-products-in-europe) [2] Gemini launches staking and derivatives in the EU (https://thepaypers.com/crypto-web3-and-cbdc/news/gemini-rolls-out-staking-and-derivatives-in-the-eu)