Written by: Wall Street Insights

The U.S. derivatives regulator has officially given the green light to "perpetual contracts," bringing this high-leverage tool, which previously operated in a regulatory gray area, into the traditional market system.

On Friday, May 29, the U.S. Commodity Futures Trading Commission (CFTC) announced that it had approved the listing of perpetual contracts based on the spot price of Bitcoin, and stated that it would review applications for other asset-linked contracts on a case-by-case basis.

This move was prompted by the explosive growth of the decentralized exchange Hyperliquid, a Singapore-based platform that has amassed a large user base and trading volume in an unregulated environment.

Prediction market operator Kalshi and cryptocurrency exchange Coinbase subsequently announced that they had received CFTC approval to launch regulated perpetual contracts in the United States "soon".

This regulatory easing will further promote the use of such high-leverage contracts in the US market. Perpetual contracts typically allow traders to bet on various asset prices with leverage up to 40 times.

What is a perpetual contract?

A perpetual contract is a derivative with no expiration date, which traders can use to make directional bets on asset prices without physical delivery.

The core appeal of this type of contract lies in its ease of operation and ability to significantly amplify leverage, thereby enabling investors to pursue higher returns.

The decentralized exchange Hyperliquid allows users to bet on the prices of cryptocurrencies, oil, traditional stocks, and even privately held companies with leverage up to 40x.

Moomoo US CEO Neil McDonald describes his user base as "a community looking for 24-hour crypto trading with high volatility," stating:

People are looking for highly volatile market conditions.

According to data from CoinDesk Data, since its launch in 2023, WTI and Brent crude oil contracts have accounted for nearly half of all trading volume on Hyperliquid. Silver futures and Nasdaq 100 index futures follow closely behind.

This structure suggests that during the recent period of sharp market volatility, speculative demand from users for real assets, rather than crypto tokens, has been equally strong.

The Iran war became a catalyst

Hyperliquid was little known outside the crypto community until the outbreak of the Iran-Iraq War, which drastically changed the situation.

The energy market experienced significant volatility, prompting a surge in bets on energy prices by numerous traders rushing to place bets after weekday trading hours and over the weekend, resulting in a sharp increase in trading volume for Hyperliquid's oil-linked contracts.

Piper Sandler senior research analyst Patrick Moley points out:

Weekend trading in the early stages of the Iran-Iraq War clearly revealed structural gaps in traditional markets.

This boom has brought substantial profits to Hyperliquid. The platform is projected to generate approximately $960 million in revenue by 2025, yet it has fewer than a dozen employees, including founder Jeff Yan.

Jeff Yan previously worked at the high-frequency trading firm Hudson River Trading.

Hyperliquid's native token HYPE has seen a cumulative increase of nearly 70% over the past year, a stark contrast to mainstream cryptocurrencies that have struggled to recover since their crash last October.

Regulatory gaps and user circumvention

As a decentralized platform, Hyperliquid does not comply with mainstream Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations, and at the regulatory level, it does not allow users within the United States to access its exchange.

However, regulatory barriers have not truly stopped users.

Similar to offshore prediction markets like Polymarket, a large number of US users easily bypass geo-blocking through location spoofing tools such as VPNs and participate in trading as usual.

Hyperliquid's rapid growth has attracted significant attention from traditional exchanges and regulatory agencies.

Paul Howard, senior director at crypto market maker Wincent, said that Hyperliquid "is one of the biggest challengers to the entire infrastructure system," noting that "there is less investor protection there, which is exactly what attracts some people."

Traditional giants are accelerating their entry into the market.

Faced with the rise of the perpetual contract market, traditional exchanges are accelerating their efforts to "catch up".

Last week, the Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, announced that it will partner with crypto group OKX to launch perpetual oil futures contracts in Europe and Asia.

ICE CEO Jeff Sprecher frankly stated at an industry conference this month:

This serves as a warning to the entire industry. Although most of these offshore exchanges are unregulated foreign entities, and our clients cannot even trade on these platforms... everyone is watching closely.

OKX Chief Marketing Officer Haider Rafique stated:

For traditional organizations burdened with heavy compliance obligations, it is perfectly reasonable for a small company that has carved out its own niche through guerrilla tactics to say that it also wants to provide a regulated version.

He also warned:

If Hyperliquid encounters problems, the impact will ripple through the entire industry and even Wall Street. A sharp fluctuation or settlement failure could result in billions of dollars in losses in an instant—this is an obvious risk.

Hyperliquid: We are "better products"

Faced with competitive pressure from all sides, Hyperliquid has not backed down.

In February of this year, the company invested $29 million to establish a policy center and hired a group of lobbyists to actively lobby in Washington to advance its policy goals.

Bob Diamond, former head of Barclays Bank and current chairman of Hyperliquid Strategies (a publicly traded company that invests in the HYPE token), countered that the concerns of traditional exchanges were "unfounded," stating:

Perpetual contracts are a superior product for non-professional investors, so these traditional venues naturally strive to protect their market share.

He dismissed external concerns about potential price manipulation of Hyperliquid as "nonsense."

Diamond revealed that he is optimistic about the progress of recent talks between the company and its allies and regulators and politicians in Washington.

Founder Jeff Yan also posted on the X platform earlier this month, expressing his hope to "make it a reality for US users to have legal access to Hyperliquid."