Don Wilson Argues Regulators Misunderstand Perpetual Futures

In a recent commentary, Don Wilson, the CEO of DRW, argued that regulators are mischaracterizing perpetual futures, commonly known as "perps." According to Wilson, conventional perceptions linking perpetuals to high risk and gambling are unfounded. He maintains that perpetual futures are just futures contracts that lack an expiration date.

Wilson highlighted that the characteristics often attributed to crypto perpetuals—such as high leverage, auto-deleveraging (ADL), and continuous trading—are influenced by specific implementation choices made by some crypto exchanges rather than inherent qualities of the contracts themselves. He pointed out that, "Most of what people think they know about 'perps' ... has nothing to do with the contract itself." This calls into question how these products should be regulated as interest in them grows in the U.S. market.

Several exchanges are exploring perpetual futures outside of the crypto realm, with questions remaining about compliance within existing futures and swaps regulations. For example, Kalshi, a market that initially saw significant success with perps, has sought regulatory approval to include such contracts for precious metals.

Technological Innovations and Risk Management

Wilson noted that traditional futures markets differ fundamentally from crypto exchanges. While traditional clearinghouses typically assess margin requirements on a daily basis, crypto exchanges like Hyperliquid can continuously calculate margins and require immediate collateral postings. This technological advancement allows for potentially higher leverage and different mechanisms for liquidation, although Wilson argued that such characteristics should not be conflated with what defines perpetual futures.

He expressed skepticism of the auto-deleveraging mechanism, stating, "I'm not a fan of ADL," and believes it does not need to be employed for perps. Wilson emphasized that digital payment infrastructure enables improved risk management practices. The ability to settle trades in real-time can minimize the necessity for large initial margin buffers traditionally seen in the clearing process.

Wilson pushed for a clearer understanding of perpetual futures, suggesting that they avoid the complications of expiring contracts. This innovation enables reduced transaction costs, minimizes market impact, and helps maintain closer alignment with the futures market. He stressed that regulators should prioritize economic substance over legal classifications, indicating that perpetual futures should not be classified as swaps simply because they do not have an expiration date. He stated, "Economically, they’re futures."

The Future of Perpetual Futures

Looking ahead, Wilson advocated for broader availability of perpetual futures across various markets, including commodities and securities, rather than confining their use to the crypto sector. He regards these products as tools for price discovery and risk management, rather than just crypto-specific innovations. As the regulatory landscape evolves, how authorities choose to classify and oversee these financial instruments will be pivotal for their future growth and acceptance in traditional finance.