The legal battle over crypto perpetual futures is no longer confined to industry debates.
Last week, CME Group, one of the largest derivatives marketplaces, sued the US Commodity Futures Trading Commission (CFTC) over the agency’s approval of crypto perpetual futures contracts, arguing that the products should be regulated as swaps rather than futures under the Dodd-Frank Act.
In the middle of the dispute is a broader question that extends well beyond the digital assets industry. As cryptocurrency, prediction markets, and tokenized financial products continue to evolve, regulators are increasingly being asked to classify products that did not exist when many of today’s derivatives laws were written.
“What is a perpetual future? Is it a swap? Is it a future?” asked John Lothian, a media executive and commodity trading veteran, during a recent interview with DeFi Rate.
The question sits in the midst of CME’s recent lawsuit, but it also highlights a growing challenge for regulators: how should entirely new financial products be treated when existing legal categories no longer fit?
A pattern that goes back to the 1990s
Lothian has watched the line between swaps and futures blur for decades, tracing the dispute back to the over-the-counter market that developed as banks began trading customized “bespoke” contracts tailored to individual customer.
“When a when an over-the-counter contract becomes standardized, that’s really futurizing it… and it becomes a futures contract. But it can’t be a futures contract unless it’s listed on a designated contract market.”
To solve this, the industry gave them a different name: swaps.
Former CFTC Chair Brooksley Born argued in the 1990s that such contracts are very similar to futures and should be under the watchful eye of the CFTC. According to Lothian, Born was pushed out of that fight by “the old boys network in Washington,” and the issue was not resolved until the 2008 financial crisis.
Dodd-Frank, Lothian noted, was a “grand compromise” that gave swaps legal certainty in exchange for new rules, registration requirements, and clearing obligations, while also handing the futures industry concessions it had long wanted.
When does a future start acting like a swap?
Lothian argued that perpetual futures function less like dated futures contracts and more like swaps because of their funding-rate mechanism. Namely, the recurring payments traders exchange to keep a contract’s price tethered to the spot market.
“[Regulators] don’t know what the definition of a swap is,” Lothian said. “Because it doesn’t fit into any one bucket nicely, they decided to put it into the futures bucket because that’s where it fits from a compliance standpoint… The best for their client, which is not the way the relationship is supposed to be.”
Lothian described the products as a workaround for crypto’s custody problems rather than a genuine derivatives need. Exchanges built perpetual contracts, he said, because crypto itself has “a flawed technology,” letting traders speculate on price without having to hold the actual coins.
Notably, Lothian thinks the CFTC’s classification problem cuts in both directions. He argued that prediction-market event contracts, which the agency has defined as swaps, do not fit that category either, because they pay out once rather than involving a recurring series of exchanged payments.
“It’s a single payment at the end. That doesn’t fit the definition of a swap. So, the fact that they’re defining them as swaps in the first place is wrong.”
Congress should draw the line
The CFTC is not acting in bad faith, but it does seem to be stretching old definitions to cover products that did not exist when the law was written. And while lacking the authority to rewrite those laws itself, the regulatory body may find itself in murky waters.
Lothian brought up KOSPI as an example.
“KOSPI is a very popular South Korean stock index that has a huge influence on it by Samsung.”
Samsung’s outsized weighting can push the index between being regulated as a narrow-based index by the Securities and Exchange Commission (SEC) and a broad-based index by the CFTC.
“It starts to look almost like a narrow-based indices as opposed to a broad-based indices,” he said, adding that the classification “fluctuates… back and forth,” precisely the kind of definitional gap he believes Congress, not regulators, should resolve.
“This Congress was one of the worst Congresses ever … in terms of doing anything,” Lothian said.
According to him, the same body that would need to settle the swap-versus-future debate has spent years failing to pass baseline digital asset market structure laws, leaving agencies like the CFTC to interpret decades-old statutory language as best as they can.
The CLARITY Act is currently sitting in the Senate’s legislative calendar with a window to reach the floor before the July 4 recess; however, experts are speculating this could be postponed once again.
Clearing the 60-vote threshold needed to beat a filibuster means resolving fights over ethics rules for officials with crypto ties, how decentralized finance (DeFi) platforms are treated under the bill’s SEC-CFTC split, and anti-money-laundering requirements for self-custodied wallets, on top of reconciling separate Banking and Agriculture Committee texts that still do not agree on how digital commodities should be defined.
Lothian added that the CFTC currently operates as a one-man panel held solely by Chairman Michael Selig. Such an imbalance leaves the agency more exposed to pressure from the exchanges it regulates.
For now, that argument is being settled in court rather than Congress. A ruling that sides with CME would force Kalshi’s perpetuals, Coinbase’s Deribit-routed product, and any other venue offering similar contracts to operate under swap rules mid-rollout. A ruling that sides with the CFTC would leave the agency’s discretion over novel-product classification intact, but without the clearer statutory lines only lawmakers can draw.
