Coinbase, Kalshi, and Kraken Support CFTC in Court Dispute Over Perpetual Stock Contracts

Coinbase, Kalshi, Payward -- the parent company of the Kraken exchange -- and other companies from the digital asset market have supported the U.S. Commodity Futures Trading Commission (CFTC) in a dispute over the regulation of perpetual futures contracts linked to individual stocks. The case concerns the division of authority between the CFTC and the Securities and Exchange Commission (SEC), which opponents of these instruments argue should oversee them.

A motion for the admission of an amicus curiae opinion, which represents the views of parties not directly involved in the case, has been submitted to the U.S. District Court for the Southern District of New York. It was filed by representatives of Coinbase, Kalshi, Payward, DRW Holdings, Jump Trading, and Paradigm. The companies aim to support the CFTC in response to a request from the Capital Markets Alliance (CMA) for a ban on the further offering of these instruments. The motion also included a proposed opinion text. The first page of the submitted motion (source: CFTC)

Coinbase, Kalshi, and other cryptocurrency entities had previously begun efforts to introduce perpetual stock contracts to the U.S. market. The applications from Coinbase Derivatives, KalshiEX, and Bitnomial for the approval of such products for trading were deemed approved on November 2. We reported on Coinbase's exchange plans and investor reactions in this article.

According to the authors of the proposed opinion, perpetual stock contracts meet the statutory definition of futures contracts for securities. They argue that these contracts allow for exposure to the future price of an individual stock, are settled in cash, listed on exchanges, and subject to a margin mechanism. The absence of an expiration date should not automatically disqualify them from being classified as futures contracts.

The companies also point out that the SEC has participated in the work on the regulatory framework for such instruments. They argue that both agencies have collaborated from the beginning in determining the classification rules for contracts, and thus it cannot be said that the authority of the securities market regulator has been completely overlooked. They emphasize that futures contracts on individual stocks are subject to joint oversight by the CFTC and SEC in the United States.

CFTC and SEC at the Center of Oversight Dispute

The applications for single-stock contracts submitted by Coinbase Derivatives, KalshiEX, and Bitnomial were deemed approved by the CFTC on November 2. However, this mechanism did not mean that the agency issued a separate decision approving each product. The applications were considered approved after the deadline for their review expired without the CFTC taking any blocking actions. The classification of the instruments and the scope of the regulators' authority have become the subject of the court dispute.

The Capital Markets Alliance presents the matter differently. The organization believes that contracts without an expiration date do not meet the definition of futures because they do not provide for the delivery of the underlying instrument at a specified time. In its view, they should be classified as swaps based on securities, which fall under the SEC's jurisdiction.

CMA is an industry organization supported by entities from the traditional financial market, including Cboe and Citadel Securities. Therefore, the dispute concerns not only the interpretation of regulations but also which institutions and entities will be able to develop a new segment of derivative instruments in the United States.

Court Did Not Halt Trading but Questioned CFTC's Authority

The proceedings before the U.S. District Court for the Southern District of New York began in early November. On November 3, Judge Valerie E. Caproni rejected the CMA's request for a temporary ban on the further offering of contracts. However, this does not mean that the court sided with the CFTC.

In her reasoning, the judge indicated that the CMA has a strong chance of demonstrating that the CFTC exceeded its statutory authority by allowing perpetual contracts on individual stocks to be classified as futures for securities. In the court's view, instruments without an expiration date may not meet the statutory definition of such contracts and resemble swaps subject to SEC oversight.

At the same time, the court found that the CMA did not sufficiently demonstrate a specific and immediate risk of irreparable harm that would justify an immediate halt to trading. For this reason, the request for a temporary ban was denied. This means that the products were not blocked, but the fundamental dispute over the regulators' authority remains unresolved.

In this context, Coinbase, Kalshi, Payward, and the other companies have voiced their opinions. In the proposed opinion, they want to convince the court that the classification adopted by the CFTC is lawful, and maintaining it will allow for the development of the market for perpetual stock contracts in the United States. The final resolution may be significant not only for the mentioned platforms but also for the future division of authority between U.S. financial market regulators.

The content of the proposed opinion from the companies can be found in the document attached to the motion submitted to the court on November 9. Meanwhile, the court's ruling from November 3 shows why the request for an immediate halt to trading was rejected.