The introduction of perpetual futures into regulated markets has sparked a heated debate, with critics warning of the potential for systemic risk. However, this criticism is misplaced, as the risk is not inherent to the contract itself, but rather a result of the venue's design. The venue's choices, such as leverage caps, margin rules, and default management, are the primary factors that contribute to systemic risk.
The concern is not unfounded, as past deleveraging episodes in the crypto market have been triggered by a combination of factors, including macro shocks, stablecoin de-pegs, and exchange outages. Nevertheless, it is the liquidation cascade, often caused by venue choices such as manipulable indices and auto-deleveraging, that turns a sell-off into a systemic event. The real question is not whether perpetual futures belong in regulated markets, but rather how a given venue is designed. Regulatory requirements, such as segregated funds, registered clearing entities, and supervisory oversight, are essential for securing the baseline.
However, the way a venue handles defaults under stress is a separate choice, and it varies even within the regulated perimeter. A more valid concern is that institutions may not want perpetual futures at all, as they are often seen as speculative and lack the term structure and delivery of traditional futures. Nevertheless, institutions are using perpetual futures to hedge delta, taking advantage of the liquidity they provide. The liquidity edge of perpetual futures is structural, drawn in by retail flow, and is the overlooked prize in bringing them onshore.
The debate surrounding perpetual futures is not about their inherent danger, but rather about how a venue handles defaults when the market is under stress. Regulated clearing has established a standard for decades, which is also the standard that Bullish is building towards. By containing defaults at their source, rather than force-feeding them into a falling market, the chain that turns one blown-out account into a market-wide cascade can be broken. This is the difference between a venue that contains a failure and one that transmits it, and it is the transmission that is the systemic risk that critics fear.