Why Regulatory Clarity on Crypto Derivatives Is a National Security Issue

Platforms like Bybit and Deribit have become the de facto global hubs for perpetual swaps and options, operating outside US jurisdiction. This creates a $100B+ notional risk pool with no visibility for US regulators.

• No KYC/AML Surveillance: Anonymous trading enables sanctions evasion and illicit finance.
• Counterparty Risk Opaqueness: User funds are commingled in offshore entities with unclear custodial practices.
• Systemic Contagion Vector: A major blow-up on these venues would spill over to onshore markets via interconnected DeFi protocols.

The Commodity Futures Trading Commission (CFTC) has clear authority over derivatives but is hamstrung by the 'actual delivery' loophole and lack of a comprehensive digital asset framework. This forces enforcement via slow, case-by-case litigation.

• Reactive, Not Proactive: The CFTC acts after the fact, chasing bad actors like Binance and FTX post-collapse.
• Stifles Regulated Innovation: US firms like CME operate under strict rules, while offshore competitors capture ~90% of retail volume.
• Creates Enforcement Theater: Scattershot penalties are a cost of business, not a deterrent.

Decentralized perpetual protocols like dYdX, GMX, and Hyperliquid replicate offshore leverage with on-chain settlement. While transparent, they are geoblocked for US users, pushing activity to VPNs and fragmenting liquidity.

• On-Chain, Off-Books: Transactions are public, but user identities and aggregate risk exposure are invisible to traditional monitors.
• Oracle Manipulation Frontier: These systems are prime targets for flash loan attacks to manipulate price feeds and drain liquidity pools.
• Protocols as Proxies: Adversarial states can use these tools to anonymously short a national currency or target specific assets.

Clarity must focus on regulated on-ramps (CEXs) and licensed intermediaries, not attempting to ban code. The SEC's security/commodity dichotomy is irrelevant for derivatives; the CFTC should have plenary authority.

• Mandate Real-Time Reporting: All US-facing liquidity venues must report large positions and trades to a CFTC surveillance system.
• License FCMs for DeFi: Create a new class of licensed Futures Commission Merchant to intermediate access to permissionless protocols, applying KYC and risk checks.
• Lead Global Standards: Use OFAC sanction powers and FSB influence to pressure offshore hubs into adopting transparency or face exclusion from the dollar system.

U.S. regulatory uncertainty has pushed ~90% of crypto derivatives volume to offshore exchanges like Binance, Bybit, and OKX. These platforms operate with opaque risk management, creating a shadow financial system with direct U.S. user exposure.

• Risk: A major counterparty failure offshore triggers contagion that U.S. regulators cannot contain.
• Reality: The CFTC's enforcement actions are a reactive, piecemeal defense against a systemic threat.

Off-chain, opaque derivatives markets are a black box for U.S. intelligence and law enforcement. Regulated venues like CME provide critical surveillance data; offshore venues do not.

• Problem: Inability to monitor large, coordinated positions that could manipulate Bitcoin or Ethereum prices or fund illicit activities.
• Consequence: The U.S. forfeits a primary tool for detecting financial threats and sanction evasion.

Derivatives are the engine of mature capital markets. By not providing clarity for DeFi protocols like dYdX or GMX, the U.S. is allowing other jurisdictions to build the foundational infrastructure for the next generation of finance.

• Strategic Loss: The rules of the game for perpetual swaps, options, and synthetics will be written elsewhere.
• Opportunity Cost: Onshoring this innovation would capture billions in economic activity and set global standards.

The path forward is not to ban, but to domesticate and regulate. Apply core principles from Traditional Finance (TradFi)—clearing, reporting, capital requirements—to the crypto-native stack.

• Action for Architects: Design protocols with transparent oracles (e.g., Chainlink), on-chain risk engines, and composable compliance layers.
• Action for Policymakers: Provide clear guidelines for licensed DeFi and regulated crypto-native exchanges, moving beyond the 'security vs. commodity' deadlock.