The US derivatives markets are poised for more changes than they have ever experienced in their relatively short history. Although there are many reasons for these changes, the primary one is the explosion of the crypto markets.
By the end of 2024, the global derivatives markets had expanded above USD700 trillion notional, of which the United States’ share was about 27%. Crypto derivatives are not centrally regulated and reported, so current estimates range widely from USD20 trillion to USD28 trillion at 2024 year-end (possibly higher), with crypto derivatives dwarfing the crypto spot market in volume. Only time will tell whether the integration of crypto derivatives into the traditional derivatives market is what the US markets need to support innovation, expansion and broad change.
A common idiom in the United States describes this situation: the tail wags the dog, instead of the dog wagging its tail. In 2025, the crypto “tail” wags the traditional derivatives “dog”. That is, the smaller crypto market is driving change in the larger, traditional market.
US President Donald Trump, who was inaugurated on 20 January 2025, has made a commitment to crypto in his second term. He had appointed his Crypto Czar even before he was sworn into office, and invited crypto executives to his inauguration. Two days later, he issued Executive Order 14178, promising “to make America the Bitcoin superpower of the world and the crypto capital of the planet”. Additional pro-crypto Executive Orders followed, including one establishing a strategic Bitcoin reserve and a US digital asset stockpile, and another opening the door for digital assets to be included in employer-sponsored retirement plans. He also:
In April, he signed a law to rescind an Internal Revenue Service (IRS) rule on broker reporting that would have disadvantaged decentralised finance (DeFi) platforms and liquidity providers. In July, he signed the GENIUS Act to support US dollar-backed stablecoins. Two more legislative initiatives – the CLARITY Act and the Anti-Central Bank Digital Currency Surveillance State (CBDC) Act – are moving through Congress, promising to significantly influence future derivatives market regulations.
The Executive Branch, Department of Justice (DOJ), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Treasury Department have all developed ambitious 2025 derivatives agendas. They are collaborating to better anticipate and respond to market developments, seek public comments on “regulations that stifle American businesses and American ingenuity”, and provide regulatory clarity for new and emerging products.
Unlike his predecessors, President Trump seems unencumbered by the existing regulatory structures of the derivative markets. He consistently leans towards deregulation. A businessman first and foremost, he did not come from a trading or regulatory background, and he seems to view market regulation flexibly. If the first half of 2025 is any indication, we will see regulatory regimes increasingly unconstrained and adjusting quickly to accommodate innovation, support DeFi, and transition towards emerging business models, products and technologies.
Regulatory Structure and Process
Calls to modernise the US derivatives markets are not new. However, because of the complex and fragmented ways in which derivatives regulations have evolved, barriers to reform remain stubbornly entrenched. Perhaps America is ready to look at “regulatory sandboxes”, where regulatory and market innovations are encouraged and have proven effective abroad in accelerating “fit-for-purpose” regulatory developments. For decades, there have been calls for better and more expeditious oversight of the US derivatives markets. Maybe, in 2025, we will see innovation driving regulatory changes that reshape not just crypto derivatives but the derivatives markets as a whole, and even beyond.
But there is always a “but”. Federal derivatives regulators face critical leadership challenges, structural and process changes, and shifts in regulatory strategies and direction. They need to tackle aggressive agendas against a backdrop of efficiency mandates, shrinking workforces and dwindling resources. The federal government’s 2.4 million workforce is expected to be reduced by about 308,000 by year-end, which is a 12.8% reduction. Already understaffed regulators are being stretched past their limits.
While staff attrition at the SEC and CFTC is likely paling in comparison to the deep cuts at the IRS, all three regulators are experiencing such attrition and deficits in the leadership ranks, as well as changes in functional responsibilities and geographic reorganisations. The CFTC is at a fork in the road: will it rebuild, will it continue to shrink, or might it disappear altogether? These questions are likely to be resolved when Congress reconvenes in the autumn.
In response to the administration’s pro-crypto push, derivatives regulators shifted their enforcement strategies, moved away from regulation by enforcement to regulation by rule-making, and backed away from the modus operandi of prior years where regulatory violators faced enforcement actions.
PWG Report Findings
The PWG issued its report to the President on July 30, providing five objectives to integrate crypto into the US financial markets:
The PWG Report and four of its five objectives are addressed in more detail in the following sections (banking regulations are beyond this article’s purview).
Positioning the United States as the Crypto World Leader
The PWG recommends that Congress establish a clear crypto framework, draw clear regulatory jurisdictional lines and encourage intragovernmental collaboration. This section looks at pending legislation and relevant SEC and CFTC actions, addresses new products, and considers 24/7 trading and settlement.
The CLARITY Act
The Digital Asset Market Clarity Act of 2025 (the “CLARITY Act”) was passed by the House in July and sent to the Senate. The House version “clarifies” crypto regulation, by calling crypto “digital commodities” subject to CFTC jurisdiction. In August, however, the Senate Banking Committee released its own version, giving the SEC primary authority over “ancillary assets”. At the time of writing, it is not known how the CLARITY Act will ultimately be enacted.
The Anti-CBDC Act
Executive Order 14178 prohibits federal agencies from issuing central banking digital currency (CBDC). The Anti-CBDC Act passed the House and was sent to the Senate in mid-July. It provides that US digital currency policy “remains in the hands of the American people so that any future development of digital cash… [is] anchored around privacy, individual sovereignty, and free market competitiveness”, according to the House Majority Whip, Tom Emmer.
SEC
On January 21st, the SEC established its Crypto Task Force to “set the SEC on a sensible regulatory path that respects the bounds of the law”. As the agency noted, enforcement creates “an environment hostile to innovation and conducive to fraud”, and there has been “confusion about what is legal”. The SEC went on to announce roundtables on regulation, custody, tokenisation, moving assets on chain, and exploring the question of what is a “security” subject to SEC jurisdiction.
Moving away from rule-making by enforcement, the SEC:
It also dropped investigations into Uniswap, Robinhood Crypto and Crypto.com, and dismissed its enforcement action against Dragonchain.
The SEC issued guidance that meme coins, certain digital assets and certain reserve stablecoins are not securities. The agency also issued guidance that mining, mining pools and certain protocol liquid staking activities do not involve security offerings.
Furthermore, the SEC:
Broad guidance included application of rules with respect to:
In August, the SEC launched “Project Crypto”, setting out five initiatives on US capital formation, facilitating custody and trading, and creating a “regulatory sandbox” with an innovation exemption to fast-track new technologies and businesses while avoiding incompatible or burdensome regulations. One of the first close collaborations between the SEC and the CFTC involved the CFTC’s launch of crypto spot contracts to be traded on CFTC-regulated commodity exchanges, known as designated contract markets (DCMs).
CFTC
To engage stakeholders, refocus and foster crypto innovation, and provide regulatory clarity, Acting CFTC Chair Caroline Pham announced a series of public roundtables on “evolving trends and innovation in market structure, including issues such as affiliated entities and conflicts of interest, prediction markets and digital assets”, renewing earlier calls for open public engagement on derivatives policy.
In February, the CFTC announced a Crypto CEO Forum to help launch a digital assets markets pilot programme for tokenised non-cash collateral such as stablecoins. In late 2024, the Digital Asset Market Subcommittee had laid the groundwork, recommending expanding the use of such collateral through blockchain technology to improve efficiency. The CFTC rescinded several advisory letters that had imposed special conditions on crypto derivatives, including Staff Advisories No 18-14 and No 23-07. In May, Acting Chair Pham announced plans to issue an advisory on exchange volatility controls to mitigate systemic risk and promote market resiliency. Also in May, CFTC Letter No 25-14 was released, addressing certain cross-border definitions of “US persons” under the CFTC Regulations.
In August, the CFTC launched “Crypto Sprint” to implement the PWG recommendations, which referenced one of the first collaborations with the SEC to facilitate trading of crypto spot contracts listed on a DCM so that “CFTC-regulated platforms [can] offer [certain investment contract] products with margin capabilities” to unlock “even greater liquidity for these assets”.
New products
A key element in positioning the United States as a crypto world leader involves support for new products. The following focuses on two new products that are taking the US derivatives markets by storm: perpetual futures and prediction contracts.
Perpetual futures
At present, the global crypto derivatives markets are dominated by perpetual futures (perps). By many accounts, perps have taken over the lion’s share of crypto’s global spot and derivatives markets. At the beginning of 2025, US participants had been closed out of the perp market, despite very strong interest; however, by April 2025, perp-style trading had begun on US DCMs.
As the name suggests, perpetuals do not have maturity dates. They trade 24/7, are extremely leveraged, and buyers (longs) and sellers (shorts) can get into and out of their positions at any time with only margin being posted.
In April 2025, the CFTC requested comments as to whether it should approve perps for trading on DCMs, noting that perps are “unlike traditional futures contracts, in which the price benchmarking between the derivative and the underlying cash commodity market is done at or around the expir[y] of the contract. Open exposures on perps may settle many times during the day or continuously with the payment based on funding rates”, depending on the terms of a particular contract. Perps “use funding rates to maintain price parity with spot markets”.
Responses to the CFTC from perp advocates focused on the importance of supporting American global competitiveness; improvements in liquidity and financial stability; encouragement of innovation; reduction of weekend “gap risk”; “better” price discovery; and lowering rollover costs.
Criticisms and concerns focused on the regulatory classification of perps as swaps, futures or another asset class entirely; sufficiency of operational readiness for 24/7 trading and clearing; support for margining requirements; excessive contract leverage; and inability to manage defaults.
In some respects, the CFTC’s outreach has been tacitly addressed by recent market developments. While the CFTC’s comment period was still open, perp-style contracts started trading on US DCMs. Two CFTC-regulated DCMs – Bitnomial Exchange and Coinbase Derivatives – filed self-certifications with the CFTC for trading perp-style contracts, and the CFTC did not “stay” certification of these contracts within the ten business days as required by law. As a consequence, we should expect to see a flood of these contracts in 2025.
Prediction contracts
Prediction contracts are binary (yes/no; win/lose) options that pay out based on the outcome of an event, such as a political event, sporting event or entertainment event. Prediction contracts are subject to CFTC jurisdiction. Before 2025, DCMs seeking to self-certify such contracts were consistently stopped by the CFTC. The CFTC relied on the Commodity Exchange Act (CEA) and CFTC rules that allow it to “stay” any contract listing “that involves, relates to, or references terrorism, assassination, war, gaming, or any activity that is unlawful under any state or federal law”, or that the CFTC determines is not in the public interest.
However, in late 2024 when the CFTC denied a self-certified prediction contract for the US presidential election, the DCM – Kalshi – sued the CFTC to allow the listing. The CFTC argued that the contract was an illegal gaming contract, but the United States District Court for the District of Columbia rejected the CFTC’s arguments. The court found that the contract was not illegal gaming because it did not incentivise criminal behaviour or manipulate election outcomes. The CFTC appealed. While on appeal, Kalshi started trading election contracts, and election contracts have been actively traded since early 2025. In May, the CFTC dropped its Kalshi appeal.
While the CFTC appeal was still pending, the CFTC announced it would host a prediction contract roundtable. With that announcement, the CFTC suddenly found itself in the middle of a passionate turf fight over Constitutional law, Indian Tribal sovereignty, federal pre-emption, public interest objections, and state gambling and gaming authority.
At present, election contracts, such as those addressed in the Kalshi case, are not gaming or sports betting. However, where do things stand with sports prediction contracts? Sports betting, where it is legal, is under the jurisdiction of state gambling commissions or Indian Tribal jurisdictions. The legal question turns on whether sports contracts are “betting”.
In January, the CFTC struck down self-certified sports contracts by Crypto.com. The CFTC requested that it suspend listing and trading such contracts, but Crypto.com did not do so. Rather, it asserted that the CFTC’s position conflicted with the incoming Trump administration’s pro-crypto, pro-innovation stance. Sports contracts are currently trading on CFTC-regulated DCMs, and are trading without CFTC challenge at present.
Even though sports contracts trade on DCMs, it is still not known whether they are legal. Under state gaming laws, several states are now suing DCMs that trade sports contracts. An increasing number of suits brought by Indian Tribes is also being seen. These state and Tribal actions raise more than an interesting legal wrinkle.
Whether a federal pre-emption applies to sports contracts is currently being fought in various courts around the country, with seminal cases in New Jersey, Maryland and California. Again, Kalshi is in the fray, fighting in several venues claiming that a federal pre-emption precludes state actions, and arguing that its DCM-traded sports contracts are legally protected from challenge because the CFTC has exclusive jurisdiction. In June, five friend-of-the-court (amici) briefs were filed in support of the New Jersey case against Kalshi, which Kalshi won. These amici briefs came from very powerful interests, including a coalition of Tribal organisations (nine groups and 60 individual Tribes); a coalition of attorneys general (from 34 US states, Washington, DC and the Northern Mariana Islands); and the American Gaming Association.
Later, in August, a Maryland federal judge refused to grant Kalshi a preliminary injunction in a different case, concluding that the federal pre-emption does not support Kalshi’s position that the CEA pre-empts state gambling and gaming laws. In its decision, the court noted that when the federal pre-emption was enacted, betting was illegal under federal law; therefore, Congress could not have intended to pre-empt state gaming laws. The California case involves three Indian Tribes that have raised the stakes by suing Kalshi and its market maker Robinhood with sweeping claims, including RICO violations.
Given the Trump administration’s pro-innovation position, the odds are better than even that sports contracts will continue to trade – that is, unless and until the state gaming regulators and the Indian Tribes have their way, and this new federally regulated sports prediction market is shut down.
Derivatives trading on a 24/7 basis
US regulated exchanges do not operate on a 24/7 basis. Rather, they are open for trading during traditional designated business hours and days, keeping Federal Reserve System (Fed)/banking settlement and payment hours. This is a long-term functional constraint that prevents 24/7 trading and clearing in the United States.
As previously mentioned, crypto derivatives (like perps) trade 24/7 because they do not rely on Fedwire operating hours or current banking system conventions. Crypto derivatives settle in crypto rather than fiat currencies, so they can operate on a 24/7 basis. These settlement logistics deliver a major competitive advantage to crypto over traditional derivatives.
It is worth looking briefly at the implications of 24/7 trading in the United States. In 2023, the Fed proposed to transition the wholesale funds settlement system to 24/7 operations sometime in 2027. The Fed payments infrastructure is expected to ultimately operate 22 hours of every day of the year. This would be a predicate to extending the hours of exchange operation.
In April 2025, the CFTC solicited comments on the “potential benefits and risks” of 24/7 derivatives trading and settlement. Key stakeholders, market participants and interested trade associations submitted comments to the CFTC, many having previously submitted feedback on 24/7 to the Fed. Most comments related to systems infrastructure, technology changes and staffing changes that would be required with bank settlements over the Fedwire.
Specifically, the CFTC noted the need to “maintain robust market surveillance for abusive trading practices, including front-running, wash trading, pre-arranged trading, and any other manipulative or disruptive trading practices […]”. Along with such concerns, migration to 24/7 will inevitably raise new legal issues. For example, netting agreements and counterparty contracts would need to be modified to add crypto assets, especially in cross-product netting or cross-collateral arrangements. Substantial issues would need to be addressed with respect to netting of over-the-counter and exchange-traded products. In addition, individual agreements would need to be renegotiated.
Artificial intelligence (AI) and blockchain technologies will have a major impact on the 24/7 transition, and each clearing firm will need to modify its own systems, infrastructure and related contractual agreements.
These significant modifications and changes will require a substantial amount of lead time for the necessary planning and implementation.
Strengthening the US Dollar Through Adoption of Dollar-Backed Stablecoins
The administration’s support for dollar-backed stablecoins was first communicated in Executive Order 14178 with the stated purposes of “promoting and protecting the sovereignty of the United States dollar, including through actions to promote the development and growth of lawful and legitimate dollar-backed stablecoins worldwide”. The PWG Report noted that “US dollar-backed stablecoins represent the next wave of innovation in payments, and policymakers should encourage their adoption”.
In July, the GENIUS Act was signed into law, setting out a regulatory framework for stablecoins to be more widely used in financial transactions. The law states that “payment stablecoins” are neither securities (subject to SEC jurisdiction) nor commodities (subject to CFTC jurisdiction). Broadly, the Act:
Modernising AML Rules to Combat Fraud
To successfully encourage crypto innovation and expansion, the PWG Report notes the need to protect the US crypto market “by mitigating and combating illicit use”. Crypto, “like traditional assets, [is] subject to abuse by bad actors – terrorists, drug traffickers, state-sponsored hackers, human traffickers, fraudsters, sanctions evaders, and others”. To combat abuse, “law enforcement needs the tools to hold those who use digital assets for illegal activities accountable”, including AML/CIF (Combat Illicit Finance) and sanctions that are tailored to crypto risks and industry structure.
Because of its decentralised nature, crypto has gained the reputation of harbouring fraudsters and hiding illegal transactions. In many circumstances, personally identifiable information and a bank account are not required to process crypto transactions. The PWG acknowledges that to combat crypto-specific fraud law enforcement needs appropriate tools, including AML/CIF and sanctions. The global discussion is broadening now, with the Bank of International Settlement raising recent concerns around “traditional AML policies – the very thing lacking in [DeFi]”.
The DOJ, SEC, CFTC and FinCEN are all focused on prosecuting bad actors, with increased regulatory inter-agency collaboration taking place in 2025. Law enforcement agencies work closely with blockchain analytic firms, using AI and machine learning to track down illegally obtained crypto and process large amounts of data. The immutable nature of blockchain makes crypto fully traceable.
A snapshot of the regulatory developments through mid-2025 follows.
DOJ
In April, following Executive Order 14178, the DOJ issued a memorandum stating that it will “no longer target virtual currency exchanges, mixing and tumbling services, and offline wallets for the acts of their end users or unwitting violations of regulations”. Instead, it will focus on:
In addition, the DOJ rescinded inconsistent prior policies and directives, instructing closure of all inconsistent ongoing investigations and enforcement actions.
Refocusing on fraud, the DOJ:
The DOJ also worked with the FBI and blockchain analytics companies to successfully link seized crypto to fraud victims.
The DOJ updated its corporate self-disclosure policy to set out more certainty about the consequences of misconduct, including deferred prosecution agreements. It also provided larger incentives to entities that self-disclose corporate misconduct.
SEC
The SEC formed its Crypto Task Force to work towards regulatory certainty, increase compliance and combat fraud. It established the Cyber and Emerging Technologies Unit (CETU) to apply AI and machine learning in countering cyber, blockchain and crypto fraud. As mentioned previously, the SEC walked away from several crypto enforcement actions and litigation over regulatory violations.
The SEC has not backed down from combating fraud. It has:
CFTC
The CFTC reorganised its Division of Enforcement Task Forces into two units: the Complex Fraud Task Force, and the Retail Fraud and General Enforcement Task Force. The Complex Fraud Task Force investigates and litigates fraud and manipulation across all asset classes. The Retail Fraud and General Enforcement Task Force investigates and litigates all other CEA violations.
The CFTC has issued several public education alerts on fraud and cyber scams, focusing on “relationship investment fraud”, “pig butchering” and binary options trading. It also issued other advisories as to how to avoid fraud, including use of generative AI.
The CFTC has modified its policy on self-reporting, co-operation and remediation. As revised, the policy provides companies with guidance on penalties and possible abatement, how penalties are calculated, how the CFTC will determine the company’s level of co-operation it receives, and possible remediations.
Recent CFTC enforcement actions have included fines for crypto and foreign currency fraud. In May, the CFTC updated its Registration Deficient List (“RED List”) by adding 43 entities, which identifies unregistered foreign entities. The RED List is a publicly available list of foreign entities operating in the derivatives markets without CFTC-required registration. It identifies and warns the public about firms that could be involved in fraudulent or illegal activities.
FinCEN
FinCEN is the US Treasury bureau tasked with safeguarding the US financial system from illicit activity, including crypto theft and ransom payments. FinCEN:
Ensuring Fair and Predictable Crypto Taxation That Eliminates Tax Compliance Hurdles
Crypto tax reporting and compliance is difficult, given the types of digital assets and the wide variety of transactions. To add to compliance difficulties, there are few parallels with tax treatment for traditional assets, and the Treasury and IRS have provided limited guidance. As types of crypto products and transactions proliferate in the markets, guidance lags behind. Staff cuts across the IRS further complicate the situation.
Perhaps in recognition of these hurdles, the PWG recommended that Congress enact comprehensive legislation to ensure fair and predictable crypto taxation. In the absence of legislation, the Treasury and the IRS would need to provide whatever guidance they can within the limits of their statutory authority.
The PWG directs the Treasury and the IRS to provide sensible and enforceable rules to ensure that crypto transactions are accurately reported. It also instructed the IRS to update its crypto FAQs, which continue to serve as a key source of information about crypto tax compliance.
In line with the administration’s pro-crypto goals, Congress passed a Joint Resolution in January to overturn a broker reporting requirement that would have become effective 1 January 2025. It invalidated the expanded definition of a “broker”, requiring DeFi platforms to report to the IRS as commodity exchanges. DeFi platforms are now exempt from broker reporting, but centralised crypto exchanges must comply.
The IRS is attacking tax fraud in 2025 by:
“Operation Hidden Treasure”, originally launched in 2021, remains active and ongoing in targeting taxpayers not reporting their crypto income. IRS agents are receiving special training in crypto logistics and blockchain analytics tools to help identify and find taxpayers that fail to report their crypto income.
The IRS, SEC and CFTC are also collaborating on various crypto regulations, focusing on perpetual swaps, synthetic digital tokens and wrapped digital assets.
Conclusion
The push-pull dynamic between derivatives regulation by enforcement and regulation by rule-making will continue to be driven by crypto derivatives as we move into 2026.
We are at a remarkable point in market evolution. It is a rare moment where there is likely to be a regulatory overhaul of the traditional derivatives markets while crypto derivatives are being folded into that new framework. The less-regulated and less-reported crypto derivatives markets are experiencing much faster growth. If the US share of the crypto derivatives markets were to increase even slightly, substantial US economic gains could be made. The President comes from a business background. He sees opportunities and seems undeterred by traditional regulatory frameworks and traditional ways of doing things.
While the opportunities “to do better” and to update disjointed regulatory frameworks are all around us, this article ends with a serious note of caution. The current regulatory and institutional checks and balances that govern the US financial markets were initially an outgrowth of the Great Depression in the 1930s and subsequent market events like those of 1987 and 2008. We learned from each one, and corrected for under-regulated and over-leveraged derivative portfolios. Huge, tangible worldwide damage in those crashes was also seen. Major companies folded, nations declared bankruptcy, millions of everyday investors got burned, and co-ordinated, massive-scale central bank interventions were required to calm the markets. Even with such enormous interventions, the repercussions in the US markets (housing, in particular) continued for years. At present, strong systems of oversight govern securities and commodities transactions that seek to double-check and back-stop one another through the various regulatory frameworks. History casts a long shadow, so US regulators have moved forwards cautiously.
The efforts of the current administration may be applauded. “Fit for purpose” regulations have never been more critical for the US derivatives markets than they are today. When the derivatives markets were out of step with their regulatory frameworks, legislative and regulatory changes resulted. As the crypto markets go mainstream, we are in uncharted territory. Derivatives policies and markets should be closely monitored. We must ensure that the next phase of US derivatives regulation can and does appropriately keep pace with business innovation, and that we get the regulatory framework right for crypto derivatives. The competitiveness of the US financial markets depends on it. After all, we are at a place in time where it looks like the crypto “tail” is wagging the derivatives markets “dog”.
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