In cases involving crypto asset exchanges handled by our team of lawyers, investigators often describe perpetual contracts in interrogation records as a gambling game of guessing price movements, aiming to characterize exchange personnel as guilty of the crime of operating a casino. Consequently, subsequent case-handling personnel, relying solely on these records, may mistakenly perceive perpetual contracts as games of chance similar to guessing big or small.
In discussions with peers on whether perpetual contracts constitute gambling, the debate often devolves into arguments such as: "Are perpetual contracts futures? If so, why is there no physical delivery? Perpetual contracts use leverage and are subject toforced liquidation!" Even if I can demonstrate that perpetual contracts are a new form of futures—drawing an analogy to index futures, which also lack physical delivery—it seems difficult to persuade the other party.
Later, I realized that the essence of these discussions lies not in whether perpetual contracts are futures, but in the need for a clear marker to distinguish financial activities from gambling activities.
So,what is the markerfor distinguishing financial activities from gambling activities?
First, is it legality? Clearly not. Illegal financial activities are still financial activities, and there are legal gambling activities (such as casinos in Macau).
Second, is it the use of leverage? Clearly not. The use of leverage is common in futures markets, while many gambling activities do not involve leverage (e.g., grabbing red packets on WeChat, playing mahjong).
Third, is it the randomness of the outcome? This seems closer. Why do we habitually say "speculating in stocks," "speculating in futures," and "speculating in contracts," yet we say "betting on football" or "betting on horse racing"? It seems that the outcomes of football matches and horse races are uncontrollable, whereas stocks, futures, and contracts have K-line charts for analysis.
In Guiding Case No. 146,the case of operating a casino,Chen Qinghao and others typified the use of financial activity concepts to conduct gambling activities.
In that case, the perpetrators operated a casino using foreign exchange trends: they downloaded and installed market data reception software and self-made plugins for the Longhui website, selected a specific foreign exchange trading instrument, chose an expiration time ranging from one minute to one hour, entered the transaction amount, and clicked the "Buy Up" or "Buy Down" button to complete the transaction. If the direction of the price movement was predicted correctly, they profited; if incorrectly, they lost their entire principal. Is this type of futures trading not a typical binary gambling game of guessing big or small? Although they also had K-line charts, they used the magnitude of fluctuations in the K-line charts to create a gambling game. There was no issue in characterizing this as operating a casino. Therefore, the randomness of the outcome should not be the marker distinguishing gambling games from financial activities.
Thus, clearly,the distinction between financial activities and gambling lies in whether the participants hold the right to control risk.
Participants in gambling activities have no control over risk, commonly known as "bets are final once placed." In contrast, in financial activities, the right to control risk rests with the individual. For example, if you believe a stock price is falling, you can sell promptly to stop losses. This differs from Guiding Case No. 146, where perpetrators usedforeign exchange futuresconcepts to conduct gambling, preventing exit before the outcome was determined. If a stock rises but you do not sell and exit, you cannot claim to have made a profit. The same applies to perpetual contracts: if you go long but the coin price falls, you can choose to close the position to stop losses, or hold until the price rises and then close the position, ultimately making a profit.
Negative Argument Against Classifying Perpetual Contracts as Gambling
Based on the above reasoning, we can easily revisit the logic used by the Pingjiang County People's Court, which sparked discussion within the domesticweb3ecosystem, stating thatBikeExchange'sperpetual contracts constitute gambling:
1. Virtual currency trading is illegal.
—Clearly, illegality does not equate to gambling. It is unclear why this point is raised. Mainland China is not Macau; are there legal gambling operations?
2. The rise and fall of virtual currencies are characterized by irregularity, randomness, and contingency.
—The trading pairs for BTC and ETH available on the Bike Exchange's perpetual contracts clearly exhibit regular price fluctuations correlated with the Nasdaq and US stock market trends, as reflected in their "K-line charts."
3. Compared to regulated futures, the obvious differences are: no physical delivery, no agreed delivery time, and 24/7 trading hours for perpetual contracts.
—Clearly, legal professionals may have limited understanding of the securities world beyond law. Perpetual contracts are a new development of regulated futures. Index futures, introduced in February 1982, already achieved futures without physical delivery. By 1993, the concept of perpetual contracts without set delivery times was proposed. In 2015, with the widespread establishment of virtual currency exchanges, perpetual contracts found their optimal application scenario—crypto assets.
4. The platform amplifies speculative risk through high leverage, posing high risks. Once high leverage is used, it is very easy to cause "liquidation."
—Leverage is not a characteristic of gambling. Many financial activities involve leverage, and many gambling activities do not. This case argues that high leverage "very easily" causes liquidation but fails to discuss the relationship between margin and leverage. Liquidation can be managed through margin, or even by adding funds to neutralize leverage, thereby preventing liquidation. This is significantly different from gambling, where, after placing a bet, one must wait for the dealer to reveal the outcome. Participants in contracts can control the outcome. This high degree of control in speculative trading is fundamentally different from the "bets are final once placed" nature of gambling transactions.
The Essential Difference Between Perpetual Contracts and Gambling
Accordingly, this article considers the perpetual contracts offered by licensed exchanges in offshore jurisdictions, such as Binance, as a standard model. Users can participate in contract trading based on virtual assets like BTC and ETH by going long or short. The platform adopts a market maker model, providing liquidity support through professional teams viaAPI interfacesand combining this with high-frequency trading systems to achieve rapid order matching. To ensure dynamic balance between contract prices and spot prices, Binance introduced the Funding Rate mechanism, incentivizing balanced positions between long and short parties through periodic fee adjustments. This design is highly similar to mechanisms in traditional financial futures markets (such as the Chicago Mercantile Exchange).
As a basis for discussion (excluding fraudulent or gambling platforms where the exchange bets against players under the guise of perpetual contracts), let us carefully outlinethe differences between perpetual contracts and gambling: Perpetual contracts do not involve "bets are final once placed" or fixed gambling settlement times. In betting on football, horse racing, or guessing big or small, one cannot withdraw midway after placing a bet. Thus, the core feature of gambling is "bets are final once placed." This implies two layers of meaning: First, there is a specific betting cutoff time; bets can be changed before this time but not after. Second, after bets are final, there will be another specific and fixed time when the result is revealed and settled, with the loser paying the winner. Bets cannot be changed after placement until the result is revealed at the fixed time. For example, as mentioned earlier in Guiding Case No. 146.
1. Perpetual Contracts Lack a "Bets Are Final Once Placed" Mechanism
Traders in perpetual contracts can close positions to stop losses or take profits at any time, and can add virtual assets to lower (or raise) their position levels. There is no mandatory deadline for betting.
This design allows participants to adjust strategies based on market dynamics. Taking recent Ethereum market trends as an example, if an Ethereum contract trader goes long and the price moves unfavorably, they can immediately close the position to avoid further losses. Alternatively, they can hold the position waiting for a rebound, turning a losing position into a profitable one. They can even add to their position at lower prices, enabling profitability even if the Ethereum price remains below the initial entry price.
Thus, the feature of perpetual contracts allowing "trading (including additional trades) and settlement withdrawal at any time" clearly negates the characterization of them as games of guessing big or small. With their anti-"bets are final once placed" characteristics, it is difficult to equate them with gambling games.
2. Perpetual Contracts Can Technically Avoid "Forced Liquidation"
All casinos hope for quick results in each game to facilitate prompt settlement by the dealer. Therefore, gambling requires clear outcomes to determine wins and losses; without results, the game cannot proceed.
However, perpetual contracts technically allow for "never settling." Initially, perpetual contracts have no expiration date, and users can hold them indefinitely. In the case of buying long, users can trade with 1x leverage, effectively mimicking the holding of spot Bitcoin or Ethereum. Considering the overall balance of funding rates for long and short positions in long-term holdings, theoretically, users in this scenario can never be liquidated.
If leverage is increased, adding funds to neutralize the leverage (or reaching a nearly impossible liquidation price) can effectively prevent liquidation. From a casino's perspective, no casino would offer a betting game where the result is never settled. How, then, can a contract that never results in liquidation and settlement be evaluated as gambling?
Future Outlook
In my previous articles, "Is Crypto Asset Perpetual Contract Trading Gambling or Financial Derivatives? Mankun Lawyers Compare Global Regulatory Status Quo》《"Perpetual Contracts" Should Not Be Considered Operating a Casino; May Be Recognized as Illegal Business Operations After Reporting to the Supreme People's Court", and in defense work, I demonstrated that under global regulatory policies, perpetual contracts are managed from the perspective of financial derivatives. In communications with exchange personnel (licensed or those emulating the Binance model), most maintain a mindset of "do no evil" and have never intended to operate a casino. Of course, during discussions with many people, some jokingly remarked that contracts are just gambling. However, this "gambling" is more of a vague expression of their speculative mindset, akin to the joke that "playing the stock market is gambling."
It was precisely through these rounds of communication that I delved into the distinctions between contractual financial activities and gambling activities, ultimately arriving at the conclusions of this article. If necessary, I will subsequently update the history of the development of perpetual contracts—how they evolved from futures contracts to perpetual futures contracts—and explore the significance of perpetual contracts as a financial innovation.
