Attorney Shao Shiwei | Does the Operation of Perpetual Contract Services by Virtual Currency Trading Platforms Constitute the Crime of Operating a Casino?

Author | Attorney Shao Shiwei

A perpetual contract (Perpetual Futures), fully named "Perpetual Futures Contract," evolved from futures contracts. It is a unique and common investment tool in the crypto circle, allowing investors to engage in leveraged trading in the cryptocurrency market. The cryptocurrency derivatives trading platform BitMEX stated on its official website that perpetual contracts were first created by this platform.

The difference between perpetual contracts and futures contracts is that futures contracts have a settlement date (delivery date), whereas perpetual contracts have no expiration date. This means that as long as the user's funds (margin) are sufficient, the contract can be held indefinitely, with the freedom to choose when to settle.

Perpetual contracts have the following characteristics:

• High leverage. Most exchanges' perpetual contracts support leverage of up to 100x, or even 200x;

• Trading without physical assets. The underlying asset for users' trades is an index based on spot prices, so users do not need to actually own the spot assets to engage in two-way trading;

• No expiration date and no delivery required. As long as the user is not liquidated, they can hold the position indefinitely, avoiding the hassle of frequent deliveries and position adjustments;

• No interest. Users only need to pay relatively low transaction fees and potential funding rates (however, funding rates are bidirectional and may result in either an expense or income).

If a user analyzes and judges that a certain cryptocurrency will rise or fall in the future, they can go long (bullish) or short (bearish) on that cryptocurrency through perpetual contracts. By increasing the leverage ratio, while users may achieve higher potential profits, their risks also increase multiplicatively. Therefore, perpetual contracts are a high-risk investment strategy.

The logic used by case-handling units to equate perpetual contracts with gambling lies in the fact that one characteristic of gambling is betting small to win big, and perpetual contracts involve guessing price rises and falls, akin to betting on big or small. Superficially, perpetual contracts appear to allow users to seek higher returns by guessing whether coin prices will rise or fall, but is this actually the case? We will analyze this in detail.

What is gambling? There is no explicit definition in Chinese law, but through the following guiding case from the Supreme People's Court, we can summarize the characteristics that would be recognized as gambling.

By analyzing the court's viewpoint in the aforementioned case and comparing it with the trading model of perpetual contracts, it can be seen thatperpetual contracts are not gambling behaviors, mainly for the following reasons:

1. In the aforementioned case,users selected "Buy Up" or "Buy Down",and once the direction was chosen incorrectly, the user incurred a loss. This reflects the concept of "bet placed, hands off" in gambling, where once a choice is made, it cannot be changed. However, in the perpetual contract model, after purchasing, users can choose to close their positions and sell at any time based on market fluctuations.

2. In the aforementioned case,the transaction price and the magnitude of profit or loss were determined in advance. In perpetual contract services, the transaction price refers to the closing price or the price at which the contract is sold, which is determined by the user's specification or the market price. The closing price, opening price, selected trading time, and other factors may all affect whether the user makes a profit or incurs a loss.

3. In the aforementioned case,the user's profit or loss result was not linked to the actual magnitude of price fluctuations, meaning that in the gambling model, the gambler's profit or loss amount can be estimated through probability. Attorney Shao mentioned a case in the article "Crypto Contract Copy Trading Promises High Returns: Angel or Devil?", where Xi, as a global agent for Star Coin, guided customers to purchase virtual currencies and gamble on price rises and falls, thereby earning transaction fees and profit/loss amounts from participants. The reason the court recognized this platform's model as operating a casino was that users bet USDT to buy and sell the rise and fall of virtual currencies; guessing correctly yielded profits, while guessing incorrectly resulted in losses. This model is consistent with the one in the aforementioned case in this article.

In perpetual contract services, although users' profits or losses are related to the rise and fall of virtual currencies, the amount of profit or loss depends on the price difference between buying and selling, and the specific amount of profit or loss is uncertain.

4. In the aforementioned case,traders had no rights to exercise or transfer positions. In perpetual contract services, users can decide whether to terminate or add to their transactions at certain time points based on their own judgment of market conditions. They can withdraw orders or cancel transactions at any time. Additionally, users can use the "reverse trading" function to switch between short and long positions with a single click.

5. In the aforementioned case,the online platform engaged in betting against investors. In perpetual contract services, the exchange earns revenue from transaction fees, rather than taking a "cut" based on users' wins or losses.

6. In the aforementioned case, the platform model was recognized as "betting on big or small, betting on winning or losing". However, as a financial derivative unique to the crypto circle, perpetual contracts require investors to conduct professional analysis and research on various factors, such as coin price trends and fluctuations, to formulate investment strategies and allocate funds reasonably. The rise and fall of coin prices are caused by the combined effect of many factors, such as macroeconomic trends, monetary policies, market supply and demand, participation of institutional investors, market sentiment, and event impacts.

In summary, Attorney Shao Shiwei believes that gambling within the crime of operating a casino is purely based on probability, where the gambler's win or loss is determined by chance factors.

In perpetual contract services, users need to independently choose operational strategies through professional technical analysis and market analysis, and can judge whether to close positions, reduce positions, or add positions based on changes in market trends during trading. Therefore, the operation of perpetual contract services by virtual currency trading platforms does not constitute the crime of operating a casino.

As a financial derivative, perpetual contracts on virtual currency trading platforms are currently recognized by some case-handling units as constituting the crime of operating a casino. From the perspective of their model and legal principles, this attorney believes there is significant controversy.

Although there are no direct policies or regulations defining virtual currency derivative trading models as criminal offenses, the "Announcement on Preventing Risks of Token Issuance and Financing" issued in 2017 clearly pointed out that businesses involving virtual currencies constitute illegal business operations. Therefore, for entrepreneurs and practitioners involved in the cryptocurrency industry, considering the avoidance of criminal risks, staying away from perpetual contract services can, at least to some extent, reduce potential legal risks.