The first qualitative and empirical analysis of crypto-derivatives markets (Marco Dell’Erba, Crypto Derivatives, Illinois Law Review) shows that at their current stage of development, crypto-derivatives do not represent a significant advance in sophistication. They largely replicate the most basic derivative structures—futures, options, swaps—in a faster, less transparent, and less regulated environment, as part of the broader crypto shadow banking ecosystem (Marco Dell’Erba, Technology in Financial Markets: Complex Change and Disruption). A related study (Marco Dell’Erba & Andrea Vianelli, Crypto-Derivatives Regulation(s), Cornell International Law Journal) shows that the regulatory response to these instruments has been fragmented, inconsistent, and—in many jurisdictions—largely absent.
Together, the two studies make a connected argument. Crypto-derivatives are structurally familiar but largely ungoverned, and the gap between what these instruments are and how they are treated is not a technical inevitability—it is a policy failure that can and should be corrected.
What are crypto-derivatives, and why do they matter?
Crypto-derivatives derive their value from crypto-asset prices, typically Bitcoin quoted in dollars or stablecoins. The most widely traded are perpetual swaps—futures with no expiration date—followed by options and quantos. Perpetuals dominate because of low margin requirements and the absence of rollover costs. They are also, for the same reasons, the most dangerous: leverage of up to 125 times is common, and retail investors can access these instruments directly, without the safeguards that apply to comparable products in traditional finance.
The market is large and growing. Between 2020 and 2023, daily trading volumes increased dramatically, with derivatives consistently outpacing spot markets. It is also highly concentrated: Binance alone accounts for nearly 60% of trading volume, with OKX and Bybit taking most of the remainder. Direct perpetuals are offered by 92% of platforms; inverse perpetuals by 49%. Options remain a more specialist product, offered by 19% of exchanges.
Linear vs inverse: a distinction that matters more than it appears
Crypto-derivatives largely replicate existing financial structures. Perpetual swaps resemble rolling spot contracts and contracts for difference, allowing traders to maintain indefinite leveraged exposure without expiration or rollover costs. Options function like their traditional equity and commodity equivalents, enabling exposure to both price movements and volatility; the absence of a risk-free rate in crypto markets complicates their pricing and underscores the need for clearer asset taxonomy. Quantos mirror cross-currency derivative structures: direct quantos use a fixed conversion rate, while inverse quantos combine inverse payoffs with cross-currency settlement, layering currency risk on top of an already non-linear exposure. Across all these instrument types, crypto-derivatives are generally classified as either linear or inverse, and the difference is not merely technical: it has significant implications for risk, regulation, and market stability.
Linear—or direct—derivatives are margined and settled in fiat currency or stablecoins. They provide straightforward exposure to crypto-asset prices without introducing additional currency risk, and their cash settlement makes them easier to capture within existing regulatory frameworks. Most jurisdictions that regulate crypto-derivatives at all focus primarily on this category.
Inverse derivatives are margined and settled in the underlying cryptocurrency itself—typically Bitcoin. Because the collateral fluctuates in value alongside the underlying asset, gains and losses are amplified in ways that are not immediately intuitive to retail investors. A trader who is long Bitcoin through an inverse perpetual benefits from rising prices in two directions simultaneously—the position appreciates and the collateral becomes more valuable—but the reverse is equally true on the downside. This convexity effect makes inverse contracts significantly more dangerous than their linear equivalents at comparable nominal leverage, yet they remain available on 49% of platforms, often with minimal disclosure.
Settlement in crypto-assets—the defining feature of inverse contracts—frequently triggers regulatory exemptions in major jurisdictions including the EU, the UK, Switzerland, and Hong Kong. The result is that products with comparable or greater risk than their linear counterparts face materially lighter regulation, purely on the basis of settlement mechanics rather than economic substance. ESMA has begun to address this at the margins, clarifying that product intervention measures targeting CFDs apply to cash-settled perpetuals regardless of commercial designation—but the inverse contract gap remains largely unaddressed.
The regulatory problem
No jurisdiction has created a standalone legal category for crypto-derivatives. Instead, regulators have tried to fit these products into existing frameworks—with results that diverge sharply despite the underlying economic similarity of the instruments.
Three fault lines drive most of this divergence. First, settlement mechanics: cash-settled crypto-derivatives are generally captured by regulation, while crypto-settled derivatives—which can produce identical or greater economic exposure—frequently fall outside it. Second, the definition of eligible underlyings varies so significantly across jurisdictions that functionally identical products may be regulated in one market and entirely unregulated in another. Third, unlisted and OTC crypto-derivatives remain largely outside regulatory reach in several jurisdictions, mirroring the pre-2008 treatment of OTC derivatives—with the same opacity risks, amplified by global venues and continuous retail access.
The divergence in national approaches is striking. The United States and Canada have taken the most assertive stance, declaring their jurisdiction through broad statutory mandates and active enforcement where retail investors are exposed. The CFTC has pursued enforcement actions against offshore platforms offering perpetual swaps to US persons, treating them as commodity derivatives subject to CEA jurisdiction regardless of settlement currency. The EU has relied primarily on MiFID II and EMIR for cash-settled instruments, leaving crypto-settled derivatives in a regulatory grey zone that MiCAR has only partially addressed. The UK has prohibited CFDs and similar instruments for retail clients but has yet to extend equivalent protections to perpetual swaps systematically. Switzerland and Hong Kong have adopted similarly partial approaches, capturing listed and cash-settled products while leaving OTC and crypto-settled instruments largely unregulated.
The consequences are already visible. Liquidity has migrated to offshore hubs offering wide exemptions. Retail investors continue to access highly leveraged instruments in lightly regulated environments. And regulators lack reliable data on market structure, counterparty exposures, and aggregate risk — precisely the information needed to intervene effectively. Critically, none of this is technologically inevitable. The fragmentation reflects regulatory design choices, not product-driven necessity.
What should be done
Three reforms are needed. First, a functional, technology-neutral definition of crypto-derivatives—one that captures economic substance rather than formal classification and treats linear and inverse contracts equivalently where their risk profiles are comparable. Second, robust reporting and prudential standards applied consistently across settlement types and listing status, closing the inverse contract gap that currently allows the most dangerous instruments the lightest oversight. Third, meaningful restrictions on retail access to high-risk instruments—including inverse perpetuals—equivalent to those that apply to comparable products in traditional markets.
This convergence should happen via international coordination—IOSCO is the natural governance venue—reflecting the inherently cross-border nature of these markets. Absent coordination, crypto-derivatives will continue to migrate offshore, remain opaque, and replicate the regulatory failures of earlier derivatives cycles. This time, however, the markets are faster, more global, and significantly less transparent.
The window for getting this right is narrowing. The crypto-economy is growing, DeFi is expanding, and the risks embedded in crypto-derivatives markets will grow with them. The question is not whether regulation is needed—it is whether it will arrive before the next crisis makes the case for it.
The author’s articles can be accessed here and here.
Marco Dell'Erba is Professor of Law at the University of Zurich, a Research Fellow at the Institute for Corporate Governance & Finance at New York University School of Law, and a Global Fellow at the Wilson Center in the Science and Technology Innovation Program.
Andrea Vianelli is Chief Operating Officer of Asset Management & Structuring Advisory at Laser Digital (Nomura Group).
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