What is a "Perpetual Contract"?
Just as the concept of ICO originated from IPO, perpetual contracts are not an original creation of the cryptocurrency world; they are derived from a traditional investment tool/financial derivative commonly seen in the capital market—futures contracts.
In the traditional sense, futures contracts refer to: both parties in an organized exchange, by signing standardized contracts, agree to buy and sell a certain quantity of a certain commodity or financial asset at a specific price at a future specific time.
The logic of speculating for profit with futures contracts is simple: since futures contracts are not transactions that are completed immediately but are scheduled to be delivered at a future time, investors can buy low and sell high or buy high and sell low based on their judgment of the market price trend of the trading subject agreed upon in the futures contracts, thereby earning a differential.
For example, suppose Xiao Ming predicts that the price of 1 jin of rice will rise from 10 yuan to 12 yuan in the next three months. Then, Xiao Ming buys a futures contract to purchase 1 jin of rice after three months at 10 yuan. If the price of 1 jin of rice rises to 12 yuan as Xiao Ming predicted, then Xiao Ming can simply sell the futures and make a profit of 2 yuan.
Understanding futures contracts, it is not difficult to understand the perpetual contracts in the cryptocurrency world, which simply replace the traded objects with cryptocurrencies such as BTC, ETH, etc.
We will also explain the gameplay and speculative profit logic of perpetual contracts through examples.
Suppose Xiao Ming accurately predicted the arrival of a bull market in the crypto market before Comrade Chuan Jianguo's election victory, and bought a futures contract for 1 BTC that expires (settles) in 100 days at a price of 70,000 USD/USDT on a platform that supports perpetual contract gameplay. This indicates that Xiao Ming holds a proof of "buying 1 BTC at 70,000 USD/USDT after 100 days."
100 days later, as Comrade Chuan Jianguo wins the election as scheduled and releases a large number of favorable policies for the crypto market, the price of 1 BTC rises to 100,000 USD. Then, Xiao Ming can profit 30,000 USD by selling this futures contract (closing the position).
Does operating perpetual contracts constitute the crime of running a gambling house?
To be honest, this question has already been thoroughly analyzed by many fellow lawyers. It is controversial whether the gameplay of perpetual contracts in the cryptocurrency world constitutes the crime of running a gambling house from a theoretical perspective, but in practice, the possibility of conviction and punishment for entities that carry out such business is high, and such business belongs to high-risk red line business.
Now let's analyze it from the perspective of judicial practice.
(1) Perpetual contract business has both "gambling" and "financial" attributes, and if the volume is large, it may endanger various legal interests
Firstly, whether it is perpetual contracts or futures contracts, they are essentially investment tools, a type of financial derivative, with two prominent features: (1) High leverage. The Sa Jie team observed that most platforms supporting perpetual contract gameplay generally support more than a hundred times leverage, fully exploiting the user's "gambling psychology" for a thrilling experience; (2) No need for physical asset transactions. Most platform users trade based on the spot price of some cryptocurrency, and do not need to actually own the cryptocurrency to trade. Therefore, the financial attribute of perpetual contracts is very strong.
Secondly, the "gambling" attribute of the perpetual contract gameplay is very strong, the realization of the two possibilities of rising or falling almost entirely depends on the occurrence of some uncertain future event. Those with legal knowledge may have heard of "gambling contracts" (for example, insurance contracts are typical gambling contracts, whether the insured can receive the payment of insurance money depends entirely on whether the agreed insurance incident occurs), considering that gambling contracts are more likely to trigger public speculative psychology, sometimes even involving gambling activities.
Based on this, the Chinese Civil Code has added a special chapter on gambling contracts, clarifying its definition, types, establishment, and effectiveness of basic legal issues, providing a clear legal basis for the legal operation of gambling contracts. In view of the special nature of gambling contracts, the law should set reasonable risk control and consumer protection mechanisms to prevent gambling contracts from being abused, causing consumer rights to be damaged and social order to be chaotic.
Taking a recently disclosed platform as an example, the defendant Lei (the principal offender) formed a business team to develop multi-level agents and users, directly or through others to develop more than 10,000 subordinate agents, and by the time of the case, the platform had a total of more than 270,000 contract trading users, including more than 60,000 active users. The platform accumulated net profits of 54,797,677 USDT (equivalent to about 300 million yuan) by collecting fees during user withdrawals and betting processes, as well as forced liquidation and counter-betting profits. Such a scale has actually had a significant impact on financial order and social order, and in special cases, the possibility of extreme events occurring cannot be ruled out (we will not expand on this here).
Therefore, if the volume is large, it may endanger various legal interests and has certain social harmfulness.
(2) Engaging in "off-exchange futures trading" without a license, under specific circumstances, may also constitute the crime of running a gambling house
The distinction between futures trading and gambling has long been discussed in the theoretical and practical circles, and there have been many cases of being abused as gambling tools. Whether an illegal futures investment trading platform can be characterized as running a gambling house generally needs to look at the specific circumstances of the case, and there are not many public cases where convictions and punishments for running a gambling house have been made, but they do exist.
Firstly, it should be clarified that China adopts strict regulatory measures for financial products, and futures trading must be conducted in specific venues. According to Article 2, Paragraph 2 of the "Futures Trading Management Regulations": The futures trading referred to in this regulation refers to trading activities with futures contracts or option contracts as trading subjects conducted in a public centralized trading manner or other methods approved by the State Council's futures supervision and management agency.
Secondly, for off-exchange derivatives trading, it is necessary to file with the China Futures Association (licensed). Off-exchange derivatives trading is currently mainly carried out in the over-the-counter derivatives market of securities companies and the over-the-counter derivatives market of risk management subsidiaries of futures companies. According to the "Pilot Guidelines for the Business of Futures Company Risk Management Companies" and "Implementation Guidelines for Investor Suitability Management of Futures Business Institutions (Trial)" issued by the China Futures Association, risk management subsidiaries are subject to the self-regulation of the China Futures Association, and subsidiaries of futures companies must be filed with the China Futures Association before they can carry out off-exchange derivatives business.
In practice, engaging in "off-exchange futures trading" without a license is an illegal act, with the risk of the crime of illegal business operations, and if there is illegal off-exchange or empty knocking counter-betting, it may constitute the crime of running a gambling house, fraud, and other multiple crimes.
A typical case refers to Guiding Case No. 146 of the Supreme Court: Chen Qinghao, Chen Shujuan, Zhao Yanhai running a gambling house case, the Judicial Committee of the Supreme People's Court after discussion believes: In the name of "binary options" trading, using the Internet to solicit "investors" outside the legally designated futures trading venues, with the price trend of foreign exchange varieties in a future period as the trading object, determining profit and loss according to "buying up" "buying down", investors who guess the direction of price fluctuations correctly profit, those who guess wrong lose their principal to the website (house), the result of profit and loss is not linked to the actual price fluctuation range, essentially "betting big or small, gambling win or lose", is gambling behavior disguised as options trading. Relevant websites should be identified as gambling websites.
We believe that, from the perspective of the Supreme Court's ruling, whether the "perpetual contracts" in the cryptocurrency circle constitute the crime of running a gambling house should focus on its operating mechanism, whether it is closer to the traditional futures trading mechanism or closer to the pure gambling speculation mechanism. If it belongs to the former, it should not be convicted and punished for running a gambling house.
The common perpetual contract gameplay in the market generally allows users to choose to close their positions and sell at any time according to the market fluctuations of cryptocurrencies, and both the closing price and the selected trading time may affect the user's profit and loss. Overall, "perpetual contracts" cannot be simply evaluated as a simple gambling behavior of "betting big or small, gambling on ups and downs". It requires participants to use their professional knowledge to choose buying and selling strategies through reasonable judgment and analysis, which is significantly different from other common "nine parts predetermined" pure probability-based gambling behaviors. The social harmfulness is also vastly different. Simply and crudely convicting and punishing it for running a gambling house, I do not agree.
Final Thoughts
Although I do not agree with the recent rulings, an undeniable reality is that the controversy over convictions cannot change the high-risk nature of the perpetual contract business itself in our country, its potential risks include but are not limited to the crimes of fraud, illegal business operations, etc. At the same time, do not engage in perpetual contract business in disguise, partners must pay more attention, do not cross the line.
