Original Authors: Liu Fuqi, Mo Yuxin

Starting from a Real Case

A certain virtual currency trading platform was investigated by the public security authorities for allegedly operating a gambling business due to its provision of perpetual contract services, and relevant personnel were subjected to criminal coercive measures. During the handling of the case, lawyer Mankun discovered significant discrepancies in the legal classification of perpetual contracts by judicial authorities—while the public security agency believed that its model of "betting small to win big, guessing price fluctuations for profit" conformed to gambling characteristics.

This case reflects an important issue in current judicial practice: Are perpetual contracts legitimate financial instruments, or are they gambling disguised in a different form? As a professional team from Shanghai Mankun Law Firm, we have handled multiple similar cases and found a tendency for judicial authorities to oversimplify the classification of perpetual contracts.

In fact, perpetual contracts should be classified as a type of financial derivative and cannot be equated to gambling solely based on "leveraged trading" and "price volatility." The key lies in distinguishing: Is this a genuine financial transaction, or is it a gambling scam disguised as innovation?

What is a Perpetual Contract? Explained with Everyday Examples

(1) The Three Core Characteristics

Perpetual contracts (perpetual futures) may sound technical, but they can be simply understood as "futures contracts without an expiration date." They have three key features:

1. Never Expiring

Traditional futures have an expiration date (for example, "October 2025 gold futures"), and delivery must occur upon expiration; however, perpetual contracts have no expiration date, allowing you to hold them indefinitely until you choose to close the position or are forced to do so.

2. Leverage Amplifies Returns (and Risks)

Assuming you have 100 yuan in capital, using 10x leverage allows you to trade 1,000 yuan. If the price rises by 10%, you earn 100 yuan (capital doubles); but if it falls by 10%, your 100 yuan capital is wiped out. This is what is commonly referred to as "betting small to win big."

3. Prices Closely Follow Spot Prices

Through a "funding rate" mechanism, when the contract price deviates too much from the spot price, both long and short positions will transfer funds to each other, forcing the price to revert. For example, if the spot price of Bitcoin is $30,000, but the contract price rises to $35,000, the long position must compensate the short position until the price approaches the spot.

(2) Using Buying a House as an Analogy

Xiaoming believes that the price of Bitcoin will rise and uses 10x leverage to buy 1 perpetual contract worth $100:

• The capital required is only $10 (100÷10)
• If Bitcoin rises by 10% → earns $10 (capital doubles)
• If Bitcoin falls by 10% → loses $10 (capital goes to zero, forced liquidation)

This is like buying a house worth 1 million with a 10% down payment (10x leverage): if the house price rises by 10%, it’s worth 1.1 million, and selling it nets you 100,000 (capital doubles); if the house price falls by 10%, it’s only worth 900,000, and the bank will forcibly take the house (forced liquidation).

(3) A Legitimate Business Conducted by Mainstream Global Platforms

Perpetual contracts are not a new invention by scammers. Since being introduced by the BitMEX exchange in 2016, they have become standard business for mainstream digital asset exchanges worldwide. In regions like the EU and Singapore, they are explicitly classified as "Contracts for Difference" (CFD) and are strictly regulated by financial regulatory authorities, making them as legitimate as stock index futures in our stock market.

Beware! These "Fake Perpetual Contracts" Are Actually Gambling or Scams

Not all contracts labeled as "perpetual contracts" are legitimate. Some platforms use this label but engage in gambling or even fraudulent activities. How to distinguish them? Look for three key signals:

(1) "Betting High or Low" Transactions—Typical Gambling

A guiding case released by the Supreme People's Court in 2020 exposed a "binary options" scam: the platform asked users to guess whether "the price of Bitcoin will rise or fall in one minute," rewarding correct guesses with 80% of the principal and losing everything for incorrect guesses. This type of trading is no different from guessing the outcome of a coin flip; winning or losing is entirely based on luck, essentially making it online gambling.

These fake contracts have three characteristics:

• No refunds (no chance to change your mind)
• Fixed profits and losses (either earn 80% or lose everything)
• Unrelated to actual price fluctuations (whether it rises by 1000 points or 1 point, the profit remains the same)

(2) Platform "Market Making" Manipulation—Suspected Fraud

Worse is the "virtual market" scam. When a certain platform was investigated, police found that the backend could arbitrarily modify the K-line chart (price trend chart). When users opened long positions (betting on a rise), the platform would "spike" (instant drop) triggering forced liquidation; if users bet on a fall, it would suddenly spike. This "you win, I lose" counterparty model is essentially a gamble between the platform and users, deceiving them by manipulating prices.

Common manipulation tactics include:

• Disconnecting the network (sudden disconnection during volatile markets, preventing liquidation)
• Slippage (the order price is far from the actual transaction price)
• Backend data tampering (forging false trading records)

(3) How Do Judicial Practices Differentiate?

Mainly look at two points:

1. Is there a real price basis? Is the price linked to the global mainstream market, or is it fabricated by the platform?

2. Can risks be controlled autonomously? Can you set stop-loss and take-profit? Does the platform manipulate prices?

Just like in stock trading, if you incur losses, you cannot blame the securities regulatory commission, but if the brokerage secretly alters your trading records, that is fraud. The perpetual contract itself is not problematic; the issue lies with those unscrupulous platforms that turn it into a "gambling tool."

Why True Perpetual Contracts Are Not Gambling: Four Core Reasons

(1) Prices Have Real Basis, Not Random Guesses

The price of Bitcoin perpetual contracts closely follows the global spot market and is influenced by various factors such as policies, supply and demand, and technology. For instance, interest rate hikes by the Federal Reserve, tweets from Elon Musk, and upgrades in blockchain technology can all affect prices. This is fundamentally different from gambling, which relies entirely on luck; professional investors analyze K-line charts, capital flows, and macro policies to judge trends.

(2) Platforms Earn Transaction Fees, Not "Rake"

Legitimate platforms profit from transaction fees (usually 0.02%-0.075%), similar to how brokerage firms charge commissions. Regardless of whether you earn or lose, the platform only charges a fixed fee based on the transaction amount. In contrast, casinos "rake"—they take a cut from winnings, and the platform is your counterparty.

(3) Risks Can Be Controlled Autonomously

You can set:

• Stop-loss (automatically close the position if it drops to a certain price, e.g., if capital loses 50%, you exit)
• Take-profit (automatically sell when it reaches a target price)
• Leverage multiples (choose conservatively at 1x or aggressively at 100x)

This is akin to brakes and seatbelts while driving; while they cannot guarantee no accidents, they significantly reduce risks. Gambling lacks these mechanisms, resulting in either total win or total loss.

(4) Has Actual Financial Functions

Perpetual contracts were originally designed as risk hedging tools for institutional investors overseas. For example, a mining operator worried about a drop in Bitcoin prices can open a short position (betting on a fall); even if the price drops, the profits from the contract can offset the losses. This is similar to farmers buying "weather insurance" to hedge against natural disaster risks.

Balancing Innovation and Regulation

The legal classification dispute over perpetual contracts essentially reflects the struggle between financial innovation and regulatory lag. From international experience, whether in the United States, the EU, or Singapore, mature markets generally incorporate them into regulation through "licensing management + business norms":

Perpetual contracts, as financial derivatives, are not inherently good or bad. Just like a kitchen knife can be used for cooking or harm, it depends on the user and the regulator. If it is turned into a gambling tool, it should be severely punished; but if it is treated as compliant financial innovation, it should be guided towards regulated development.

As the regulatory framework becomes clearer, we look forward to seeing perpetual contracts play a positive role in price discovery and risk hedging under controllable risks. For ordinary people, rather than fearing risks, it is more important to learn to identify risks—this is the key to survival in the financial market.

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