A protocol once hailed as a standard-bearer for DeFi now finds itself quietly cornered by the formidable encirclement of traditional finance. Is it inevitable that permissionless innovation will be pulled in by the gravity of the law?
On August 6, a team of analysts at JPMorgan published a report highlighting a significant structural threat facing Hyperliquid, a decentralized perpetual futures exchange. Backed by data, the report points to stagnating capital inflows into HYPE-related ETFs—which once drove the market—and intensifying competition from US-regulated trading platforms.
The three HYPE spot ETFs—launched by Bitwise and 21Shares in May, followed by Grayscale in June—have seen rapid shifts in capital flow trends. While they recorded a weekly net inflow of approximately $111 million in late June, they saw zero inflows for 12 consecutive trading days between July 17 and August 3, resulting in a total net outflow of $29.8 million for that period.
Coinciding with these market trends, the Commodity Futures Trading Commission (CFTC) made a pivotal decision on May 29. It approved "BTCPERP"—a Bitcoin cash-settled perpetual futures contract—for the prediction market platform Kalshi. Simultaneously, it issued a "no-action letter" to Coinbase Financial Markets (CFM) regarding the treatment of the crypto exchange Deribit as a foreign futures exchange.
These regulatory moves could significantly bolster customer protection by mandating the strict segregation of exchange assets from client assets at US-regulated derivatives exchanges. Furthermore, if the preferential tax rules for specific futures contracts—outlined in "Section 1256" of the Internal Revenue Code—are applied, the effective maximum tax rate for traders could drop to 26.8%. However, the application of this tax benefit is by no means a certainty. The IRS has yet to provide clear guidance on whether perpetual contracts—which lack an expiration date and peg their price via a funding rate—should be legally classified as "futures" or "swaps." In fact, CME has sued the CFTC over its approval of these products, arguing that perpetuals are swaps. In other words, the very legal basis required for the tax benefit is currently being litigated in federal court.
As a trade-off for coming under regulatory oversight, Kalshi’s initial leverage was capped at a maximum of 5.7x. Meanwhile, the decentralized crypto exchange Hyperliquid executed a major strategic shift on May 14, prior to the CFTC's decision. The company effectively discontinued its proprietary stablecoin, "USDH," and joined the USDC ecosystem by bringing on Coinbase to manage its treasury assets. This move secured a new revenue model in which approximately 90% of the yield generated from USDC reserves is returned to an assistance fund.
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