By Jonathan Stempel
June 18 (Reuters) - The Chicago Mercantile Exchange sued the U.S. Commodity Futures Trading Commission and its chairman, Michael Selig, on Thursday, challenging a recent decision to let the prediction markets platform Kalshi and cryptocurrency exchange Coinbase list perpetual futures.
CME, a unit of CME Group, said the contracts are swaps under the 2010 Dodd-Frank financial reforms, a view it said the CFTC had previously accepted, and that the regulator acted arbitrarily and capriciously
in approving them as futures.
The lawsuit filed in the Washington, D.C., federal court seeks to void the CFTC's May 29 approval for Kalshi to list a bitcoin perpetual future, as well as a policy statement allowing futures exchanges to offer similar contracts. CFTC said the same day it would not object if Coinbase allowed U.S. investors access to its foreign perpetual futures pegged to cryptocurrencies.
A CFTC spokesperson called the lawsuit "frivolous." Kalshi and Coinbase were not named as defendants.
Perpetual futures, sometimes known as perpetual contracts, are derivatives that track prices of underlying assets such as cryptocurrencies, and allow investors to use high levels of leverage.
The investments also lack expiration dates, allowing traders to hold positions indefinitely, and can qualify for favorable tax treatment.
CFTC SAYS CME FEARS COMPETITION
In its complaint, CME said the CFTC's decision to approve perpetual futures inflicts "textbook competitive injury" by letting Kalshi, Coinbase and others compete for its retail customers.
Shares of CME and Intercontinental Exchange, the parent of the New York Stock Exchange, fell after the decision, reflecting investor concern about the competitive threat to existing exchanges.
The CFTC spokesperson said: “Rather than compete in the marketplace, the CME has decided to undertake lawfare against the agency and the Trump Administration’s pro-innovation agenda. Incumbents fear the future and having to compete on a level playing field."
Kalshi spokesperson Elisabeth Diana said: "This isn't about the law, it's about the fear of competition."
Faryar Shirzad, Coinbase's chief policy officer, said: "Competition and innovation are the bedrock of vibrant financial markets and we commend the CFTC for onshoring modern contract structures that benefit American investors."
SEEKING PROFITS FROM CRYPTOCURRENCY VOLATILITY
Perpetual futures trading volume grew 29% last year to $61.7 trillion, according to market data provider CryptoQuant, as traders sought new ways to profit from cryptocurrency volatility.
In a May 29 editorial published by CoinDesk, Selig said allowing perpetual futures reflected the CFTC's "statutory obligation to promote responsible innovation," and supported President Donald Trump's goal of making the United States the "crypto capital of the world."
Selig is the only commissioner on the CFTC, which normally has five commissioners.
The agency is also involved in lawsuits with many U.S. states over prediction markets, which let people wager on the outcome of events such as sports and elections. Many states consider such wagers a form of gambling.
(Reporting by Jonathan Stempel in New York; Editing by Sanjeev Miglani)
