Brett Harrison, the former president of FTX US, is set to roll out a new perpetual futures exchange in the coming weeks—but it won’t include markets on crypto.
In fact, the former FTX US executive told Decrypt he believes offering leveraged trading, where borrowed capital is used to multiply both gains and losses, on volatile crypto assets is “irresponsible” and becoming a “major problem.” His comments echo those from analysts who have recently raised concerns about excessive leverage in the crypto market following the flash crash on October 10, when a record $19 billion was flushed from the derivatives market.
Harrison’s new exchange, called Architect, will offer perpetual futures on traditional stocks, foreign exchange markets, and other asset classes, like rare metals. While digital assets won’t be listed on the exchange, users will be able to use some stablecoins as collateral, he said. In the coming weeks, it’ll become available to institutions, before opening to retail investors in the “intermediate future.”
Perpetual futures, or perps, are derivative contracts with no expiration date that allow users to place leveraged bets, using borrowed capital, on the direction of an asset. Traders can open long positions to bet the price of an asset will rise, or short positions to bet that it will fall, using it as a hedging strategy against risk in the spot market.
If an asset moves in the direction that favors the trader, their position will swell to the multiplier of the chosen leverage. But if the trader is wrong, their losses will also be multiplied—and in the worst case, their positions can be liquidated, or forcibly closed.
And that’s all well and good, in itself, according Harrison, who said Architect was inspired by how “extremely successful and useful” perpetual futures have been in the world of crypto. The trouble begins when exchanges offer large amounts of leverage—100 or even 1000 times a trader’s initial capital—on highly volatile markets prone to large swings, said the former FTX US exec.
“I think it’s a major problem. I think it’s irresponsible. It encourages people to blow out their accounts as fast as possible,” Harrison told Decrypt. “The point of a derivatives exchange is to allow people to safely and securely, in a long-term fashion, establish open interest. The goal is not to try to blow out accounts and collect liquidation fees. I think that is much more of a gambling platform than an actual futures trading platform.”
Architect will offer a maximum of 25X leverage on trading positions, said Harrison, and only on the least volatile assets offered by the exchange—such as the EUR/USD trading pair. More volatile assets, such as Tesla stock, may only have a maximum of 8X leverage, he said.
It’s a far cry from the crypto derivatives market, where the rush of quick gains on 100X or even 1,000X leverage has increasingly become the norm.
Perpetual futures in the crypto market now generate $1.3 trillion a month in volume, according to DefiLlama. And much of the rise of perps in crypto has come thanks to decentralized exchanges, like Hyperliquid and Aster, lowering the barrier to entry.
In traditional finance or on centralized exchanges, users are required to complete know-your-customer procedures (providing personally identifiable information), fill out risk assessment forms, or pass quizzes. Such requirements are not in place in the world of decentralized finance and decentralized exchanges, or DEXs, meaning anyone with a crypto wallet can access 1,001X leverage on the Aster DEX.
Purveyors and proponents of leverage trading on decentralized exchanges argue they are leveling the playing field, democratizing access to these markets beyond just institutional investors and hedge funds.
Gleb Kostarev, co-founder of the Telegram trading app Blum, previously told Decrypt that adding perps to its platform was a “no-brainer” due to high demand for the trading strategy. He also said that the Blum app offers 100x leverage as a way to entice retail traders, since leverage is a more attractive offering for those with smaller portfolios to invest.
In other words, crypto exchanges offering high leverage through perps are simply giving retail traders what they want.
BitMEX, the Seychelles-based exchange widely credited with having invented crypto-based perpetual futures, did not respond to Decrypt’s request for comment regarding Harrison’s statements. Hyperliquid, Aster, and Blum likewise did not respond.
Following the record wipeout in the crypto derivatives market earlier this month, Harrison argues that the incentives remain in place for retail traders to get hurt, and for more liquidation cascades to wreak havoc on the crypto market in the future.
“If the exchange allows for irresponsible leverage and doesn’t have good procedures for backstopping that leverage, then you will end up with liquidation cascades,” Harrison said.
