Coinbase Acquires Futures Exchange FairX
Coinbase Acquires Futures Exchange FairX

On January 12th, 2022, Coinbase announced the acquisition of FairX, a
Commodities Futures Trading Commission (CFTC) registered Designated
Contract Market (DCM) offering futures. Architect Partners served as the
financial advisor for FairX.

FairX operates a regulated futures exchange for retail investors. The
company offers 1) straightforward and retail user-friendly products 2)
discounted fees compared to a traditional futures exchange, 3) retailfocused products requiring less capital, and 4) committed market makers
enabling strong liquidity. FairX launched in June 2021 and currently offers
futures on two index products in two sizes: the Bloomberg US Large Cap
Index Futures and SuperTech Index Futures, as well as Micro Crude Oil
Since launch, FairX had an average daily volume across its products of about
9,000 contracts. Based in Chicago, FairX was founded in 2019 by Neal Brady,
CEO and co-founder of ErisX, acquired by CBOE (M&A Alert) last year,
Harsha Bhat, CTO and previous SVP/CTO of State Street’s GlobalLink trading
platforms, and Chairman Clifford Lewis. FairX raised over $27 million in three
funding rounds. Notable investors include Hyde Park Venture Partners, TD
Ameritrade, XTX Ventures, Battery Ventures, Limerick Hill, and Virtu

We are seeing a trend of crypto-native firms acquiring regulated entities to
expand their offerings of sophisticated financial products. Both retail and
institutional clients demand regulatorily compliant solutions, but current
regulation is often disjointed as crypto can be an awkward fit for existing
regulatory structures. There has been much discussion regarding a
straightforward set of rules for crypto, most likely tweaks to existing
frameworks. Buying regulated entities therefore provides regulatory
“insurance” for crypto firms while future regulations are being
implemented. Coinbase has done this in the past, via purchases of three
SEC-licensed firms. FTX’s October 2021 acquisition of LedgerX is another
example, absorbing LedgerX’s 3 CFTC licenses of DCM, Swap Execution
Facility, and Derivatives Clearing Organization. We expect this approach to
accelerate in the next twelve months as crypto-native firms continue to
integrate with traditional financial services.

There are several drivers for this acquisition. First, FairX provides Coinbase
with a crypto derivatives regulatory framework for both retail and
institutional investors in the US. FairX is a CFTC registered DCM, and will be
Coinbase’s first entity fully regulated by CFTC (Coinbase applied for an
Futures Commission Merchant license in September of 2021, but has not yet
been approved). Second, it allows simplified access to futures to their
sizable retail client base. Lastly, it furthers Coinbase’s institutional product
line. Institutions need to hedge positions and hedging Bitcoin or Ethereum
is done under the commodity framework in the US.

Crypto Public Companies Snapshot

Crypto Public Companies Snapshot

Todd White
August 11, 2023

Bakkt announced Q2 earnings this week, reflecting for the first time its April 1 acquisition of Apex Crypto. Bakkt’s revenues of $347.6M, up from $14.0M in 2Q22, include $335.3M in crypto services revenue and $1.3M in gross profit associated with Apex. This reflects “principal” revenue recognition, where Bakkt must recognize the entire transaction volume, rather than “agency” recognition which would only report the transaction spread amount. According to Bakkt, this is in accordance with GAAP standards, and there are similar offsetting gross-ups on the asset and liability side of their balance sheet for custody of institutional amounts reported as “safeguarding assets”. 


For Bakkt, this “principal” revenue recognition will result in a much lower EV / revenue multiple as seen in our table, which may paint a confusing picture. This compares to groups in the traditional space like Block who process billions in transaction volume, and recognize the full volume as revenue, but are only capturing a small portion of that volume as profit. When speaking in the context of investors, Block essentially ignores revenue and points investors to gross profit which they view as a far better measure of the company’s performance. 


Potential economic distortions required by GAAP are certainly not unique to the digital asset space, and lead many companies to report on a non-GAAP basis to provide investors a more meaningful view of their financial picture.  But the perils of Crypto accounting can challenge companies and investors alike, particularly when uncertain accounting rules combine with other difficulties such as tracking opaque transaction volumes and the notoriously uncertain legal environment.