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
September 15, 2023

SEC chair Gensler testified before the Senate Banking Committee this week. Though the legislators’ attention was more focused on AI and ESG, Mr. Gensler’s crypto comments echoed his familiar refrain about rampant fraud and manipulation in the sector. He’ll face another round of scrutiny from the House Finance Committee at the end of the month, where he may face more pointed questions about his approach to crypto. Gensler has faced severe criticism, with some suggesting an intent to kill startups such as Coinbase and Ripple and to allow the trusted old guard such as Blackrock, Goldman, and JPMorgan to take over the digital assets market.


Yet outside the walls of the courtroom and legislature, there are increasing signs of collaboration, not competition, between the old and the new. For example, Deutsche Bank, the largest and traditional German bank, has partnered with Swiss crypto firm Taurus to explore digital asset custody and tokenization. Franklin Templeton, the giant asset manager that made waves earlier this year with a tokenized money market fund, joined the spot Bitcoin ETF crowd with its own application this week. PayPal has teamed up with Paxos on its stablecoin initiative. And the London Stock Exchange Group is exploring blockchain enhancements to traditional asset trading capabilities, though whether an internal or collaborative effort is unclear. These are but a few of many examples, and we expect to learn more before the year is out.


In the midst of this collaborative current, Coinbase has introduced a Web3 wallet through its Prime unit, intended as a tool enabling institutions to interact with on-chain applications and gain access to NFTs and other aspects of the DeFi world. Opportunities for institutional integration are exciting on their own, but the move also highlights the impressive scope of activity at Coinbase. Their new Layer 2 blockchain, Base, hit record daily transaction volumes this week after bringing the breadth of Coinbase’s reach to startups such as the social app Coinbase kicked off an institutional crypto lending platform earlier this month, with the intent to fill the void left by numerous beleaguered or defunct lenders. And on Wednesday, Mr. Armstrong announced their decision to integrate the Bitcoin Lightning network, adding their muscular endorsement to numerous other prominent exchanges that support Lightning as a scalable and cost-efficient solution for Bitcoin transactions.


Back in the courtroom, Coinbase is of course leading the industry’s battle with the SEC, and yesterday Mr. Armstrong entered another fray by endorsing DeFi protocols and cautioning the CFTC against a regulation-by-enforcement approach in its recent actions against Opyn, ZeroEx, and Deridex. This combination of commercial collaboration and regulatory confrontation is certainly a lot to take on, yet it may be just what our industry needs as this eventful year nears its final quarter.