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

Glenn Gottlieb
October 20, 2023

News on Macro Economic Data


The view of the economy remains conflicted:


    • Fed Chairman Jay Powell spoke yesterday and suggested that rates may not be tight enough, but may pause in November, based on data showing economic growth is better than expected, strong consumer demand, and  inflation remaining stubbornly high at roughly 4%


    • Powell’s remarks are balanced against The Conference Board’s data showing that the leading economic indicators declined 0.7% in September following a 0.5% decrease in August, and a 3.4% decline over the last 6 months.  Lagging economic indicators are up only 0.1% over the same six-month period.   While the economy has shown resilience that will likely not continue and projects a shallow recession in the first half of 2024


Long rates at 16-year highs of roughly 5% along with growing geopolitical instability have had a negative effect on risk assets in general.


A November rate hike may not be in the works as long as 10 and 30-year treasury yields remain near 5% and continue to do the Fed’s job for it, and as the Fed keeps an eye on geopolitical instability.


Crypto Public Company Activity


Crypto assets had positive news on Thursday as the US Securities and Exchange Commission dropped its securities violations case against Ripple (XRP up 6.5% alone on Thursday), voting to dismiss the charges with prejudice.   This seems like a logical extension of the July ruling that “XRP is not, in and of itself a security”, and the recent denial of the SEC’s appeal of that ruling.  


There is optimism of a spot Bitcoin ETF getting SEC approval, perhaps this year.   The current optimism is beginning to drive up both the value of Bitcoin (again near or above $30,000), as well as associated equities.  Coinbase Chief Legal Officer, Paul Grewal told CNBC that he is confident that the ETF will be approved soon citing the SEC’s failure to block Grayscale from converting its GBTC bitcoin fund to an ETF.


Despite having licenses in multiple EU countries, Coinbase announced its EU Hub will be located in Ireland, an area where it already has an e-money license.   Coinbase is positioned well to operate once the Markets in Crypto Assets (MiCA) laws are enacted, which allows crypto exchanges to operate across the EU providing it has at least one license for an EU member country.   Ireland was chosen due to its favorable approach to taxation.