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 27, 2023

News on Macro Economic Data

There was mixed news on the economic front this past week: GDP for Q3 came in at a robust 4.9%, however:


2.7 percentage points were associated with consumer spending. How long can this be maintained is a key question, as consumer debt is rising fast, and credit card and auto loan delinquencies are increasing


1.3 percentage points were attributed to Inventory buildup for Q4


While durable goods orders were up, business equipment was negative, and investment in IP was weaker than during the pandemic


PCE, the Fed’s favorite metric for inflation, remained stubbornly high, and rose 0.4% in Sept (3.4% annualized)


Important to note that PCE does not include key consumer needs of food and energy. Food and energy were up 6.6% YoY


Consumer spending was up 0.7% in Sept, but personal income gains only increased 0.3%


Given the mixed economic news, global instability, and 10-year T-Bills yielding 4.8 +/-%, the markets have remained volatile. Given the current environment, most economists believe the Fed will leave rates as is during their upcoming meeting.


Crypto Public Company Activity


The surge in cryptocurrency values earlier in the week was fueled by growing excitement over the possibility of crypto spot ETFs available on traditional exchanges without having to deal with managing an account/wallet on crypto exchanges that collectively have a less than stellar reputation.


In a move that foreshadows an SEC approval, Blackrock’s spot bitcoin ETF appeared on the Depository Trust and Clearing Corp.’s eligibility list. DTCC is an American operating clearing house for stocks and ETFs.


Bitcoin gained 18% on Tuesday, trading above $35,000 for the first time since May 2022 at the height of the surge. Publicly traded crypto exchanges, miners, and other associated companies all had a very good day. However, these assets lost value over the course of the week, much like the broader market, as global instability and broad economic concerns drove investment decisions.


Does this major short-term move in crypto assets provide evidence that the crypto winter is thawing? It’s tough to predict given global turmoil, both geo-political and financial, as well as the ongoing regulatory environment. But, it’s a welcome reprieve.


On another positive note, the market capitalization of DeFi assets is up 15% to a three-month high of $49.4B, and for the first time since August, TVL (Total Value Locked) has surpassed $40B.