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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
Futures.
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
Financial.

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
November 10, 2023
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News on Macro Economic Data

Fed Chairman Jay Powell asked Fed governors to think outside the box in thinking about the economy and their continued analysis and approach.   To that end, perhaps the Fed chairman would take the same bold approach former Fed Chairman Alan Greenspan did and speak up loudly about the threat posed by the US government’s excessive spending and the nation’s unsustainable and growing debt. 

 

The upcoming CPI number is expected to show a decrease in inflation mostly due to a decrease in energy costs of greater than 10%. 

 

Indicators continue to forecast an economic slowdown in 2024.   One indicator that the Fed is watching is unemployment.  Unemployment is up 15% over the last six months, and the majority of new jobs in the last few jobs reports are government jobs (which add nothing to GDP and only add to the tax burden) and lower paying part-time jobs.  The reports also point to multiple job holders being at an all-time high.   Additionally, Warren notices were very high in August and were recently raised for September suggesting further rises in unemployment.

 

Crypto Public Company Activity

 

Stablecoins promise many benefits, including yield, easy movement of funds from crypto to an underlying currency, inexpensive peer-to-peer transfer of funds, and payment for goods.   However, as many investors learned recently, “stable” only refers to their price and not its value.  Value is ensured by the issuer’s reserves as well as the value of the underlying asset to which it’s pegged.  The issue of value based on reserves affected Circle in March of this year, when they revealed that $3.3B of its $40B in reserves was with failed Silicon Valley Bank, and the value of USDC immediately fell 12%.  There have been other well-publicised issues with stablecoins, such as Tether’s past unreported shortfall in reserves (since rectified). 

 

However, properly capitalized and regulated stablecoins represent an opportunity to utilize all the benefits of digital currency without the volatility of cryptocurrencies.  To this end, as the regulatory environment is solidified, many large and trusted financial institutions are planning stablecoin-based offerings.  

 

Against this backdrop, the news this week is that Circle is considering an IPO in 2024.   Circle had a much publicized $9B SPAC deal fail in 2022.   Circle is backed by Goldman Sachs, Blackrock, and Fidelity, and is the second-largest stablecoin issuer with USDC having a $24B market cap.   Circle is a key component of what will be a growing and important market.  Thus, going public makes sense to fund the company’s growth as well as provide liquidity to early investors.