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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 24, 2023
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 News on Macro Economic Data

Overall, many economists are projecting a “soft landing” or a shallow recession in 2024, with the Conference Board projecting 0.8% GDP growth in 2024.    With inflation remaining persistent, and many companies’ ability to pass those cost increases along being challenged by customer’s ability to pay, there is some sign that the market may be choppy over the next few quarters. 

 

The percentage of companies beating earnings estimates is at the lowest level, except for two points, in the last twenty years – Q1 2020 and the fall of 2008 – two of the darkest economic periods over the last twenty years.   An average of 2-3% revenue growth in a 3-5% inflation environment becomes challenging.   Much of the market’s gain this year has come from multiple expansion rather than earnings growth.   Companies cutting costs, and manipulating earnings is fine for a short period, but on a longer-term basis how the S&P 493- less the magnificent 7 behaves going forward is a looming question.

 

Crypto Public Company Activity

There was no bigger news this week than the status of Binance. 

 

Binance – the world’s largest crypto exchange, and Changpeng Zhao (“CZ”), the founder of Binance pled guilty to failing to adhere to anti-money laundering and other laws.  The government proved multiple bad actors utilizing the platform, and the company admitted to money laundering, unlicensed money transmitting, allowing ransomware hackers to operate, and sanctions violations.  

 

As part of the settlement Binance is to pay a $4.3B fine, CZ will personally pay a $50M fine and step away from the company, and CZ faces a 1-10 year prison term with a sentencing hearing to be held sometime in 2024

 

This action is a great example of the government’s focused enforcement regarding illicit activities involving crypto.   To add to the government’s actions this week, the SEC also sued Kraken alleging it is operating as an unregistered securities exchange. 

 

These actions only add to the perception of illicit activity within the crypto industry.  There is much good in the crypto industry and the industry must prove these actions are not the norm.   Additionally, this action provides a strong market opportunity for those firms acting in the US with stronger governance, such as Coinbase ( also under a government suit regarding operating an unlicensed security exchange, brokerage, and clearing agency).

 

This link provides an update on crypto firms facing regulatory charges this year.