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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
December 8, 2023
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News on Macro Economic Data

 

The headline number in today’s employment report seemed to reinforce strength in the US economy.  The report showed the addition of 199,000 non-farm jobs.  However, upon further inspection, the numbers point to a fundamental weakness. 25% of the gains came from the ending of the UAW and SAG strikes, 38% was health care, 25% was government, and 8% came from social services.  Including education, approximately 35%+ of job gains represent “non-GDP growth jobs” requiring sustained growth in government spending at a time when government spending needs to decline.  Additionally, consumer surveys suggest that 31% are working overtime or have taken a second job. 

 

These numbers suggest very little growth in GDP-focused industries, and in fact, show job losses in key industries.  Adding to this, JP Morgan released a bearish report for 2024 in which they suggest that, aside from the top 1%, all other segments will fall below the level of liquid assets they had, adjusted for inflation, in March of 2020. And they expect a 23% fall in the S&P by mid-2024.

 

This overall dim picture of the macro environment should please the Fed, and perhaps point to possible rate declines sometime in 2024.

 

Crypto Public Company Activity

 

“Not your keys, not your coins” has been a refrain from the beginning of the crypto industry.   Self-custody, holding your own keys and storing your crypto in your own hardware device that is offline, provides complete security that crypto assets cannot be stolen electronically or lost due to exchange risk. However, there have been numerous examples of users losing either their private key or access to the storage device resulting in complete loss of funds. As of a September report from Chainalysis, about 25% of bitcoins are believed to be lost forever due to lost private keys, with about 70% of that representing early investors. 

 

Due to those experiences and the added convenience, a migration to custodial wallets/centralized custody has been popular and provided by exchanges.   However, if the exchange ceases to operate, or is hacked, customers lose access to their funds, as customers of FTX and others discovered. 

 

Despite the fact that users would have greater control, pay less in fees, have a higher level of security, and more privacy, they remain wary of self-custody.   This could be mitigated with a better user experience and a greater ability to recover assets if keys and/or devices are lost.  

 

Enter Block’s recent announcement of Bitkey Bitcoin Wallet, the main elements of which are a mobile app, hardware device, and recovery tools. The app and hardware device serve as two of the necessary three keys to access the wallet, and the third key is stored with Bitkey. The key stored with Bitkey is also used to recover the wallet if the phone and/or hardware device are lost or stolen. 

 

There are many benefits to Block’s Bitkey wallet, but it seems the most important is ensuring that the benefits of self-custody are provided in a user-friendly manner with a reliable recovery path.

 

Bitkey is expected to ship in early 2024.