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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
January 12, 2023
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News on Macro Economic Data

 

CPI came in slightly higher than expected for December ending 2023 up 3.4% year over year.   However, December’s PPI unexpectedly dipped 0.1% in December, representing three straight months of decline, and a 1% increase year over year.  Overall, the two numbers represent a cautiously optimistic view of the economy going forward.    

 

The Fed’s interest rate hiking cycle along with quantitative tightening has done its job of reducing inflation from its highs, although getting down to the targeted 2% may take much longer and may be harder to achieve due to persistent economic pressures.  Lingering inflation also remains an issue, with overall prices up 17.6% since January 2021 (food up 33.7%, shelter up 18.7%, energy up 32.8%, and electricity up 27.1%), with many of these price increases being permanent. 

 

For now, despite ongoing major geopolitical events, rising oil prices, the ever-rising US debt, and other issues, the economy remains resilient and appears to be headed only for a slight contraction in 2024.  Earning season just kicked off and 2024 guidance will be important. 

 

Crypto Public Company Activity

 

One more week of Bitcoin ETFs

 

The SEC approved eleven spot bitcoin ETFs this week which saw a total of $4.6B in volume on the first day of trading with Grayscale Bitcoin Trust leading the way with $2.32B.

 

The general investor will get all the usual benefits of ETFs – liquidity, easy access, and security.  Portfolio management also becomes much easier for the general investor who wishes to allocate a portion of assets into more speculative investments. 

 

The fees charged by the ETFs are significantly lower than existing bitcoin funds.  However, an interesting aspect of the SEC’s rules for these ETFs is that bitcoin transaction fees are operating expenses and are not deducted from each customer transaction.   This will reduce the overall performance of the ETF – to what extent will only be known over time. 

 

One of the true winners is Coinbase which is providing much of the “plumbing”. For most of the ETFs Coinbase will be the crypto custodian as well as the likely exchange for ETF bitcoin trading.  Coinbase is also responsible for SEC-mandated surveillance-sharing agreements with the listing exchanges providing details of crypto trading that could affect ETF prices.