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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 26, 2024
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News on Macro Economic Data

 

Economic news this week was positive with a Q4 read on GDP at 3.3%, and the Fed’s preferred inflation rate PCE was down to 2.9%. As has been the case, the underlying details remain mixed, and the Federal Reserve’s Summary of Economic Data report suggested that the 2% inflation target will not be reached until the end of 2026.     

 

A further look into the numbers shows that the largest factor in GDP growth has been government spending. Over the last couple of years, the government spent about $11T for about $1.5T in real growth. The effects of massive government overspending may lead to a dilemma for the Fed over the coming months. Almost $9T in government debt has to be repackaged this year, and with projected US government interest payments exceeding $1T for the first time, the Fed may have to decide between inflation and order in the Treasury markets. There have been challenges in the Treasury markets over the past couple of years, and while Treasure markets are not part of the Fed mandate, it is a pollical year.

 

Crypto Public Company Activity

 

ETHEREUM ETF NEWS: Now that Bitcoin ETFs have been approved, attention is turning to an Ethereum ETF. The SEC pushed back its decision on Blackrock’s proposed ETF with no explanation aside from needing more time.  The SEC must make a final decision by August 7th but is expected to decide in May as a decision on VanEck and Ark 21 Shares applications must come by late May.  Final decision due dates also include Grayscale (June), Invesco Galaxy (July) and Fidelity (August).

 

SEC NEWS:  According to research compiled by Milk Road, the SEC significantly increased enforcement in the Crypto sector by 53% over 2022 with 46 enforcement actions. Key statistics published in Milk Road include:

 

  • $281M in fines
  • 82% involved fraud charges
  • 37% targeted unregistered ICO securities

 

SEC chair Gary Gensler has been a vocal advocate of greater scrutiny of Crypto. The SEC’s actions reinforce his views and can be attributed to multiple key factors:

 

  • Focus on overall investor protection
  • Concerns about unregistered securities
  • Scrutiny of Crypto trading platforms with a  focus on lack of registration, manipulative practices, and inadequate investor protection

 

Given the current view of the SEC and Mr. Gensler, SEC enforcement activity is not expected to decline in the near future.