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
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

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
February 2, 2024

News on Macro Economic Data


Headline economic news continues to be positive, yet the underlying detail presents a puzzle.  Non-farm payrolls boasted a remarkable surge of 353K.  The government also reported wages increased above the inflation rate and labor participation remained stable.  These numbers seemingly support a very healthy economy, potentially delaying the discussion of Fed rate cuts.


Contrastingly, this optimism is challenged by conflicting data to the announced jobs report, including the Jolts report, reports of corporate downsizings, the ADP report, and the household survey.  There is also a question about the quality of jobs and the number of multiple job holders.  Despite the report touting an increase in hourly wages, hours worked declined to a very low 34.1, weekly earnings have declined, and tax revenue fell 2%. 


Adding to the uncertainty, Fed watchers noted that Chairman Powell deleted an entire paragraph highlighting the strength of the US banking system.  This raises questions about the reasoning.  Some have speculated it is due to a potential crisis with regional banks.  Howard Lutnick of Cater Fitzgerald has warned that up to $700B in commercial real estate loans could default, adding a layer to the complexity of the economic narrative, and directly affecting regional banks significantly more than national banks.


Crypto Public Company Activity


Tether, the entity behind the USDT stablecoin, has unveiled an impressive Q4 2023 report, disclosing a remarkable $2.85 billion net profit. Notably, Tether allocated $2.2 billion of this profit to bolster its excess reserves, reaching a substantial $5.4 billion. The earnings breakdown reveals a $1 billion contribution from US T-Bill interest, and $1.85 billion attributed to the appreciation of assets, including gold and BTC holdings.


Presently, approximately 90% of Tether’s stablecoin issuance is backed by cash or cash equivalents. The remaining $640 million, not earmarked for excess reserves, is strategically invested across various projects, encompassing Bitcoin mining, AI infrastructure, and P2P communications.


Importantly, all outstanding secured loans are fully covered, marking the successful fulfillment of Tether’s objective to eliminate the risk associated with secured loans from its token reserves.


With Tether’s long history, this attestation comes as good news and shows a level of scale and risk management sophistication that Tether has adopted. Most impressive is Tether is estimated to have around 100 employees while generating $2.85B in Net Profit in Q4, while Goldman Sachs, who has an estimated 50,000 employees, did $2.01B in Net Profit in Q4.