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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.

Public Companies

Q3 2022 Crypto Quarterly Snapshot

Eric F. Risley
May 5th, 2023

New words, phrases, acronyms, hyperbolic or perhaps misleading statements, virtually indecipherable sentences and incomplete disclosure are bugs, not features of our sector.

Coinbase does it right.

 

That is, doing an exceptional job with transparent financial and operating disclosure using clear, plain English each quarter in their Shareholder Letter.

 

New words, phrases, acronyms, hyperbolic or perhaps misleading statements, virtually indecipherable sentences and incomplete disclosure are bugs, not features of our sector.  In our three decades of working with companies leading innovation, we have seen it many thousands of times and it’s a serious problem.  In fact, it got so bad in the go-go late 1990s that the Securities & Exchange Commission passed Rule 421(d), called the Plain English Rule and an associated rulebook.

 

We’ve also been impressed by Bitcoin miners who publish monthly operating updates which is another great example of the value of clear, concise and timely data to assist all interested parties with decision-making.

 

We expect data & data analytics and real-time or close to real-time operating data accessibility to become more and more prevalent.  Groups like Amberdata, Lukka and Coin Metrics are actively pursuing this vision.  Many DeFi proponents tout  transparency and automated, event-triggered transaction execution as key benefits.  While there are clearly issues with KYC | AML | Sanctions compliance and completely opaque counterparty visibility, directionally we love the notion of data transparency.  

 

Now all of us need to continue to work on Plain English!