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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 Quarterly Snapshots

Q2 2023 Crypto M&A and Financing Report

Dan Wang
July 7, 2023
DOWNLOAD FULL REPORT

Download the full report above.

Crypto Mergers & Acquisitions

 

Q2 2023 Crypto M&A activity declined from the trend established over the past three years, dipping to Q1 2021 levels.

 

Comparable sectors such as technology and financial technology faced even sharper declines in volume.

 

 

BitGo’s proposed acquisition of Prime Trust (for 15 days before being abandoned) demonstrates that the lack of basic prudent management continues to plague our industry. 

 

Regulatory uncertainty, particularly in the U.S., continues to adversely impact M&A with Coinbase and Binance now embroiled in a protracted regulatory action by the SEC.

 

Prospects for improvement?  Pricing for Bitcoin, Ethereum and the public crypto equity markets suggest optimism.  We’re leaning toward pragmatic optimism.

 

Crypto Private Financings

 

Crypto private financing declined 75% in the first half of 2023 versus first half 2022. The number of financings remained fairly flat the past three quarters, but the amount raised has declined, especially for later stage rounds, consistent with broader tech.

 

The most active lead investors in 1H 2023 were a16z, CoinFund, Blockchain Capital, Outlier Ventures, Shima Capital and Animoca.  All were top prior year investors – but none invested at even half their 2022 pace.

 

The first half saw only six financing rounds over $100M.  The largest was a $250M round for eToro after canceling their SPAC plans – note that this was negotiated in 2021. The second largest was a $125M Series B for Blockstream. The third largest was a $120M Series B for LayerZero. This transaction felt like a return to early 2022 – a real Series B round size, at a solid valuation uptick, with a roster of quality investors. 

 

Crypto Public Companies

 

The public crypto markets offer a bright spot for the quarter.  Stock prices across our index rose by an average of 35% in Q2 2023 and 191% for the full first half of the year. Network Operators (mining companies) gained the most, growing 54% in Q2 2023 and 277% for the year so far. 

 

Investment platforms however were more muted, with with the sub-sector largely flat at 0.4% as Investors likely priced in the active scrutiny and high-profile enforcement actions into effected shares.  Interestingly, Coinbase showed a modest gain of 6% for the quarter, after losing ground but then reclaiming 39% in the weeks following the SEC suit initiated June 6. 

 

Also notable is the continued decoupling of the public crypto sector from the price of Bitcoin.  BTC ended the quarter at $30,405, for a modest 6.51%, suggesting that public crypto sector is breaking from historical correlation with the coin that started it all.

Architect Insights: Q2 2023 Crypto M&A and Financing Report Q2 2023 Crypto M&A and Financing Report