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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.

Insights

Week of December 4 – December 10

J. Todd White
December 13, 2023
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21 Crypto Private Financings Raised ~$249M 

Rolling 3-Month-Average: $166M

Rolling 52-Week Average: $179M

 

Private financings announced this week came in with a healthy $249M raised across 21 deals, representing consistent deal flow and a robust amount of capital after a few banner weeks. The majority were smaller and earlier stage deals, with the $165M announced by Swan Bitcoin standing out as the sole larger raise.

 

Swan is an investment platform founded in 2019 that provides asset management services to investors seeking to accumulate bitcoin. This week they announced a pair of financings completed in 2023 – $40M to fund expansion plans and another $125M to support PE and venture investing across the Bitcoin ecosystem – with an additional $150M planned for 2024.

 

At the core, Swan develops investment software to facilitate consistent accumulation of Bitcoin with low costs and friction. They are focused exclusively on Bitcoin investment and savings, and intend to use their new expansion capital to move into institutional products. This will include bitcoin-backed lending products, a potentially controversial move after high-profile meltdowns among the likes of Celsius, BlockFi, and Genesis. But the wake has left a void of lending capacity, and Swan feels well-positioned to enter the space as a trusted institutional-grade player after withstanding and emerging from the crypto carnage of 2022. They intend to do so with two key differentiators from other failed crypto lenders – first, focusing exclusively on Bitcoin-backed loans, and second, by insisting they will never rehypothecate funds to invest or lend client assets outside of their own accounts.

 

Details, including valuation and participation, on the round(s) are scant, but the investor validation from a sizeable raise during a sparse year for big rounds seems clear. And this is yet another example of the ongoing evolution from speculation to investment, which we believe to be a healthy sign of maturation for Bitcoin and the crypto asset class in general.