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.


Week of February 27 – March 5

Elliot Chun
March 11, 2023

31 financings raised ~$164M


Certainly a historic week with two U.S. Banks – Silvergate and Silicon Valley Bank (SVB) – no longer independently operating.


Both institutions provided critical market infrastructure to the crypto industry and both scenarios played out in shockingly fast timelines, measured in hours.


Silvergate’s SEN network essentially allowed its customers 24/7/365 access to the U.S. Banking system, which was vital for crypto market participants operating in an industry that is always open.


SVB was the preferred banking partner for most private investment funds, especially VC funds, and while not exact, I’d estimate two thirds of U.S. crypto venture funds have their LP capital currently locked up at SVB.


Additionally, it’s been reported that Circle has $3.3B of its USDC reserves at SVB.


Less than 24 hours since SVB’s announcement, the combined loss of both institutions (little ability to transact over the weekend without SEN & questions over the safely of SVB deposits) is having an immediate effect on crypto markets as USDC – arguably the most important stablecoin – is under duress as its peg to the U.S. Dollar is challenged.


We have not hit “max pain” in crypto yet and that is now a real possibility if crypto companies cannot access the U.S. banking network, if SVB does not return depositor capital and if USDC does not defend its peg.


The seemingly standard-operating-procedure investment that most believe took down SVB was likely made by other U.S. banks, so I expect further distressed bank announcements.


Key weaknesses in today’s U.S. banking system will be highlighted and heavily discussed, and it takes market defining events, like these today, to push proven market solutions to the forefront of adoption which, when properly implemented, can provide real solutions to these ongoing structural weaknesses.


For example, this Wednesday, we participated in Jones Day’s FinAccelerate event that focused on DeFi products that are leading the innovation transition across all industries.


I appreciate being inspired by hearing each Founder’s journey, why they are dedicating their lives to affecting real change, and how they are achieving market adoption.


New solutions are live today in government reporting; international money transfer & trade; retirement & aged care funding; compliance & financial crime risk management; data & market intelligence; prediction & gambling markets; whiskey ownership; carbon credits; and universities, sports associations & nonprofits.


Learning from this historic week by innovating forward instead of regulating backward is essential as long as we keep in mind that innovation will not escape the vortex of regulation and law.


Silvergate and SVB were innovators to the U.S. Banking system and are reminders of how difficult the innovation journey is.