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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 M&A Snapshot

Week of January 29 – February 4

Steve Payne
February 4, 2024
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Right on trend, only three announced M&A transactions this week, and only 1 with disclosed value.

 

Art Blocks, a platform for generative art that has raised $6M, acquired Sansa, a marketplace for art NFTs and secondary sales.  Art Blocks runs the well-known Marfa digital art festival, and has moved towards NFTs, opening an NFT marketplace for its artist community last year.  Sansa was part of the Art Blocks ecosystem and this is a logical combination of forces.

 

Lokotech Group AS, a listed European company, announced the acquisition of a 66.6% stake in Powerpool.io, a six-algorithm mining pool, for about $1M.

 

The biggest deal this week was around parts of Qredo, a well-known web3 infrastructure provider, being placed into administration (akin to bankruptcy in the U.S.) in the U.K.  Dan Tapiero’s 10T and 1RT firms acquired the remaining “substantial” assets of Qredo through their new U.K.-based entity, Fusion Laboratories. The two creditor firms led Qredo’s bridge financing round and reorganized the company late last year after a year-plus of decline in revenues and cash.  Two dozen key Qredo employees shifted over to Fusion, the remaining ~40 were laid off.

 

Qredo was founded as a L2 protocol featuring instant cross-chain swaps and settlements.  They raised $35M in July 2021 via the QRDO token, and also raised $94M in venture capital, including $80M in a Series A in February 2022 led by 10T with Coinbase, Avalanche, Terra and others at a $460M post-money valuation.  QRDO’s market cap reached as high as $300M in November 2021 and is currently $18M, as their business has fallen off markedly with the crypto market decline.

 

Qredo recently shut down Anker, a hybrid (both DEX and CEX features) derivatives exchange, just months after launch.  The company has stated it will now focus on web3 wallets and custody.

 

Events

Architect Partners will be at the Satoshi Roundtable (1/31-2/7), ETH Denver (2/29 – 3/3), and Digital Asset Summit (3/18 – 3/20). Please contact elliot@architectpartners.com or arjun@architectpartners.com if you would like to meet.