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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 January 8 – January 15

J. Todd White
January 19, 2024

28 Crypto Private Financings Raised ~$174M 

Rolling 3-Month-Average: $189M

Rolling 52-Week Average: $183M

 

Private financings maintained their muted trend over the last few weeks, with $174M raised, slightly below both the near and medium-term averages, which have hovered between $180M and $190M. Earlier stage rounds for DApps in media, gaming and trading saw the most activity, with the sole medium stage (Series B) going to the trade document management platform, WaveBL.

 

Documentation is essential across almost every business function, from customer relations to compliance and reporting and everything in between. Efficient management of business documents has presented a consistent and evolving challenge, with storage rooms full of filing cabinets first scanned into servers, and eventually migrated onto cloud-based collaboration, management and storage solutions that, at least in theory, never require an actual physical document. But the push to paperless systems has created new challenges including version control, verification, storage, and the security and integrity of digital records.

 

Blockchain technology seems an intuitive solution, enabling instantaneous and immutable verification of the location and history of all records throughout the business cycle.  And numerous initiatives have attempted to realize this potential.   WaveBL was launched in 2015 to focus on the electronic transfer of trade documents and now claims to have issued almost 500,000 electronic bills of lading in 136 countries. Their current investment of $11M from new strategic investors tops off $26M announced in June to close their Series B round. Proceeds will be used to expand offerings and increase sales, marketing and R&D resources.

 

As highlighted in our 2023 report, we view document management as a key area to watch for blockchain enterprise solutions.  WaveBL’s successful raise and apparent market traction also supports our thesis that established players offering tangible real-world solutions will receive continued support as the crypto sector matures beyond the speculation of its formative years into practical, real-world solutions.