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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.

Snapshots

Week of May 1 – May 7

Steve Payne
May 10, 2023
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22 Crypto Private Financings Raised ~$95M

Not much to write home about this week – a decent number of financings were announced, but announced capital raised was the second lowest week of the year.  

 

Arguably, one week is too short a period to extract much meaning, but let’s parse the data a bit:

 

  • Deals raising over $100M – zero
  • Deals raising over $10M – just two
  • Stage – half of the top ten are seed stage
  • Lead Investors – evenly split between VCs, crypto-centric VCs and some large institutions/strategics

 

Compared to our financing snapshot from one year ago:

 

  • $433M was raised in 47 announced financings (and this was the lowest week in April)
  • Deals raising over $100M – zero
  • Deals raising over $10M – ten!
  • Stage – none were seed stage, half were Series B/late stage
  • Lead Investors – 2/10 were VCs, 8/10 were crypto-centric or not disclosed (=same)

 

The largest deal last week, Fedi, was a $17M raise by this project started in 2022.  Today, most users store their crypto on an exchange for convenience, or in their own wallet, for security.  Both have problems – like FTX in the former case, or losing your keys (and being unable to recover your crypto) in the latter.  To provide both convenience and security, Fedi is building a product to help trusted communities (“federations”) store bitcoin together and simplify crypto transactions between members. Using an open-source protocol called Fedimint, Fedi offers a compromise between (easy) custodial storage and (safe) self-custody: outsourcing backup storage to people you personally know and trust.

 

Fedi lead investor Ego Death Capital (!) explains it well:  “Imagine a wallet app holding your Bitcoin where a family could act as their own guardians and trusted network for each other. Lose your key – no problem as the members of your family can easily vouch for you and get your Bitcoin back. Now imagine that the definition of “family” could be extended to any size of network of trusted “guardians”. With Lightning and Fedi, since transactions are not on-chain and instead use blind signatures, privacy is greatly enhanced and scale becomes unlimited and cheap.”  We’re interested to see how this project develops.