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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 November 27 – December 3

J. Todd White
December 3, 2023
DOWNLOAD FULL REPORT

25 Crypto Private Financings Raised ~$316M 

Rolling 3-Month-Average: $166M

Rolling 52-Week Average: $179M

 

The ability for different blockchains to communicate and transact with each other is one of the more critical infrastructure needs for the Web3 ecosystem to realize the full scale of its potential.  Broadly one can think of such interoperability in two functions – communications and transactions or value flows across chains.  Both are essential to eliminate fragmentation of the larger ecosystem among specific blockchain communities and initiatives.

 

Wormhole is a protocol launched in August of 2021 and incubated by Jump Crypto (the crypto arm of high-frequency trading firm Jump Trading) that, according to its press release, has won the trust of leading firms such as Circle and Uniswap, and facilitated over $35 billion in value transfer and regularly processes 2+ million daily messages across more than 30 chains. 

 

This past week Wormhole built on its success with an impressive $225 million capital raise in exchange for a token warrant and at a $2.5 billion valuation.  The deal is the largest single capital round so far this year, with the third-largest valuation for 2023.  The round received diverse support, including Brevan Howard, Coinbase Ventures, Multicoin Capital, Jump Trading, ParaFi, Dialectic, Borderless Capital, and Arrington Capital. It also deployed an interesting structure for a deal of this size, offering token warrants instead of traditional equity stakes, more typical of smaller and earlier-stage projects in the Web3 space. Proceeds will be used to onboard additional employees, build out and develop the protocol, promote cross-chain activity and encourage developers to build on top of the protocol’s messaging technology.

 

There are several intriguing aspects here. It is the first external funding round after being incubated by Jump Crypto. The team concurrently launched Wormhole Labs to complete its spinout from Jump and provide product development and implementation capabilities. Purportedly the round did not have a “lead”, and achieved more equal and collaborative support among its investors.  And of course, this is another example of teams building critical market infrastructure receiving solid investor support.

 

Relatively few companies have raised this year at valuations north of $1 billion. Coming on the heels of the largest total capital raised last week, Wormhole’s impressive financing round certainly has the hallmark of growing momentum for the sector.