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.

Crypto M&A Snapshot

Week of October 30 – November 5

Eric F. Risley
November 5, 2023

You can’t build everything.


That may be a modest overstatement, however, it’s a truism that all software-based companies, protocols, open-source projects and individuals that are working on their own start with an idea that becomes software code which morphs into a working product or feature.  That’s hard work representing talented and expensive human capital time. Now the even harder work.  Attracting users, tending to users’ needs, evolving, improving and extending the product.  Repeat, repeat, repeat, …  That’s what builds successful businesses and widely used protocols and open-source products.


Over time “what’s next?” is a constant question that, when answered, converts to “how”.  Most companies use a pretty simple decision-making framework – build, partner or buy.  Most often that decision-making framework skews something like this:


  • Build if it’s a product feature or natural product extension


  • Partner if the capability i) complements but is not critical or ii) complements and a partner can be trusted to fulfill the need for a while or perhaps indefinitely or iii) complements and the partner brings significant benefits like customer relationships or brand value.


  • Buy if the capability is very important, others have already built it and i) it would be difficult to build in a reasonable time or ii) it comes with, talent, customers and a business that are a natural fit to achieving the “what’s next?”.


Of course, each path has costs which often limits what is practical.  This is a bit like mom and apple pie, most acknowledge and accept this as a reasonable framework.


However, often we see a different mindset with open-source projects.  We’d posit that is due to software developers both creating and managing these efforts.  As is natural, software developers build and what they build is important and protected by them.  Introducing a new group to their efforts creates tension, potential conflict and certainly a period of “getting to know each other” compromise.  Protocols are often fundamentally open source projects.  In our view, that reality has inhibited protocols from actively participating in the buy option highlighted above.  This is beginning to change but not without the predicted tension as was well highlighted by the Cardano community bickering this week following the announcement of the acquisition of Nami Wallet by Input | Output.  


Make no mistake, software developers rule and are the lifeblood of crypto.  Over time we hope and expect those that are building protocols will become a bit more pragmatic with the expected result of more mergers and acquisitions within these ecosystems.