Coinbase buys futures exchange FairX for crypto derivatives push in US

Coinbase Global Inc. is acquiring futures exchange FairX in its biggest step yet toward expanding into crypto derivatives.

Already registered with U.S. regulators, the firm could give Coinbase the edge it needs in getting a derivatives marketplace up and running. Terms of the deal were not provided. 

“This is the most important stepping stone for us to help a derivatives market come to form,” Brett Tejpaul, head of Coinbase Institutional, said in an interview. “We think the U.S.-listed derivative market presents a very substantial commercial opportunity.” 

Cryptocurrency futures and options -- which let investors hedge their bets by agreeing to buy or sell coins on a certain day at a certain price -- have long been a glaring hole in Coinbase’s product portfolio. The bulk of Coinbase’s revenues come from spot trading fees in coins like Bitcoin and declines during bear markets can create an urgent need for diversification. Plus, volumes in the derivatives market outshine that of the spot market, reaching $2.9 trillion in December, according to CryptoCompare.

The acquisition is expected to close in the first quarter.

Exchanges outside of the U.S. such as Binance and OKEx have the lion’s share of the derivatives market -- sometimes offering traders up to 100 times leverage. But some U.S.-based companies including CME Group Inc. and Kraken also provide them. 

Many U.S. exchanges have stayed away from the fast-growing market due to regulatory uncertainty. But more are starting to expand into derivatives. FTX.US, one of Coinbase’s U.S. competitors, similarly used an acquisition of LedgerX LLC’s parent company to gain a foothold last year. 

Coinbase has been laying the groundwork to expand into derivatives for months. Back in September, it filed an application with the National Futures Association to register as a futures commission merchant -- a process it’s continuing. Earlier last year, it also bought Skew, which tracks derivatives.  

Now FairX, based in Chicago, offers Coinbase a way to expedite the process. It’s already regulated by the Commodity Futures Trading Commission. It offers margin trading, which is key to attracting investors. And it provides its products through established brokers like TD Ameritrade and E*Trade Financial. Coinbase likely hopes that some of these companies will eventually offer its crypto derivatives, although it doesn’t have formal agreements with them. 

“We want to work with regulators to make sure everything is in position to launch as early as we can,” Tejpaul said.

Previous FairX financing rounds were led by Hyde Park Venture Partners with participation from Battery Ventures, Limerick Hill LLC, TD Ameritrade, Virtu Financial Inc. and XTX Ventures.

About 30 staffers who worked at FairX will join Coinbase.