Coinbase's futures grab is another crypto leap onto Wall Street
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The U.S.'s largest crypto exchange, Coinbase, is expanding its line of crypto products and services to include regulated futures trading.
Why it matters: For Coinbase, derivatives present another source of revenue (a bigger potential market than spot trading). For the industry, it would appear to bone up the crypto trading ecosystem.
- For customers, derivatives can be a useful trading tool. Futures allow traders to do things like short-sell (bet that prices on a given asset will fall) and trade on leverage — borrowing funds to increase one's trading position beyond what they have handy.
Driving the news: Coinbase Financial Markets got regulatory approval Wednesday from the National Futures Association (NFA), a CFTC-designated group, to be a futures commission merchant (FCM).
Of note: The FCM model is what FTX US tried to move away from just last year, prompting the ire of Wall Street's middlemen as well as a congressional hearing that most folks probably would like to forget.
The intrigue: Coinbase, as an FCM, is now registered at the CFTC — what the SEC has been trying to get crypto exchanges to do under its own regulatory umbrella.
In the weeds: In the U.S., futures trading runs through middlemen — the FCMs — that absorb counterparty risk.
- It's what Coinbase is now allowed to be, and what FTX tried to circumvent.
- FCMs work with derivatives clearing organizations (DCOs), which clear and settle derivative transactions.
- Nodal Clear provides central counterparty clearing services for Coinbase Derivatives.
What we're watching: Whether Coinbase as an FCM will scale by clearing its futures transactions with more DCOs, like LedgerX, which was acquired out of FTX's bankruptcy, or a shop like Cboe Clear Digital.
What they're saying: "We don't have anything additional to share at this time as we assess the needs of our customers ahead of product availability," Megan Cook, a spokesperson for Coinbase, tells Axios.
Details: Coinbase intends to roll out futures trading in the coming weeks to its retail customers first, according to Cook.
- When asked how much leverage customers will be able to take on, Axios was pointed to Coinbase's website: Up to 4x leverage.
What others are saying: "The retail futures market has historically been run by offshore entities not operating in a regulated environment. Now you see Coinbase entering with a regulatory stamp," Matt Hougan, chief investment officer at Bitwise Asset Management, tells Axios.
- "The crypto derivatives market has not taken off in the U.S. because the legacy infrastructure is challenged," Chris Perkins, managing partner at CoinFund with expertise in FCMs, tells Axios.
- Post Dodd-Frank, FCM numbers have thinned and many are big banks with Basel requirements that make crypto a difficult undertaking, according to Perkins.
Between the lines: Coinbase's entry is welcome.
