Today Coinbase Financial Markets announced it received approval as a Futures Commission Merchant (FCM), enabling it to list crypto derivatives directly. The approval is from the National Futures Association (NFA), a self-regulatory organization for the Commodity Futures Trading Commission (CFTC), where Coinbase first applied in 2021.
Coinbase was already up and running with futures through its 2022 acquisition of the FairX derivatives exchange. However, without a FCM approval it had to work through other FCMs as intermediaries, whereas now it can offer derivatives direct to consumers.
As it points out, around three quarters of crypto trading is in crypto derivatives rather than spot markets.
Following the SEC’s lawsuit filed against Coinbase earlier this year, the crypto exchange took the opportunity to take a dig.
“Where regulations are clear and sensible, we will work with regulators to receive the authorizations needed to offer products that align with our purpose of using crypto to update the financial system to advance economic freedom and opportunity,” it wrote in a blog post.
Why the FCM approval matters
Chris Perkins, CEO of Coinfund, and a member of the CFTC’s Global Market’s Advisory Committee, believes this is an important and much needed step for cultivating liquid derivative markets in the United States.
He observes that over the last 20 odd years there has been significant consolidation in the number FCMs while segregated client assets have grown more than eight fold to around $500 billion. “With high fixed compliance costs, the big have gotten bigger,” observed Perkins.
Looking at the list of FCMs on the CFTC website, a large proportion are banks, particularly those that hold the most segregated funds. At the same time, restrictive Basel balance sheet crypto rules combined with bank oversight have meant that while banks participate in crypto derivatives, they are not major players.
“This has left crypto market participants in a bind – unable to access derivative markets to hedge risk, especially in a way that segregates and protects their collateral. You see, future market structure is designed to mitigate counterparty risk,” said Perkins.
He continued, “In other jurisdictions that lack the requirement for FCMs, direct access models have resulted in liquid derivative markets that allow market participants to hedge risk. I testified before Congress suggesting that the US move away from a mandated intermediary model. While still a very viable solution in my mind, politically it will be difficult to adopt, because of the damage done by another exchange.” Perkins is referring to Sam Bankman-Fried’s proposal for direct access.
In Perkins’ view, “This should be very good for Coinbase, and excellent for crypto markets.”