Leading cryptocurrency exchange Coinbase will now allow U.S.-based investors to access the crypto derivatives market. The approval received on Wednesday comes two years after the company first applied for the product.
Coinbase Approved to Operate as a Futures Commission Merchant
Coinbase Financial Markets secured regulatory approval from the National Futures Association (NFA) – a self-regulatory organization designated by the Commodities Futures Trading Commission (CFTC) – to operate a Futures Commission Merchant (FCM) that will offer crypto futures to eligible U.S. investors.
An FCM enables retail investors to participate in the futures market. Similar to a market maker, the FCM is an individual or entity that can buy or sell futures contracts, options on futures, retail off-exchange forex contracts, or swaps, in exchange for money or other assets from customers using the service.
The move will allow the world’s second-largest crypto exchange to offer Bitcoin (BTC) or Ether (ETH) futures directly to retail clients. Crypto derivatives make up more than 75% of all global trades on the crypto market.
But the financial instruments, which allow traders to speculate on price movements of an underlying asset without actually owning them, have been out of reach for customers in the U.S. due to their complexity and high-risk levels. Only institutional investors in the country could trade in derivatives.
Coinbase first applied an application with the NFA to register as an FCM in September 2021. According to a statement released by the exchange, it has worked with regulators since then to ensure that it would comply with all the necessary regulations and that the company’s FCM business model would meet the CFTC’s customer protection requirements.
In preparation to become an FCM, Coinbase Global Inc. acquired FairX, a CFTC-regulated futures exchange, early last year. The company now known as the Coinbase Derivatives Exchange has since launched nano Bitcoin (BTI) and Ethereum (ETI) futures contracts designed for retail investors in the U.S.
Both products became instant hits that institutional investors demanded the company release far-advanced versions of its derivatives. Heeding popular demand, Coinbase launched institutional-sized, USD-settled Bitcoin and Ether futures contracts in June.
Coinbase’s Bitcoin and Ether Futures are Collectively Worth Over $6.5 Billion
The BTI and ETI futures are sized at 1 BTC and 10 ETH per contract. Coinbase says the derivatives will enable customers to “tailor their exposure” to digital asset commodities “with granularity”, and allow traders to seize the right opportunity in the highly volatile crypto market environment.
The Coinbase Derivatives Exchange, which is now open to third-party brokers, other FCMs, and market markets, has established a deep liquidity pool with $4.7 billion in Bitcoin and $2 billion in Ether futures traded this year alone.
The approval makes Coinbase the first crypto company in the States to offer regulated and leveraged crypto futures alongside traditional crypto spot trading.
The Decision Strikes the SEC Right on its Head
The news comes as a big blow to the U.S. Securities and Exchange Commission (SEC), which sued Coinbase and its chief rival Binance in June after accusing both companies of operating in the country illegally without registering as a brokerage.
In a statement released at the time, the financial regulator said Coinbase had made “billions of dollars” by unlawfully facilitating the buying and selling of crypto asset securities.
The SEC alleged that the company offers the services of an exchange, broker, and clearing agency without having any of those functions registered with the agency as required by law.
The SEC’s move came in response to the astronomical collapse of FTX, once the world’s third-largest crypto exchange, in November 2022. The Commission has been conducting a regulatory crackdown on crypto service providers ever since and is also pressuring lawmakers to bring the crypto market under its jurisdiction.
Responding to the SEC’s allegations, Coinbase Global CEO Brian Armstrong warned that the hostile regulatory environment created by the Commission and the enforcement-first approach promoted by its Chair Gary Gensler could force more U.S.-based crypto firms to move offshore, stifling the industry’s growth in America.
Crypto Firms Demand the Digital Assets Be Regulated Under Bespoke Rules
While the SEC demands that crypto assets should be regulated the same way as traditional securities or commodities like stocks and bonds, crypto firms argue the products are a whole new kind of digital asset that requires bespoke rules and regulations.
Andrew Sears, the CEO of Coinbase Financial Markets, explained that the key to unlocking growth and ensuring wider participation in the crypto sector would be by giving U.S. investors access to crypto futures in a more secure and regulated environment.
CFTC Commissioner Christy Goldsmith Romero has been a vocal proponent of crypto assets. After approving Coinbase’s BTI and ETI futures, Romero said that he fully supports bringing “appropriate” crypto activities into a regulated space in order to protect customers. But in a way that supports “oversight, accountability, transparency, and risk management”.
Soon after the news broke that Coinbase was approved by the CFTC to operate as an FCM, company shares rose over 4% to trade at $82.49. However, a crash in Bitcoin (BTC) price has led to Coinbase trading at $75.56 on Nasdaq today, dropping 4.35%.
At the time of writing, BTC is trading at $26,503.22 – down 7.3% in the last 24 hours. Meanwhile, Ether (ETH) is priced at $1,687.55, down by 6.1% in the same period.