Coinbase (NASDAQ:COIN) has secured regulatory approval from the National Futures Association (NFA) to operate a Futures Commission Merchant (FCM). This will enable it to provide access to crypto futures trading for eligible customers.
The NFA is a Commodities Futures Trading Commission (CFTC) designated self-regulatory organization. According to the NFA, an FCM is an “entity that solicits or accepts orders to buy or sell futures contracts, options on futures, retail off-exchange forex contracts or swaps, and accepts money or other assets from customers to support such orders.” Coinbase notes that approximately 75% of crypto trading volume is via derivatives.
According to a blog post, Coinbase filed for the status in September of 2021.
CI received a comment on the Coinbase approval from Chris Perkins, President and Managing Partner at CoinFund, who previously led a large FCM. He said these entities are a crucial part of the market as a vital intermediary.
“In derivatives markets in the US, there are two types of market participants, members and non-members of clearing houses. For those who aren’t members, they need an FCM to serve as intermediary and guarantor,” explained Perkins. So, clients need to find an FCM in order to access futures and cleared derivative markets. But, here is the problem, FCMs have been slowly dying and consolidating. They have materially decreased over the last two decades from a high of 188 in 2004 to just 61 by 2022.”
Perkins added that client assets have “skyrocketed from $60 billion in 2022 to around $500 billion last year. Because of higher costs, bigger firms have gotten bigger to be better able to manage compliance and scale. He said that crypto derivative markets are very difficult to scale and legacy operations “simply cannot keep up with the speed and volatility of crypto markets.”
“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. “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.”
With Coinbase approved as a compliant FCM this should be very good for both Coinbase and the crypto markets in general Perkins added.