LONDON, ENGLAND – NOVEMBER 09: In this photo, an upside down version of the Coinbase logo is reflected on a mobile phone screen on November 09, 2021 in London, England. The cryptocurrency exchange platform is set to announce its quarterly earnings today. (Photo illustration by Leon Neal/Getty Images)
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Coinbase plans to offer crypto-linked derivatives in the European Union and plans to acquire a company licensed to do so.
The US cryptocurrency exchange exclusively told CNBC that it has entered into an agreement to buy an anonymous holding company that holds a MiFID II license.
MiFID II refers to the updated EU rules governing financial instruments. The EU updated the legislation in 2017 to address criticism that it focused too much on equities and did not take into account other asset classes such as fixed income, derivatives and currencies.
It is part of a long-standing ambition of Coinbase to serve professional and institutional customers.
The company, which was launched 12 years ago, has been looking to expand its offering to institutions such as hedge funds and high-frequency trading firms in recent years, seeking to take advantage of the much larger trade sizes made by such traders.
If and when Coinbase completes the deal, the move will mark the company’s first derivatives trading in the EU.
With a MiFID II license, Coinbase will be able to start offering regulated derivatives, such as futures and options, in the EU. The company already offers spot trading in bitcoin and other cryptocurrencies.
The deal is subject to regulatory approval and Coinbase expects to close later in 2024.
“This license will help expand access to our derivatives products by allowing Coinbase to offer them to eligible European customers in select countries across the EU,” Coinbase said in a blog post, which was shared exclusively with CNBC on Friday.
“As an industry leader in reliable, compliant products and services, we aim for the highest standards of regulatory compliance, and before operating any license or serving any user, this entity must achieve the Global Five Point Compliance Standard.”
Coinbase said it will strive to adhere to strict compliance standards observed in the EU, including requirements related to anti-money laundering, customer transparency and sanctions.
The company said it is committed to ensuring a global five-point compliance standard, supported by a team of more than 400 professionals with experience in agencies including the FBI and the Department of Justice.
“We have a long way to go before we finalize the acquisition and get the EU MiFID-licensed entity up and running, but this is an exciting step forward in our efforts to expand access to our international derivatives offerings and bring a more global and open financial system to 1 billion people worldwide,” Coinbase said in its blog post.
Basic battlefield
Derivatives could be a critical battleground for Coinbase. According to the company, derivatives make up 75% of the total cryptocurrency trading volume. Coinbase has a long way to go to compete with its biggest competitor Binance, which is a huge player in the crypto-linked derivatives market, as well as companies like Bybit, OKX and Deribit.
According to data from CoinGecko, Binance saw a trading volume of over $56.6 billion in futures contracts in the last 24 hours. This is seismically larger than Coinbase’s volume. Its international derivatives exchange saw $300 million in futures trading volume in the past 24 hours.
Coinbase does not currently offer cryptocurrency derivative products in the UK, where they are prohibited. The Financial Conduct Authority banned crypto-linked derivatives in January 2020, saying at the time that they were “unsuitable” for retail consumers because of the harm they cause.
Coinbase currently offers trading in bitcoin futures and ether futures in the US, and bitcoin futures, ether futures, “nano” ether futures and West Texas Intermediate crude oil futures in markets outside USA
Derivatives are a type of financial instrument that derive their value from the performance of an underlying asset.
Futures contracts are derivatives that allow investors to speculate about the value of an asset at a later point in time. They are generally considered riskier than spot purchases of digital assets, given the notoriously volatile nature of cryptocurrencies such as bitcoin and the use of leverage, which can greatly amplify profits and losses.
The company made its first move into derivatives in May, with the launch of an international derivatives exchange Bermuda. And the company debuted cryptocurrency derivatives in the US in November after receiving regulatory approval from the National Futures Association.
Coinbase had reportedly considered acquiring FTX Europe, the European entity of the now-collapsed crypto space, but then scrapped the idea, according to report from Fortune. CNBC could not independently verify Fortune’s reports.
Expansion beyond the US
The move to derivatives continues Coinbase’s expansion into non-US markets
In October, the company chose Ireland as its main EU regulatory base ahead of an incoming package of crypto laws known as Markets in Crypto-Assets (MiCA) and applied for a single MiCA license, which it hopes to obtain by December. 2024, when the rules are due to be fully implemented.
Coinbase also recently acquired a virtual asset service provider license from France, which gives it permission to offer custody and trading of crypto assets in the country.