LONDON, ENGLAND – NOVEMBER 09: On this photo illustration, a flipped version of the Coinbase logo is reflected in a cell phone screen on November 09, 2021 in London, England. The cryptocurrency exchange platform is to release 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 it’s planning to acquire an organization with a license to achieve this.
The U.S. cryptocurrency exchange told CNBC exclusively that it entered into an agreement to buy an unnamed holding company which owns a MiFID II license.
MiFID II refers to the EU’s updated rules governing financial instruments. The EU updated the laws in 2017 to address criticism that it was too focused on stocks and didn’t consider other asset classes, like fixed income, derivatives and currencies.
It’s a part of a long-standing ambition by Coinbase to serve skilled and institutional customers.
The corporate, which began 12 years ago, has been searching for to expand its offering to institutions resembling hedge funds and high-frequency trading firms during the last several years, looking to profit from the much higher sizes of transactions done by these sorts of traders.
If and when Coinbase completes the deal, the move would mark the primary launch of derivatives trading by the corporate in the EU.
With a MiFID II license, Coinbase will find a way to begin offering regulated derivatives, like futures and options, in the EU. The corporate already offers spot trading in bitcoin and other cryptocurrencies.
The deal is subject to regulatory approval and Coinbase expects it would close later in 2024.
“This license would 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.
“Because the industry leader in trusted, compliant services and products, we aim for the best standards for regulatory compliance, and before operationalizing any license or serving any users, this entity must achieve our Five-point Global Compliance Standard.”
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Coinbase said it could look to adhere to rigorous compliance standards which can be upheld in the EU, including requirements related to combating money laundering, customer transparency and sanctions.
The corporate said it’s committed to ensuring a five-point global compliance standard, supported by a team of greater than 400 professionals with experience at agencies including the FBI and Department of Justice.
“We’ve got a protracted road ahead before finalizing the acquisition and operationalizing the EU MiFID licensed entity, but that is an exciting step forward in our efforts to expand access to our international derivatives offerings and produce a more global and open economic system to 1 billion people world wide,” Coinbase said in its blog post.
A key battleground
Derivatives might be a vital battleground for Coinbase. According to the corporate, derivatives make up 75% of overall crypto trading volumes. Coinbase has a great distance to go to compete with its larger rival Binance, which is a large player in the marketplace for crypto-linked derivatives, in addition to firms like Bybit, OKX and Deribit.
According to data from CoinGecko, Binance saw trading volume of greater than $56.6 billion in futures contracts in the past 24 hours. That is seismically larger than the quantity of volume done by Coinbase. Its international derivatives exchange did $300 million of futures trading volume in the last 24 hours.
Coinbase doesn’t currently offer crypto derivatives products in the U.K., where they’re prohibited. The Financial Conduct Authority banned crypto-linked derivatives in January 2020, saying on the time they’re “ill-suited” for retail consumers due to the harm they pose.
Coinbase currently offers trading in bitcoin futures and ether futures in the U.S., and bitcoin futures, ether futures, “nano” ether futures and West Texas Intermediate crude oil futures in markets outside the U.S.
Derivatives are a form of financial instrument that derive their value from the performance of an underlying asset.
Futures are derivatives that allow investors to speculate on what an asset will probably be value at a later point in time. They’re generally considered riskier than spot markets in digital assets given the notoriously volatile nature of cryptocurrencies like bitcoin, and using leverage, which may significantly amplify gains and losses.
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The corporate made its first move into derivatives in May, with the launch of a world derivatives exchange in Bermuda. And the corporate debuted crypto derivatives in the U.S. 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 venue, but subsequently shelved the thought, according to reporting from Fortune. CNBC has not been able to independently confirm Fortune’s reporting.
Expanding beyond U.S.
The move into derivatives continues Coinbase’s expansion drive in markets outside of the U.S.
Coinbase has been aggressively chasing international expansion in the past yr because it faces a tougher time at home. The corporate is the goal of a U.S. Securities and Exchange Commission lawsuit alleging it violated securities laws.
In October, the firm picked Ireland as its primary regulatory base in the EU ahead of an incoming package of crypto laws often called Markets in Crypto-Assets (MiCA), and submitted an application for a single MiCA license, which it hopes to obtain by December. 2024 when the principles are slated to be fully applied.
Coinbase also recently obtained a virtual asset service provider license from France, which supplies it permission to offer custody and trading in crypto assets in the country.