Coinbase’s Plan to Dominate $200 Billion EU Crypto Derivatives Market

Major U.S. cryptocurrency exchange Coinbase has announced plans to acquire a Cyprus-based holding company as part of a bid to enter the lucrative crypto derivatives market in the European Union. The acquisition, subject to regulatory approval, would provide Coinbase with a MiFID II license enabling it to offer futures, options and other derivatives linked to bitcoin, ether and other cryptocurrencies.

Keypoints

• Coinbase plans to acquire a Cyprus-based company to offer crypto derivatives in the EU
• The acquisition would give Coinbase access to a MiFID II license to provide investing services in EU countries
• Coinbase sees a major opportunity in crypto derivatives, which account for 75% of crypto trading volume globally
• Crypto derivatives would expand Coinbase’s offerings beyond spot trading to futures, options, etc.
• The acquisition is pending regulatory approval and is expected to close later in 2024

In a blog post on Friday, Coinbase said the MiFID II 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.” The company stressed that before launching any new offerings, its Cyprus-based entity must meet Coinbase’s stringent compliance standards related to anti-money laundering, customer transparency and sanctions screening.

Crypto derivatives, such as futures contracts and options, currently comprise about 75% of total crypto asset trading volumes globally. For a firm like Coinbase with over 100 million verified users, entering this market represents a major strategic opportunity at a time when its U.S. retail business is facing headwinds amid a “crypto winter” and increased regulatory scrutiny.

Thus far, most of Coinbase’s operations have concentrated on enabling users to buy, sell and hold cryptocurrencies like bitcoin and ether in their investment accounts. However, European institutions and sophisticated traders have demonstrated growing demand for more advanced crypto risk management tools. By acquiring an EU-licensed company, Coinbase positions itself to tap into this lucrative terrain.

Regulated access to crypto derivatives also aligns with Coinbase’s longstanding efforts to expand its institutional clientele. Over the past several years, the company has been trying to bring on board hedge funds, banks, high-frequency traders and other institutional investors with an appetite for larger trade sizes and more complex crypto-linked financial products.

Coinbase’s announcement comes shortly after rival crypto exchange Kraken terminated its pursuit of a U.S. banking charter following pushback from state regulators over its crypto staking services. This reinforces skepticism around near-term prospects for regulatory approval of crypto derivatives offerings targeted at U.S. retail investors. Thus Coinbase’s primary avenue for entering this market remains through international expansion for the time being.

The move forms part of Coinbase’s broader strategy to rapidly grow its European operations ahead of incoming EU crypto regulations in 2024. This includes plans to make Ireland its hub for compliance with the bloc’s new Markets in Crypto Assets (MiCA) framework. Becoming a fully licensed MiFID II firm would bolster Coinbase’s positioning as it works towards full MiCA registration over the next 12 months.