Crypto exchange FTX.US wades into derivatives with deal for LedgerX

Sam Bankman-Fried’s U.S. affiliate of crypto exchange FTX has agreed to buy LedgerX, a derivatives exchange and clearinghouse regulated by the Commodity Futures Trading Commission (CFTC), for an undisclosed amount. The deal, if completed, will provide FTX.US with the ability to offer options and futures contracts on Bitcoin and Ethereum to big and small investors alike, expanding on its current capabilities of permitting users to trade directly in a handful of cryptocurrencies. 

U.S. crypto derivative markets represent a “huge untapped opportunity” for FTX.US, said LedgerX CEO Zach Dexter, who met with Bankman-Fried at Bitcoin 2021 in Miami roughly three months ago to discuss ways to work together—a conversation that ultimately led to Tuesday’s announcement. Retail and institutional investors commonly use derivatives products, cryptocurrency-related or not, to hedge their exposures to the underlying asset or trade based on where they think the price is headed, sometimes even making aggressive and risky bets in the process.

For FTX.US, the deal represents more than just an expansion into crypto derivatives, said president Brett Harrison. He told Fortune that the LedgerX deal is a critical step toward becoming the next great derivatives bourse—one that trades much more than just crypto and is on par with exchange giants like CME Group and Intercontinental Exchange that oversee the daily trading of millions of contracts in complex financial instruments related to everything from the price of a bushel of corn to interest rate fluctuations.  

“By combining our forces here, we’re looking to build out not just a best-in-class crypto derivatives exchange in the U.S. but a best-in-class derivatives exchange in the U.S. that will only increase competition and the quality of markets for derivatives as a whole,” said Harrison, a veteran of speedy Wall Street trading firms like Jane Street and Citadel Securities. “It’s an exciting opportunity for us to really grow into a lasting and very significant part of the U.S. capital markets.”  

Harrison is not planning to push FTX.US outside the cryptoverse quite yet. But an acquisition of LedgerX, which is a CFTC-recognized designated contract market, would provide FTX.US with broad authority to pursue plenty of paths in the sprawling derivatives market when it does. The deal is expected to close in October.

It could be years before FTX.US reaches the size and scale of CME and Intercontinental Exchange. The two exchange giants command market capitalizations in excess of $60 billion each. By comparison, FTX—that is, the larger crypto exchange—was recently valued at $18 billion as part of a $900 million Series B financing. But Bankman-Fried, who founded FTX.US and FTX, has not shied away from ambitious targets in the past. He even recently told the Financial Timesthat buying Goldman Sachs or CME would not be “out of the question at all” if FTX becomes the largest crypto exchange in the world. FTX.US is a separate business from FTX. 

More immediately, FTX.US is focusing on what lies ahead: offering its clients crypto options and futures in a way that aligns with regulators’ expectations. 

The deal has hit at a time when much of Washington, D.C., is paying more attention than ever to the burgeoning cryptocurrency industry. So FTX.US is being careful. For now, LedgerX will continue to operate on its own. Once FTX.US closes the deal, it can work with the CFTC on how to fold the two companies’ platforms together and begin offering derivatives to its customers, Harrison said. Then FTX.US will begin looking at other items, like adding new products to the platform and different types of margin. 

“Crypto has entered the mainstream dialogue for these different agencies and legislators,” said Harrison, who added that the LedgerX and FTX.US teams see regulation as the “only real path to a long-term sustainable business.”

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