Markets

Inside the Polychain-backed, offshore futures exchange hoping to beat Bakkt

Quick Take

  • CoinFLEX is aiming to be the first physically delivered crypto futures exchange, with a launch date circled for the coming weeks
  • The Seychelles-incorporated company will bypass official regulation to allow it to cater to an international market but will be tough on wash trading, it says
  • The exchange is backed by the likes of Polychain and DCG, and hopes to lure customers with high leverage and monthly contracts

As Cboe left the bitcoin futures market last week, another has been lining up to take its place.

CoinFLEX, a still-dormant exchange with a low profile but big backers, is not intimidated by the players who remain in the futures game. It’s planning to be the first to offer physically delivered bitcoin futures, set to launch in the “next few weeks,” and says it’s got a few tricks up its sleeve.

For one, it’s planning to operate from an offshore base.

“That’s so as to not alienate the crypto community,” CoinFLEX’s CEO Mark Lamb told The Block. “It’ll be politically neutral.”

In other words, it will be free of a specific regulator – and a specific set of rules – allowing it to operate globally.

As Bakkt and ErisX hold their breath for regulatory approval, CoinFLEX could beat them to market, unphased by U.S. Commodities Futures Trading Commission (CFTC) constraints as a Seychelles-based exchange.

While institutions will naturally be wary of this laissez-faire framework, Lamb says CoinFLEX is not trying to appeal to the big banks anyway – or the U.S. (where there is operational “high-risk”).

“The U.S.-regulated futures market is sub-2% of the crypto derivatives market, which is primarily an Asian phenomenon,” he explains, although this figure excludes OTC-trading stats.

Instead, it’s targeting international retail investors, like mining firms and OTC desks, which Lamb says are driving the derivatives market and will eventually attract institutions.

“Institutions don’t want to be trading with others all day long.”

However, CoinFLEX is taking one leaf out of Bakkt’s book with its focus on physically delivered contracts, which are settled with actual bitcoin rather than cash.

“There’s all sorts of ways you can manipulate a cash-settled futures contract,” he explains. Indeed, head of markets at trading firm DRW, Richard Gorelick, told the CFTC last year, “We continue to have concerns that the way these futures contracts are pegged to these cash markets…could result in dislocations in the future.”

That, Lamb says, puts market-leader CME’s cash-settled contracts on the backfoot. Apparently, even Bakkt isn’t playing the same game.

“Bakkt aren’t really doing future contracts. In my view, Bakkt is in more competition with Coinbase pro or any U.S.-regulated spot exchange. Which is a pretty small percentage of the market…It sounds pretty similar to spot,” he notes, given it’s to be a one-day contract with no time duration or any leverage.

In comparison, CoinFLEX wants to offer monthly maturities and 20x leverage, which could lower the cost of trading.

Lamb says that’s part of why Polychain and DCG put their venture capital behind them, as well as CoinFLEX’s 13-person (and growing) team.

“We’re looking for people who are extremely passionate [about crypto] to the point of obsession”

While state-regulation won’t be a priority, Lamb says wash-trading prevention is an absolute priority. He says this will be driven by AI and the willingness to “boot” non-compliant market markers from the platform.

Launch and prospective clients

As “final testing” comes to a close, Lamb says “a pretty big [customer] pick-up” is on the horizon, with market makers and prospective users already reportedly in place.

“We’ve got 150 people in our telegram channel and I think a lot of those are going to be active traders,” he says.

The exchange will also offer early traders their own loyalty-based crypto, the FLEX coin, which will launch soon after CoinFLEX itself, and eventually diminish to fuel demand.

“I’ve personally been sceptical of most non-money-based coins” Lamb says. “But I do think exchange coins can actually play a pretty important role in the space, especially for generating early volume and liquidity to an exchange, and also incentivising customers.”

CoinFLEX may be a far cry from ICE’s pending crypto platform Bakkt in both regulatory-rigour and funding, but they could be a threat. If, that is, they can demonstrate the demand.