Bakkt, Inc. (BKKT) Earnings Call Transcript & Summary

Well, investors, welcome to another fireside chat. I'm John Roy, Managing Director here at Water Tower Research. And I'm very pleased today to have Dan O'Prey. He is the Chief Product Officer for Bitcoin & Crypto at Bakkt. So Dan, very nice to have you.

Thank you so much for having me, John. Pleasure to be here.

So for those of you in the audience that don't know you, can you give us a little bit of your background and maybe a little bit of how you fit into the whole Bakkt situation?

Sure. Yes, I've been in and around the space for sort of 8 or 9 years now. So back in 2013, 2014, I started a company called Hyperledger, which was the first sort of what's now sort of enterprise blockchain type companies. Then that was ended up being acquired by a company called Digital Asset, whereas there for about 6 years, as in a couple of different roles, obviously marketing, communication, strategy, product development pieces. And then joined back about 1.5 year a quarter ago or so to lead our Bitcoin & Crypto Product group. So Bakkt has sort of 3 core areas of focus: Bitcoin & Crypto on my side, loyalty and rewards and payments as well. So one of the interesting need things about Bakkt is the intersection between each of those different 3 pieces as well. So yes, I've been here for about 1.5 years, been growing the team and really excited for the future.

That's cool. That's -- Hyperledger certainly made a flash when it came out for sure. Now there are a number of companies in the crypto space today. What do you think makes you most different from your competitors?

Yes. I think our main thesis really is that as crypto becomes mainstream, it's going to be available in far more places, right? So there's going to be less that they need to go directly to a dedicated crypto exchange. You'll be able to get it through your bank, through your broker, through your wealth management side through your pension, and as it becomes more available in more different places, yes, that need for a dedicated crypto exchange or direct-to-consumer crypto companies is lessened. So we really are different in the fact that we are a platform. We help non-crypto companies provide crypto services to their consumers. So we're powered buybacks behind the scenes, taking care of custody and security and regulation and licensing so that our partners don't have to touch crypto, but they can keep their relationship with the user inside their application with our branding and provide trading capabilities, rewards, payouts and payments all powered by us behind the scenes.

Interesting. Now obviously, there was a lot of events over the last 6 months in crypto. Can you give us your view as to how that's changed the industry?

Yes, certainly been an interesting time, certainly not the first, but to be expected and are still very young and emerging industry. Personally, in my view, I think last year, in particular, we saw a bit of irrational exuberance of people chasing games and taking risks or at least not appreciating the risks that they were actually taking both on the consumer side in terms of trusting companies that didn't necessarily have a strong track record or lending between each of those different companies. And really, I think it was sad as it is for people to lose money, and I hope [indiscernible] does end up getting recovered. It was a healthy thing for the industry to clear out some of the more speculative high risk business models, projects and companies ultimately. So I think as an industry explodes as the crypto space has done, and you're going to see that Cambrian Explosion and a coalescence. I am really back as being more on the conservative end of that spectrum sort of being very calculated and measured with the risks that we consider. And so we didn't participate in any of that lending that ended up lowering up or integrations with some of the stable coins that had issues. And really when you're in it for the long term and you're building a solid foundation, you've got to be careful and calculated and we're well capitalized, we haven't been hit directly by any of the challenges in this space. We don't participate in those activities. And now it's a good opportunity before the next full run for the adults in the room to come in the financial services providers who are trusted and regulated and we'll do things the right way. Markets proven, but the models that were tried were gone.

Right. Now the volatility that we saw hasn't radically changed the adoption? I mean, the adoption rate for certain types, I guess. But can you give us a little bit of color on what you see there?

Yes. I mean it's a volatile space by its nature. It always has been pretty volatile. That's one of the things that is attractive to many investors and speculators is -- there's the potential for massive games, but with that comes the potential for drops in price. Bitcoin is still hovering around $20,000, which is still a very large market capital where it is today. And really, I think for us, again, taking a step back or looking at the long term, there are going to be peaks and dips along the way. And our partners are not -- they're not coming in last year through all the excitement. They've been monitoring the space. They're looking at actually, this is something for the long term. And they're well aware there will be volatility. And as we go through that phase of price discovery for how much these assets are worth. And really, as we move beyond just that investment speculation stage into actually providing utility by leveraging Bitcoin as a means for payment, then we'll start to see as a wider adoption of why the utility comes that volatility start to dampen. So I think it hasn't had a huge impact on our business, thankfully. Our partners have been around. They know what they're getting into, and they know that this is the nature of the space. But moving forward, I expect to see that sort of dampen over time with every run.

Right. So if you take a step back and looked at Bakkt, particularly, can you kind of give an idea of what the products are for our audience? And maybe who your target customers are?

Sure. So we're a B2B2C company primarily. So we enable our partners typically through financial institutions and regulated entities, but also merchants like Starbucks as well for a suite of different offerings. So the heart of that offering is our custody solution. So we have a NYDFS chartered trust license. So we're a custodian of Bitcoin and ether today. And then building on top of that, we allow our partners to embed or enable them to embed trading capabilities. So you can buy and sell Bitcoin and ether directly from your bank account for our partnerships with Pfizer and Finastra and their community of credit unions and banks through rewards. So earning on the back of card spend or converting your loyalty points or spending your loyalty points like cash, getting payouts, getting paid in crypto for a portion of your salary, particularly seeing a lot of interest there within the sort of gig economy work out space. So let 10% or 20% of my biweekly paychecks to be coming in Bitcoin. And then finally, sort of payments, so enabling you once you have that crypto and you're custodying it with us, not just holding and waiting for the price to go up, but actually getting that convenience and leverage and be able to use it and tap to pay and spend it anywhere that Visa or Mastercard are accepted.

Right. Maybe you could give us a little bit of an idea of how the crypto capabilities within Bakkt intersect with the other elements of firm because I see that as definitely a pretty unique position to be in.

Yes. It's definitely one of our biggest differentiators. So I mentioned there's the payment side and then the loyalty side as well and several of our products will cross 1, 2 or even all 3 of those. So with the ability to earn crypto rewards being a capability that if you are a provider of loyalty point, loyalty program, actually, younger generations are starting, they want to receive crypto or Bitcoin as that method of reward rather than a particular point. And it's an opportunity to then differentiate your loyalty program, track to younger, generally wealthier crypto savvy generation and actually provide earning crypto as part of that. And that's also a great entry point. We're really looking at how do we get the next 100 million people on board were not going after the crypto diehards of today. The next 100 million people may not want to transfer their money to a crypto exchange and then look through a list of hundreds of coins and decide what they want to buy. But if you're earning that on the back of spend that you're doing anyway or through a loyalty program that you already have, it's free money as such. So it's a great entry point for people to get their toes here, but they don't happen to sort of actively go in and invest in crypto directly.

Yes. So within the crypto, let's call it the crypto product line for lack of a better word, what platform capability you're most excited about? And can you give us maybe some preview as to what might be coming down the pike?

Yes, actually. So when -- a couple of years ago, I sort of thinking crypto custody right, holding private keys securing them, making sure they don't get lost. It's a difficult job, but it's -- there are a few different custodians out there. Now I'm actually quite excited about the opportunities there. We have being a highly regulated trusted custodian both on the B2B2C side and directly for institutions as well. There's actually a lot of room to differentiate with that and provide layer on additional services down the line that we are planning to add as well. But then I think looking a little bit further out, the most exciting area for me is Bakkt is focused on driving that utility, actually enabling people to get value from these assets rather than just the pure speculation or store of value side. So I'm quite excited about the intersection with payments and crypto and actually leveraging crypto-native rails under the hood to do faster, more efficient payments. Whether the consumer knows or whether they're holding crypto and actually paying with that crypto or whether they're just seeing dollars to dollars or dollars to euros, actually leveraging the rails, the new infrastructure as an alternative payment rail to add value to consumers with cheaper, faster Internet native global payment system. That to me is money payments is the biggest use case in the whole of the crypto space in the area that I'm personally most excited about.

Interesting. Now you were mentioning that Bakkt is fairly highly regulated. And there's been a lot of buzz about the regulatory changes in Europe and in the U.S. as well. Can you give us a little bit of your view of what's likely to have happened and likely to happen?

Yes. It's tough to guess. I mean, there is multiple different areas of actions. So we saw that by an executive order earlier, I believe, in March for this year to help push multiple agencies to be a little bit more coordinated and come out with their stances. But particularly in the U.S., there's still different views within the different regulatory bodies on where -- who has oversight which jurisdiction that's in. So we've seen the chair of the SEC, Gary Gensler, start to make some moves and make some suggestions that certain cryptocurrencies could be convened securities and need to be registered. He's been very clear that, that Bitcoin isn't one of those and is a commodity, so it won't be under that jurisdiction. But then you see slightly different views from the CFTC, you regulate commodities and features as well as the treasury and the Fed as well. So it's an area of -- there's still a little bit of a gray zone. I think a lot of clarity in some areas like with Bitcoin, less clarity with things like stable coins or further out to other crypto tokens or our assets. We encourage full regulation on this space. That will actually help us as a business and protect consumers and our partners, and we engage with our various regulators to ensure that we are compliant with where the market is today and anticipate as much as where it can go. I wouldn't want to make any predictions on that. It can take a little bit of time, but I think it's going to be important. This is a new and very difficult space to regulate in many regards. So I think on the one hand, the industry wants clarity today, but we also don't want to make sure it's well thought out regulation as well. So I think going through the time staying engaged with the regulators and helping them really understand because there's a lot of different -- differences and nuances between projects and companies and business models as well. It's not a sort of one-size-fits-all space.

Yes, the maturation of the regulatory complex for lack of a better word, and it's certainly one of the stages in the adoption. Where do you see we are in the adoption of crypto by institutions and consumers. So are we in the first inning? Are we still in batting ages?

So I'm not a big baseball guy, so I'll try and use your analogy. But I would say we're in the second, right? This is not the super early stages of the industry where it was more of a world West. We are seeing -- we have seen institutional adoption, major traditional financial services players, [indiscernible] Fidelity, BNY Mellon are all active in this space. We've seen public companies put it on their corporate balance sheet. We've seen some smaller nations like El Salvador in the Central African Republic, adopt Bitcoin as legal tender. And some companies like BlackRock and multiple banks that previously historically had not been too friendly to the space actually start to offer it to their consumers as well. So institutional adoption is here and is growing rapidly. And I think a great opportunity for traditional financial services players who have the user base, who have the trust, who are regulated and have the protections in place to actually still step into this space and provide these capabilities to their consumers in a way that traditional crypto companies or crypto-native companies just can't do today.

Right. Now your title is Chief Product Officer for Bitcoin and other Crypto. Is it really that big of a distinction? Is it Bitcoin and everything else? Maybe if you can give us a little bit of your insight.

Great question. I think a good pick up there. Yes, so I think there is a distinction between those 2. I mean the people talk about the crypto space and sometimes they made the analogy of like the dotcom era or Internet companies when we used to talk about a company being an Internet company. Over time, people now talk about e-commerce companies or social media companies, and they're just companies in different spaces, everyone uses the Internet. And similarly, in Bitcoin and crypto industries, there's vast differences between the stable coin space or the NFT space, Metaverse and DeFi and lending and Bitcoin. So I think we're starting to see the industry start to make a bit more of a distinction there. Bitcoin is unique in that it is truly decentralized. Some of the other projects have made trade-offs for slightly less decentralization in order to get more functionality or more speed. But Bitcoin -- they have leaders or foundations or teams, Bitcoin has none of those. It really is a fully peer-to-peer neutral network than anyone can interoperate where than anyone -- and no one can have control or influence over. And that's really important to be the fundamental decentralized network that multiple companies can interact with, without being concerned of a particular jurisdiction or government or having too much potential way or a team or company.

Interesting. So some people speaking of Bitcoin, it's being different, looked at it as digital gold, I guess, store value sort of line of logic. Is that what you see? Are we seeing the narrative shift?

I think, yes, there's multiple phases, right, and multiple different use cases. And so I think the original -- well, the original white paper, it was a peer-to-peer electronic cash. It was designed as a means to make payments without any centralized intermediaries. Over time, we start to see that sort of because it has a hard supply cap, there will only ever be 21 million Bitcoin people who is helpful to the mainstream to understand an analogy to something that they used to and gold as a historical form of money that is limited in its supply, was a helpful metaphor for understanding what is very new and very different technology was. And that is still a use case. It is volatile. But actually, interestingly, over the last few days, we've seen multiple currencies fall against the U.S. dollar, but Bitcoin actually stayed surprisingly heavy -- steady. But that is just the first use case. Bitcoin is not just supposed to be buy it, store it and forget about it. It can be used. It can be an Internet native payment rail. And now with the creation of new technologies like Layer 2 solutions like the Lightning Network on top of Bitcoin, now you have the base settlement layer and a fast, cheap, efficient payment network on top of it, we'll start to see, I believe, more of that focus on utility and actually being leveraged as a means to transact. And again, as I mentioned earlier, that doesn't necessarily mean everyone's paying in Bitcoin directly. There are ways to abstract that away from the user and get more value by leveraging that network. So digital gold is the first sort of use case but then moving to the meta transaction at the moment with a lot of adoption going on around Lightning.

So as you look ahead, and this is probably our final question because I see we are running up on our time here, what could really be a catalyst for a faster crypto adoption rate? I mean, what would really make it take off in your line.

I think it will -- normal mainstream users care about convenience and safety and trust. So ironically, as this was created is to have no central intermediaries normal people who are not crypto-native, they don't want to have to deal with their own private keys and risk losing all their funds. They don't want to have to research different crypto exchanges and understand what the risks are there. They have a bank account, they have a brokerage. They have a loyalty program. And the more we can get crypto alongside where users already are with entities they already trust. Bakkt, to me, is what will help us sort of cross the chasm to the real next 100 million, 1 billion mainstream users, and then actually providing that utility, like whether if you're making a payment right now today, you've got Venmo or Cash App or PayPal and you try to tip someone, you have to ask, do you have this or that.

It is true.

In the future, if they were all Lightning enabled, it doesn't matter which platform you use, you can just make payments. And that utility piece will really then you'll know as product market fit and we'll be off to the races in terms of mainstream adoption.

Well, Dan, this has been super useful. Thank you so much for your insights and have a great day, I guess.

Thank you very much, John. Pleasure to be here. bye-bye.