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

Thanks, everyone, for joining. Thanks everyone for coming out to the conference and for joining the session. For those who don't know me, my name is David Weinberg. I'm the Vice President of our Financial Institutions Group, and very happy to be joined today by Gavin Michael, the CEO of Bakkt. Gavin, maybe just to start off, would you mind introducing yourself and then also sharing just a little bit of the history of Bakkt.

Sure. Good morning, and thanks for having us. It's great to be able to talk about the company at the conference. So I joined the company in January of 2021, just as we announced the transaction to go public. Bakkt was formed in 2018 and spun out of Intercontinental Exchange as part of our listing and de-SPAC process. We gain a lot from that heritage, having come out of ICE with the goal and the mission to be able to provide trust and transparency into the digital asset space. And so I've been with the company over the last 2 years as we're driving towards this new growth of being the platform of choice for institutions and companies who are looking to enter the crypto economy.

Yes. What drew you to Bakkt in the first place, you obviously have a history of several large financial institutions, including being JPMorgan alone.

Yes.

What drove you do to Bakkt in the digital asset ecosystem?

So I spent my career inside financial services working with firms like JP, Citi, Lloyd's in the U.K. and National Australia Bank down in Sydney. But all of that activity, it always been around working at the intersection of digital disruption and banking. So disrupting, if you like, inside out. And when the opportunity came up to join Bakkt, it really was to go the other way. It was to disrupt the industry outside and it was to really be a significant player in this crypto environment showing that we can onboard people in a secure compliant regulatory first way and unlock the benefits of the innovation that we see the crypto economy providing to traditional financial services. So it was a little bit of an option to be able to take what I've been doing classically inside out and try it outside in.

That's great. So Bakkt today, let's talk about -- let's talk about the business. It provides infrastructure for a number of different end markets, obviously, the crypto business, loyalty solutions and much more. How does it all -- what's the vision? How does it all come together? Can you speak to that?

Yes, sure. So at our core is our institutional grade, secure compliant platform that really brings together crypto custody and crypto trading all in one place. So when we talk about custody, it's about providing that secure compliant environment where we can store at this point, Bitcoin and if as a self-custody qualified custodian. We have advanced trading capabilities that help us service trading on a range of tokens. And then as you think about trading, it moves into crypto rewards and crypto payouts that are really specializations of that more general trading use case. And that's a great tie-in to the loyalty business that is really about providing ways for brands to be able to differentiate themselves in this digital asset space. What's appealing to the partners that we work with is that we're a one-stop shop, where you're able to get access to core infrastructure to allow you to power the crypto innovation that so many firms are looking to enter at the moment, but also then the ability for them to be able to move into other use cases beyond trading. When you start to think about utility, you start to think about things like tokenization of assets. If you're going to tokenize a set of assets, you need to store the tokens with a custodial provider like ourselves or even moving then into payment innovation and using Lightning and the rails that crypto runs on to provide different ways to fit transactions to progress. So the core is this institutional grade platform that really supports this innovation around crypto in financial services.

When you think about the custody business being at the core, and I think about sort of themes that have become increasingly important, recently, safety, soundness protection and segregation of customer assets, how have recent events in crypto impacted your business?

Positively, we've seen a material increase in the number of inbounds that we're seeing for crypto solutions, particularly around custody. And those inbounds are coming from a diverse range of institutions. It could be institutions who are looking for somewhere else to be able to store their assets. So they're looking to initiate a relationship with a secure compliant regulatory custodial set of services. It could be a fintech who's looking to start this journey into crypto trading or it could be an institution that's looking to diversify its crypto custody services because in light of the events that have happened throughout the industry, it's forced a number of institutions to look at have they got the right disaster recovery, have they got the right redundancy and the relationships that they hold. So we have definitely seen -- if I look at the number of inbound leads through the first quarter of this year compared to where we ended last year, it's -- we've seen a doubling. And it really is that idea of being the secure compliant reg first player that's differentiating us when people are looking for a qualified custodian that has set up and established the entities with a limited purpose trust charter that stores all of the assets that we have that's very separate from our trading and exchange activities. And in that very setup, we're showing that regulatory first compliant first mindset.

On the theme of being regulatory surge being compliance focused. Can you share a little bit about your views on the regulatory landscape in the U.S.?

So there's no doubt we're not moving fast enough. I mean, the ambiguity that's been introduced into the U.S. environment through the lack of progress is evident in many of our discussions. We work with a range of regulators. We work very closely with New York state regulators who have done a very good job in establishing a digital assets framework. We have a great working relationship with them through both our trust and we hold a bit license as well. But when you look at the federal level, they're just slower to act. And slower to act, not just in the context of necessarily providing us with the regulatory guidance, but also slower to act in comparison to what's happening around the world. We're definitely seeing markets that are leading towards more and deeper understanding of the regulatory environment, and that's leading to an uptick in demand. There are positive signs. So it's not all just slow. I mean the week before last, has Financial Services and ag committee held their first ever joint sitting to talk about digital assets and to take testimony from a wide range of witnesses. I'm hopeful with the farm bill coming due in September that ag committee might look to ride a crypto piece through that. We're absolutely supportive of the actions that are being taken around enforcement for bad actors. That's really important when we want to establish trust back into our industry. I think the challenges that we've got to move beyond enforcement, we've got to move beyond just showing the third rail. When we think about a comprehensive regulatory framework, it not only tells us what we can't do, but it gives us ideas on consumer protection, consumer disclosures, what our operational risk appetite should look like, how do we conform to BSA, what KYC, AML standards do we need to be held to. And it's that, that we're lacking. And so the fear is that -- and I think it's a very real fear is that other markets where that clarity is being sought and found will lead the world around innovation and move us beyond that investable asset paradigm and into one of utility, where the tokenization is the new world of securitization or not, whether Lightning can make payments more efficient or not, they're the test beds that we want to be able to see. So this is both about regulation and regulation to allow innovation.

When you think about some of those international markets that have taken further steps than the U.S. regulators, what are some of the ones that you think have been particularly impressive. And I guess, how does it impact your own international strategy?

So I think international expansion, as we've said in a couple of our recent discussions is really very important to us. I think it shows that when we see a slowdown in one market, we have the ability and the agility to move into another. We're very focused on the U.K., parts of the European Union and Southeast Asia, Hong Kong, for example. All of these markets are showing that regulatory clarity. We're seeing demand from our partners to start operating in those new jurisdictions because they want to capitalize on the positive consumer sentiment that they see. And there's very attractive trading flows in those markets that we want to be a part of. I think when we think about international expansion for us, we're in a very unique position for the way in which we can think about entry into those markets because we have clients who are already established that. So we're following them in. They're already established. They have the payment integrations built. They're trading U.S. equities, for example, we're able to go in behind them with the new asset class that they add to their platform. So we have a very low barrier to entry when we think about our ability to move quickly. And it's a big focus for us right now. We're hoping that we'll see some activity through the next few quarters.

International expansion, obviously, a strategic priority. What are -- what else is in that top 3.

So international definitely custody. Custody is a great anchor product. It really allows us to establish ourselves with a client. We are able to then take on the ownership of the assets. And we continue to invest in our custody infrastructure to move to a more modern architecture to something that's very agile, the ability for us to be able to help our B2B to see partners as well as institutions, providing capabilities like hot wallets that are allowing automatic withdrawal and depositive assets in expanding the asset classes that we support. So moving beyond just Bitcoin underneath, adding additional tokens and then providing yield opportunities as well. There are many long-term holders out there of the assets that really want to be able to extract the yield. So we think staking becomes an important capability, not just at the consumer level, but also at the institutional level. And then I think the final one is driving to utility. Our ability to be able to provide core infrastructure to allow institutions and partners to really embark on extracting value from the broader crypto stack. So as I said, that's allowing them to be able to tokenize different asset classes, tokenization of asset classes, you've got to store the token somewhere. That's where we come into play. And then as we move into a lightning environment, payment innovation, and this isn't so much of the narrative around payments. It was Bitcoin Pizza Day this week that I fondly remember as the many people in the industry, but it's not about using Bitcoin necessarily as a medium of exchange. It's about using the infrastructure that underlies it to allow peer-to-peer transaction to really process in real time and uniquely without a third party involved. So we think that has great application for B2B business, payment use cases and has great application for cross-border remittances. And you can go further because there's so much more we can embed at the protocol level about the payment and the payment instruction. So we see international, we obviously see custody and then we definitely see this utility move using our platform to create those moments of innovation.

You've prioritized a B2B and B2B2C model sitting squarely in that infrastructure space. What drove that versus others in the space that have been B2C? And in the past, that has been there to...

I think part of it is efficient and effective scale growth. When you're a B2B2C company, you're able to put your product out there in so many more venues that grow scale quickly and efficiently because the CAC is so much lower when we're working with a partner. The partners are incented to be able to deploy the infrastructure because they see that they're taking value to their customers. It's definitely a part of the proposition they want to be able to hold true to. We -- so our move has been one about how do I achieve scale and growth quickly, how do I create a platform environment and keep the company focused on running that vertical very, very well. And moving into a place where when you start looking at D2C the scale and the CAC gets can get -- gets tough, particularly in a market that we're in at the moment. And I think when we look at the partners that we appeal to, we've got a terrific number of partners across the platform, but the fintechs are really leading the space right now. They have a different customer demographic, a younger, more tech savvy, one that these digital assets really start to appeal to. We have great TradFi partners as well, but the activations have just become so much slower given the lack of regulatory clarity that we see.

That's maybe a good transition point to maybe talk a bit about Apex Crypto, which you announced last year, the acquisition even closed in the last month or so. Maybe just to start, can you lay out the strategic rationale and how it contributes to your B2B2C strategy?

So we're really excited by the acquisition, and we're delighted that it closed in a short amount of time, which I think is testament to the regulatory approach that both companies have taken. The rationale for us was really one of looking for growth, looking for a sustainable growth. They bring advanced trading capabilities that were on our road map and this accelerated our road map. So the ability for us to then be able to pair an advanced trading capability underneath supported by our custody environment really creates a platform that we believe is unrivaled in the marketplace and is really making it the platform of choice for many institutions and client partners. They bring immediate scale in both activity. We have almost 6 million crypto accounts as well as distribution. They -- we now have some terrific partners on the platform. We support Webull, we support M1 Finance, Stash, Public.com, who are all being innovative and creative in the trading and wealth management space. And we continue to see strong traction with those partners and great interest from others wanting to come on to the platform. We believe that when you think about the capabilities we now have, we have unparalleled access to liquidity. We have deep, tight pricing, transparent pricing that we give our consumers access to. And because of the redundancy in the platform, we have 100% uptime. Again, these are all aspects that really start to differentiate the platform when we're in the marketplace. It gives us the ability to do gifting advanced order types, the ability for us to be able to move coins in and out of the platform, are all good examples of, again, features that we wanted to develop that we now have through the acquisition. We're very focused on the integration. And in addition to getting great technology and access to some great clients, we've been able to acquire an enormous amount of talent across operations, across product, across technology who have really come into the environment in a -- with a culture that is very akin to the culture of Bakkt. So the integration is focused on efforts to bring the 2 companies together in an expeditious manner and then work to continue to invest in the platform as we move forward.

Coming out of the deal, is there -- and setting aside kind of the relationships that of Apex Crypto, but thinking about distribution, you obviously also now have a bit of a relationship with Apex Fintech, which serves innumerable fintechs in kind of traditional asset classes. How do you see that developing?