Galaxy Digital Inc. (GLXY) Earnings Call Transcript & Summary

Welcome back, everybody, to day 2 of the Barclays Crypto & Blockchain Summit. We're kicking off the day with Mike Novogratz, CEO of Galaxy Digital. Mike is always full of industry insights and wisdom. So looking forward to our conversation as usual and with Galaxy. Mike has put together the sort of all-in-one multifaceted crypto strategy. We're looking forward to learning -- hearing more about that today. So Mike, thanks so much for joining us. Appreciate it.

Thank you, Ramsey.

Fantastic, let's start with a little bit of industry commentary from you. This is a really high-level question, but how do you feel about crypto and blockchain? Given everything that's going on in the space, have you -- has your faith in the sort of disruptive potential of the underlying technology have een raveled at all or...

There was that song. "This is the moment." I forgot who sang it. Like in some ways, this is why crypto. And 2 weeks ago, when we had the banking crisis I sat here, I was like, "Oh, my goodness, this is why we all got in, right?" And it was hitting on multiple fronts. It was this realization that as hard as our stewards of the financial system are trying, right? As hard as [ J. Pallet ], Janet Yellen are trying to maneuver the economy into a place where you have a soft landing and you don't have to debate the dollar, we gorged ourselves on debt for too long, and we -- only way out of this is really debasing the currency. And so we had QT, QT, QT. And then in 5 days, 80% of the government's balance sheet that has shrunk grew back. And so it was such a clarion call for Bitcoin, in particular, right, for a deflationary or noninflationary store value like 21 million Bitcoin that as -- you couldn't make a better script of why people want to own gold or Bitcoin or something that is a hedge against monetary debasement. At the same time, I sat here that whole week wondering about Signature Bank, and are they going to be available? And what overnight deposits became credit risk? The functionality of a checking account became credit risk and you think about crypto with instant settlement and no counterparty risk. And you're like we're using ancient technology in our entire financial system. And so from a macro perspective and from a plumbing perspective, both sides, it was like this is why we got into the business, decentralizing risk. And so you could tell the crypto community roared, right? Look at the prices of Bitcoin on the year. This is post [ debankment ] frame, post of regulatory assault on our space in the United States, trying to debank the space, right? Regulating by judicial action, right, by enforcement as opposed to setting up clear rules. The FCC attacking. Despite it all, Bitcoin and Ethereum on a sharp ratio adjusted basis, so adjusting for volatility and risk, are the single best investments in the world this year, are the single best investments in the world over 2 years, over 3 years and over 4 years. That's JPMorgan, sorry, Jamie. It's Google, it's Tesla. And so you can't say, "Well, these are for crazy people." This was -- no, these have been unbelievable good places to store your value. And that weekend really reinvigorated me, but reinvigorated the crypto community. It's a resilient community. Galaxy is a resilient firm. And so it reminds me a little bit when that the U.S. -- the Olympic Committee tried to throw out wrestling. And I was on the TV, I was like, "Are these guys insane? You're going to pick a fight with 1 million wrestlers around the world?" The crypto community has that kind of result because they care about this deeply.

I want to get into some of your views on the regulatory environment in just a second. But before that, I wanted to ask about -- it's so clear, obviously, to your point, that there was a lot of really bad, really bad sort of risk management practices and that were going on across the industry that really kind of exploded. Right now, from your view, do you think there are -- that we have kind of seen the survival of the fittest sort of play out, the tide has gone out, the folks that didn't -- weren't swinging naked or whatever the expression, guys have been washed away? Are there other boots left to drop in terms of some of these kind of horrible risk management practices? Or can we kind of feel like the worst is over?

I certainly hope we've swept out most of the bad actors. Listen, they're really a combination of, in the worst case, fraudsters and criminals, and we're going to see a bunch of guys go to jail. And then in the medium case, just knuckleheads with their risk management process. But again, we just saw that same thing in the banking system. And so let's not hold only crypto accountable for knucklehead risk management, right? You know, in great banks, in lots of ways, "Oh, with a little bit of a blind spot to a giant asset liability mismatch in Silicon Valley Bank." And so I think because of the stress that crypto went through, most of the bad actors and most of the terrible risk management practices have been washed away. The risk we have to crypto, going forward, is that there are still some companies that have survived, but don't have the right capitalization. And there's not a lot of money flowing into the space. The money flowing into the space isn't coming from Barclays and your clientele in a big way. It's coming from retail, still. It's the crypto community that supported it the entire time. And so it's coming from Asia. China has reopened in lots of ways. Hong Kong is reopening, it's coming from overseas. And we're seeing some institutional adoption, but there are plenty of companies that are capital starved. And so we see a great opportunity. A, we've got to figure out how to bring capital into our Asset Management business and into our company, how to be able to borrow at cheaper levels than we can because there are so many places we can deploy capital. But the whole space is starved with capital. And so you might see some slow deaths.

What is the -- how DeFi has kind of fared through all this? I mean, when I look at some of the truly decentralized protocols, borrowing, lending or marketplaces, they've kind of been humming along pretty nicely through this entire turbulence. It's the centralized stuff that we've had, I think, some of the bigger issues. I guess, a, do you agree with this assessment? And b, I know there's a lot of other -- we're going to get into regulatory stuff in a minute. There's a lot of other pressures on DeFi in terms of definitions of the security and -- et cetera. I mean, how do you think DeFi fit -- how do you think -- where is DeFi right now relative to...

If I just think in the biggest picture of decentralized systems, the biggest DeFi protocol is Bitcoin. And Bitcoin held up, no wonder. Ethereum held up. The lending protocols held up. The exchanges held up. And so they, with the exception of 1 or 2, all passed the stress test. That said, right, coming out of this is a migration to Bitcoin and Ethereum versus other stuff because people are nervous. There is a -- from an institutional investor perspective, backing away a little bit because of the KYC/AML stuff being brought more into the limelight. And so it is ironic because I think what DeFi showed us is transparent systems work pretty well, right? They always work perfectly, but they work pretty well. And what we had in Celsius and BlockFi and FTX were nontransparent systems, where people looked into an opaque box, trusted somebody and turned out to feel really foolish for having trust that person. We've been pushing in D.C. a bill to have proof of reserves at all exchanges. And quite frankly, you could have the same thing at banks, right? You can have banks put their balance sheets on blockchains and then people could actually do -- you'd probably get ChatGPT to do your risk management on the d*** thing and know what you're investing in. But right now, it feels unfair to ask the depositor to like do the kind of work necessary to determine if Signature Bank is a safe place versus the bank down the Street. There's an opacity to most organizations that creates a level of trust. You need trust in FDIC the government trust, something. Like blockchain solves a lot of that. And it was proven to work. Again, early stages, not on the scale that we're talking about in TradFi. But what I kept saying on our earnings call we had it is the real risk in the U.S. is we filled the baby out with the bathwater, right? These are real technologies that have real chances to make great progress, and we have this regulatory on slot now that's making it tough to do business here in the U.S.

I want to get into regulation in just a second. I think that's a really key large topic at this point. But one follow-up on -- we're just talking about in terms of DeFi and some of these models. I mean, do you see the mainstream financial services industry, banks, et cetera, adopting some of these decentralized models? I mean, I look at some of the efficiencies and market making with a blockchain-based sort of algorithm as something, and I look at a bank's traditional kind of whatever human-heavy market-making process, and I think how can this not, over time, supplant the other. But I don't know, what is your view in terms of institutional adoption here?

I think you're going to continue to see banks fight the adoption of crypto because it's been their self-interest to, and they're going to invest in private blockchains, right, that should make them more efficient, right? They all want to "We don't like crypto, but we actually like blockchains, if we control the database." So there's this tension. And listen, some private blockchains make a lot of sense. I always thought, when I first started, if we could get all the currency banks to settle everything on blockchain. And of course, that never happened, but it should have happened. You have this push with CD -- CBDCs now, right? The Chinese and lots of the developing market countries are going to move to CBDCs. What do CBDCs do in the long run? Well, if you're hungry, you can sell directly with China with CBC to CBDC instead of going through JPMorgan or Citibank and going euro -- HUF to euro, euro to dollar, dollar to the Chinese renminbi, right? There's 3 steps to go from Hungary to renminbi versus one step if you have the CBDC architecture. And so the entire foreign exchange world could get disrupted if countries look to their own blockchain -- their own CBDC. And so there's a ton at stake, and banks don't like to lose money.

Yes. Let me ask you about regulatory. That's a big topic, obviously, for good reason these days. You touched on this before. It seems like the regulators -- felt to me like pre-FTX, even the Democrats were kind of coming around. And it just feels like there's been a little -- there's been a backlash. And so what is the risk here that the needle does not get threaded in the regulation and D.C. is such -- in such grid lock that an intelligent framework never gets really passed such that it becomes this perpetual regulation by enforcement? Like what is the -- I guess the real question here, Mike, is what is the risk that the regulatory regime does not get sort of settled here in such a way that it actually permanently damages or impairs the industry?

It's not zero, and it's getting higher. Let me give like my framework. You're dead right. The Democrats realized there are 50 million Americans that care about crypto a lot. It's a bad position to be anti-crypto as a politician. And you saw a real shift to bipartisan solutions. A lot of bills that were in the hopper in the last part of the year. . And then Sam happened in FTX. And it was almost like the photos came out with Sam dressed as Santa Claus and all the Democrat sitting on his lap, starting with Biden with his #1 donor to his campaign, Sam being the #1 donor to the Democratic midterm campaign. And they had egg on their face. Gensler having had private meetings. The CFTC having -- had private meetings. Sam getting this kind of special -- or at least perceived special treatment. And it was embarrassing and people were angry. And then listen, I was angry. He set our industry back a long way. And so now you have Elizabeth Warren, who's never liked crypto for her own reasons, filling the void with the SEC and others, really pushing this operation showpoint to like -- Janet Yellen is part of it to kind of choke off crypto oxygen. It's a terrible decision from a U.S. policy maker and a Democrat. It's a terrible decision, period. And it's throwing the baby out with the bathwater. I don't think they can do permanent damage. And I'd tell you, I have hoped that we have an independent judiciary. You'll see a lot of these cases come through. When you read through some of the Wells notices and some of the cases the SC hear, they're weak. I mean on the one hand, they're hitting Paxos with BUSD being a security. And a week later or 3 weeks later, the CFTC is writing in their lawsuit that BUSD is a commodity. Can it be both? I guess it could be both, but that's a pretty weird position. And I have hoped that, that will have some clarity through the judicial process. I also know that the Democrats in the House and in the Senate are riled up about this issue. Even closing Signature Bank versus not closing Republic Bank or others seems to be political. And how we run our bureaucracy, how we manage banking relationships and which one lives and which one does should not be political. I don't care if they gave loans to Donald Trump or the real estate community that liked Donald Trump or if they were -- 50% of the deposits were engaged in crypto, we should have the same yardstick to close one bank, lets close another. And it doesn't feel like that happened. I don't have the facts. [ Frank ] was on the board and talked to a lot of friends associated with that space. And so I think there's an anger that's screwing up. I think maybe the administration is overplaying their hand. And so I'm not looking for anything positive in the next few months by any stretch, but I don't think they can be permanent damage. And the price action on the community is showing you two things. People are going to move more stuff offshore, which is a shame for the U.S. But all of this high jinks, all of this bad-faith acting, just it galvanizes the community. Prices are higher today than they were before the CFTC lawsuit was filed.

Yes. I wanted to touch on something that you -- in the context of regulation that came up on your recent earnings call, which is something that you mentioned in the context of checks and balances in the government. And do you think there are sufficient sort of checks and balances such that there can't be -- with this specific issue, you won't get one sort of dominant power center emerging, maybe that's Gensler, maybe that's whomever, who basically is able to [ ride rough strides ] over their balances, where you have a tension between Congress, between Republicans, between this committee, that committee, the CFTC, the SEC that's going to kind of keep things in check before maybe a more productive framework sort of evolves?

Well, I certainly am hoping we have that balance, right? You've got guys like Tom Emmer, the Whip in the House, who has been very vocal and outspoken pro crypto. The House is going to call Gensler, I think, next week, and the Financial Services Committee is going to be hold hearings and pressure him. And so he's going to be under a lot of heat. And I do think, like I said, the -- we'll see what the courts end up doing on some of these cases. But the Biden administration has been very clear that they are nervous about crypto. And again, I think it's a terrible stance. I think it's going to turn off voters. I'm hoping that this keeps us as a stalemate. I don't think any legislation gets done, but this regulation, by 1,000 cuts, is damaging. Will it kill off our industry? Absolutely not. Like I said, more people are moving more things offshore. I really appreciate Brian Armstrong taking the fight public, say, "Hey, we're going to play poker with our cards showing." Like this is how confident we feel that we're on the side of right. And so it's very strange what the SEC has done, right? Like these Wells noises without detail in them, them leaking or potentially leaking these things, it's not the way our government is supposed to function.

Let's switch over to Galaxy -- some Galaxy-specific questions. I was, as usual, super insightful on the industry and on the regulatory environment. I guess, first and foremost, are there any highlights from the earnings call this week you want to share about Galaxy's go-forward strategy?

Yes. Listen, I think -- I mean, the highlight in my mind was book probably bottomed. Partners equity probably bottomed in the fourth quarter, and it had a nice rebound this year. We mentioned on the call, so it's public information, our book is about [ 6 60, 6 70 ] Canada -- Canadian. Our stock is trading at CAD 4. And so that seems to be a disconnect that in some ways, as explained by the fact that the crypto community has come back, but maybe the retail equity community in Canada or in the U.S. [ advisory ] stock hasn't. Frustrating as a guy whose job is to get the stock price higher. Our operating businesses were profitable in the first quarter. We're going to reconfigure our financials for next quarter to make it much more clear around our 3 businesses, right? We have the markets business, which will drive earnings this year. The biggest thing we're doing there is Galaxy won a prime offering, which we think will be best in breed. That's going to start rolling out in the next month or so. And by the end of the year, we'll hopefully have a real prime business. Our second business is really infrastructure. We spent $65 million, plus some improvements on a data center in Texas called Helios. We're plugging in minds every day. And so I expect that to be a positive-EBITDA business, a significantly positive-EBITDA business by the end of the year on a run rate basis and to make money this year. And so providing infrastructure for the overall space, I think, is really important. And the third is Asset Management. This will be a big challenge this year, growing assets in a world where venture money is going to be hard to get. But we do see a line of sight on money in a fund that does secondaries, i.e, buys distressed pieces of paper in our space. We're also announcing partnerships. We've got a partnership with that's kicked off to distribute our product. We're very close to announcing one in Europe with a big asset manager. And so we're doing all the right things. And I kind of have a feeling that by the end of the year, all 3 of those businesses have good stories to tell and our balance sheet, hopefully, continues to grow. Like again, I put it in context, we made $1 billion -- we made $400 million at $1.750 billion seven fifty and then we lost $1 billion. And a lot of that was mark-to-market. That loss last year was a lot of marking stuff back down. And so the book is -- it's a better book, if you want to think about it having marked a lot of the privates down.

Did any of the turmoil in the banking system, Signature dropping out, what kind of an impact did that have on your business?

It certainly cost me a weekend. Listen, we were good enough, lucky enough, smart enough to have multiple banking relationships, multiple brokerage relationships. And so while Signature and Silvergate were important counterparties for us, we also had Bank of New York and others and so didn't have that crisis of, "Oh, God, where are we going to put our money." We took advantage in lots of ways of that disconnect. We had our single largest volume days in our customer franchise. We provided liquidity where others weren't willing to provide liquidity.and we made a whole lot of money over that weekend. And so I feel really good about that weekend. I don't feel good about the crypto space losing the Signature platform or the Silvergate platform, right? That -- those platforms allowed 24-hour participation. It does give us a window with our prime to be a more important player. And so kind of bad [ feel ] for the overall industry might be good for Galaxy. But you don't like to see that industry architecture go away that quickly.

Yes. We have time for one more question here, and it's going to be a big one. Tell us about Galaxy and the evolution of Galaxy, how you're looking at it over the next few years? Are you thinking of sort of like the segments you're in are the ones you're in and you just kind of develop those? Is there going to be further diversification? Like what does Galaxy look like in a few years?

Well, one of the issues of having a stock that trades poorly is it doesn't give you the right to use your currency to do anything fun. And so our first priority is to execute on our plan in these 3 segments and tell that story well enough, so people start believing in it. And that part of that is actually, at one point, moving into the U.S. market and where the liquidity really is because it's frustrating to have a stock to trade so poorly. Listen, there are lots of amazing businesses that I could see adding on. I just don't have a currency that makes sense to do it at this point. And I say that because there was so much talent that went into the space. People were building businesses another capital starved. And so I think unless something changes really quickly, you're going to have great pools of talent with real niches that are good plug-ons that in small size, we can do. We did it with GK8, which can be a great, great addition to our firm. But any kind of big size, we're not in a position to do it until we get our currency trading better.

That's terrific. Listen, Mike, as usual, always good to talk to you. Thanks so much for sharing some of your wisdom and insights with us again, and we will be in touch. Really appreciate it.

Appreciate it.