K33 AB (publ) (K33) Earnings Call Transcript & Summary

Welcome to today's presentation and the Q&A session that will follow. Joining us is Torbjørn Bull Jenssen, CEO of K33 formerly known as Arcario. So the digital asset sector is evolving rapidly and we see companies like K33 shaping how institutions and investors engage with this emerging market. So now let's take a closer look at K33's market and strategy and the company's vision for the future. So Torbjørn Bull Jenssen, thank you for being here, and let's begin.

Thank you so much. So K33 is a company that works to lead the future of digital asset wealth management. And the way we're going about that is by positioning K33 as the preferred partner for financial institutions. The digital asset market was a retail-driven market for the longest time. But what we are witnessing right now is the emergence of this as a new investment class taken seriously by specifically institutional investors. K33 has been operational for many years, and there are different names [ Carrie Broly ] and Arcario. That means that we have many years of experience working with high net worth individuals, family offices, we already have different hedge funds. Nordic brokers using our services, taking benefit from our superior liquidity insight from our market research. We're now building on this as we build out the tools needed for financial institutions to offer crypto services to their clients. And as a partner, our goal is to distribute our services through these financial institutions, enable them to sell our products to their clients and capitalize on their massive market opportunity represented by wealth management services for digital assets. One of our key advantages is our research arm. We are internationally recognized for our market insights. Our analysts are invited to Bloomberg TV. We are reported weekly basis by Tier 1 financial outlets, and we are distributing our research through platforms like Bloomberg, Refinitiv and Infront. That ensures that we are in front of the right clients, on the platforms where they are today. And we are, therefore, both building a brand and recognition with these clients, while we're also providing the insight and need to be able to engage with the digital asset space in an informed and intelligent manner. Zooming out and looking at the market, it's important to realize that the digital asset market is probably one of the fastest-growing markets in the world right now. There are many ways to quantify this. But from our perspective, looking at the total asset value in the sector is the best metric. The cryptocurrency market now has a valuation of around $3.5 trillion, this is the basis for all the financial services that we can build on top of these assets. This is the basis for trading for custody for investment advice for lending, and it's these services that we build out. It's also this capital base that attracts asset managers to the space. This is where they can, over time, charge AUM-based fees. And as I said, there's a big shift happening as we speak. While the market used to be driven by retail investors, it's now driven by institutions and even nation states. The U.S. has actually declared or Donald Trump President elect, as declared that the U.S. will establish Bitcoin as a strategic reserve and this clearly represents a major shift in the view of this industry. Looking then at the wealth management side, it's a market that is often overlooked by a lot of start-ups and fintech companies. But that is a shame because this is a highly lucrative market. Globally, the wealth management market is estimated to generate $1.5 trillion in annual revenue. If you estimate or assume that the average allocation to digital asset will reach 4% in line with other alternative investments, we are looking at an annual revenue potential from digital asset wealth management services of around $100 billion a year. And assuming 4% is actually on the conservative side, given the growth rate we're seeing of this sector and also estimates from research houses like KPMG, it's more likely to exceed the 4%. For K33, the primarily targeting the European market. The $25 billion the quarter of the total possible revenue potential is the most relevant for us. And we're not going to sit on the side and wait for this market to evolve. We're going to drive the evolvement of this market. This is the revenue potential for the asset managers that we will help unlock by positioning ourselves as a partner, enabling them to move into this space and expand their services into digital assets as well. And the challenge that financial institutions are facing is that they are seeing the client demand, that's very clear. That's very well identified. But they don't have the expertise, and they don't have the products to fully meet this demand. We've recently seen the launch of exchange-traded products like ETF in the U.S., attracting a lot of capital almost overnight due to the high client demand. The challenge with ETF, however, is that they are not traded 24/7. It doesn't give you access to [ D5 ] or any of the services linked to natively handling crypto assets. K33 on the other hand, is dealing with real crypto assets with 24/7 liquidity and can therefore offer competitive and compelling products complementing the more traditional ETF approach to packetizing digital asset exposure. So in K33, we are building the future, where every financial institution will have a digital asset offering, and we'll build that over the coming years because the revenue potential from that is too big, and the client demand is too big. The challenge is that they lack the industry expertise and they don't have the product. And a lot of these institutions will therefore prefer a partner to have a faster time to market and to be able to work with someone who really knows the industry, who has a proven track record, and that is where K33 comes in. We already have the products. We are already working with the private wealth clients. We have clients from all of the different wealth managers that are clients of ours. We have wealth managers that advise their clients to reach out to us because they can't help them today. And building the services for these clients is what's enabled us to now identify the products that the financial institutions want to distribute tomorrow. Also, we are right now in dialogue with several financial institutions, wealth managers and figuring out precisely how we can optimize our product so that it fits into their setup. And our service is highly appreciated. We launched K33 1 year ago in Q3, 2023. Since then, K33 has grown around 800% in activity and that has been in the market, where the volumes otherwise have been flat. Looking ahead, we expect to continue to see a strong growth trend. Of course, with a lot of volatility. I mean the equipment industry is highly volatile. But from growing first with private clients and eventually with institutions, we expect to be able to grow this multifold in the years to come. And one of our unique advantages is our track record from having been operational for several years, that ensures that we are fully licensed already. If you start a company from scratch now and want to apply for a license, you'll probably look at least a year or more in lead time until he can obtain such a license. Within a part of the working group preparing for MiCA. We are therefore fully MiCA ready and will apply for a license once that becomes applicable in Norway. We have multiple European banking partners and have very efficient payment rails. That set us aside from a lot of our competitors from the crypto side. We've also optimized our FX, which is highly important when you work with the European market. The liquidity in the crypto market is mainly in the dollar peers, which means that if you're going from a local currency like Norwegian kroners, Swedish pound or even euro, you take a high cost if you let the bank do the FX for you. With K33 we are pricing digital assets directly in those local currencies, enabling us to charge healthy margins, while offering a competitive price to our clients. We also optimized our execution on the crypto side. We have multiple exchange accounts, multiple liquidity providers. We always make sure to source the most effective execution or the best price for our clients. And this is something that really differentiates us from a lot of the traditional financial players. They might have good FX rails -- sorry, payment rails and FX setups, but they lack the industry expertise and lack the industry partnerships that we have. And we have a track record of really knowing what's happening in this industry and of giving advice and giving good guidance for investments. And this is really reflected by the recognition of our research on. We are covered by Tier 1 financial outlets on a weekly basis. Outlets like the Financial Times, Bloomberg, Forbes. We've been approved by both Bloomberg, Infront and Refinitiv. So we're distributing our research through these platforms. And this gives us very valuable insight. We can see who is working in different financial institutions and who is reading our research. We know which person in which organization that is kind of already following our work. And in platforms like Infront, we are distributing research today, but our trading platform is fully interoperable, meaning that we can integrate trading capabilities tomorrow. We have all the APIs ready so that clients of a traditional broker can trade through their Infront, if they prefer that, but to execute on K33 in the future. The research is also a great way to establish a relationship with financial institutions. Because there are a lot of compliance overhead and headaches linked to launching a crypto investment product. But the institutions already have the ETFs, what they like is the market insights. We can, therefore, start by providing research, maybe in the white labeled agreement, so they can start advising their clients when they invest in ETFs and from there, we can expand to more interesting products like custody, trading and advisory, the directly for spot crypto exposure. So looking at our road map, we spent all of 2024 of tweaking and optimizing our product. That's the basis for the growth we've seen through this year. Moving into 2025, we'll continue the iterative product development. We'll continue to have a main focus on private clients, but we will expand from a Norwegian focus to a pan-European focus. Our platform has been built with a global reach from day 1. We have clients already from all over Europe, and there's no lockers for us to expand, especially with MiCA, expanding to the European market will become even more appealing as MiCA license is pass portable. During 2025 and mainly driven by MiCA as well, we anticipate working closer and closer with wealth managers, brokers and other financial institutions to prepare for the first partnerships. We are technically ready. We have the liquidity and pricing capabilities institutions are slow moving. But with MiCA creating regulatory clarity, we expect that the first to move maybe in '25 or maybe in '26, regardless of when they are ready to move. We will be there. I mean we're ready to move into the sector with them. Looking further into the future, 2026 and onwards, the whole plan is to tweak K33 from a service primarily serving private clients today, the service primarily working with other institutions. We are not going to become a bank ourselves because we don't want to compete with the banks. We're going to be the partner that will enable the banks to distribute and reach their clients with digital asset products. We will not have hundreds and thousands of end users. We will have a few powerful users, large private clients, large family offices, institutions. And then through those institutions, we will be able to reach hundreds and thousands of underlying clients. That is how we're going to make this business highly scalable. We built on the tech. We have all the compliance then, and we are ready to grow with this industry and take part of the next chapter. So to sum it up, K33 is today a research-led digital asset brokerage. We're already offering superior pricing for those who want to buy, sell and store digital assets. We are mainly working with private wealth clients, and we're increasingly working with financial institutions preparing for partnerships, which will enable us to scale this much more effectively. From the financial institutions point of view, digital assets represents a very lucrative revenue potential. It's a new revenue stream that is not cannibalizing the revenue streams they have today, and the client demand is massive. That in combination with MiCA creating regulatory clarity makes us extremely optimistic for the possibilities, especially the European market moving ahead. And in K33, we are ready to not only partake in this journey, but I should drive this journey.

Thank you. So the listed company is now being renamed to K33. What does it mean to the shareholders to begin with?

So when we went public originally under the name Arcane Crypto, we were a portfolio company of many different businesses working with the financial services linked to digital assets. The plan was always to consolidate parts of that business, and that's what we did when we unified K33 bringing together our asset management, our research and the brokerage. And the launch, as I said, K33 a year ago, and since then, K33 has really shown strong growth. K33 is now taking over in many ways, Arcario, which means that it's not only a name change, but it's also a reflection of fully betting on K33 going ahead. So this is the result of the many years of building a portfolio, figuring out exactly, where this industry is heading. We're now ready to commit fully to K33 and how that's reflected by also the mother company being named K33.

Okay. So K33 was a platform that gained the name of the company?

Yes, in many way. So it was developed as a product brand first. And we now see that, that product brand truly has the potential to kind of drive the whole business and become the sole focus of the whole company.

Okay. And what inspires you to move to take charge of K33? And what has -- how has your experience shaped the company so far?

So both for myself and a lot of my colleagues, we've been in crypto assets and trading that for a long time. And we never really found a service that we were satisfied with, like we saw some strength with some services, some weaknesses with others. And what we've done with K33 is that we build the service we wanted for ourselves. I'm using K33 myself. I have the multisig set-up stored in my own Bitcoins. I don't do that anymore. I leverage our Vault offering. When I buy more Bitcoin I do that through K33, not because I'm the CEO, but because it's the best service for me out there. So we built it based on the expertise we have and the experience we have, we built a service that we wish was there when we started and then we are bringing that to others.

So do you personally invest in K33 in the digital assets?

Yes. So I should maybe not give finance advice to have a concentrated portfolio themselves, but apart from kind of investment in the house, most of my assets are either in Bitcoin or in K33. I'm extremely bullish on the development of K33 and recently acquired a lot more shares.

So can you explain to us how does K33 long-term vision aligned to the evolving digital asset landscape?

So you see now a bifurcation of the digital asset landscape. On the 1 hand, get more and more of the truly decentralized truly unregulated kind of wild digital asset space. And I think that will continue to grow. The business will likely grow outside of, for instance, EU as a jurisdiction -- then on the other side of the market, we're starting to see this asset class becoming a part of the financial system and also the financial system actually coming into this asset class. This other side is much more regulated. It's much more ordered, and we did strengthen businesses. And it's this side that K33 now helps drive forward and will be a part of.

Okay. And let's dive into your business model and the market strategy. First, you can see that K33 reduced the bid-ask spreads to 0.45%. And that was -- that meant that you're outperforming major players like Coinbase and Kraken, how did you achieve this and how sustainable is it?

So 1 of the things that we really didn't like with the priorities out there is that they are way too expensive. They're fleasing retail customers by overcharging and whole crypto industry to date has been built around charging exuberant markets and fees. From our point of view, the exchange really needs to have way lower cost and then you monetize on more AUM-driven models. From K33's point of view, we've actually been able to lower the effective spread for end clients, improving the pricing, as you say, and being competitive and cheaper even than Coinbase and Kraken by optimizing the FX. So when you trade on Coinbase, you would have to deposit Euro or Dollars. And if you want to trade it in the most [ liquid ] period you have to exchange those Euros into Dollars. That is a pretty high cost for U.S. and in Coinbase, if you do that with your bank. We, on the other hand, have optimized that we barely pay for the FX exchange, which means that we can make that margin instead of your bank making that margin and then we can share some of that savings with the end clients. So the fact that we price competitively directly in the local currency is the source to how we can have both superior pricing and a healthy margin for ourselves.

Do you emphasize very much that you have a focus in financial institutions as a [ crypto ] groups. But why do you believe that those institutions will collaborate like actors like K33 instead of building the in-house platforms for their clients.

Yes. So we can look internationally. We already see the largest financial institutions in the world, launching crypto services. And none of them have built it in us. All of them have found a partner and we, of course, believe that we'll be the same for Nordic and European players and also especially the smaller players. Also working with a partner as an institution or financial service provider, you can outsource more of the compliance risk to us. We can find a division of labor, where we can carry more of the crypto-specific compliance-related tasks. We have many years of experience of doing that and then back in the shield the traditional player from unwanted risk. In addition, we have the products. We have proven for the same end clients that we have a market fit. And if you build yourself in-house. First, we have to get all of the services up and running. And then you have to start the product development process. That will take years. And seeing also from other shifts in the financial industry, there might be some players that are building almost in-house, but most other players will want a faster time to market and lower risk, and that's what we can offer.

Okay. And let's talk about the markets. How is the global rollout progressing? And what markets will you prioritize?

So for this year, we have prioritized the Norwegian market, but we always build the service as a global service. We will have full support for dollars, Franc, Pounds, Euros, since day one. Our service been built in English. We never optimized by -- for the core Norwegian market by building it out in Norwegian. Our onboarding is available to people all over the world, and we already have users all over the world. So when I say that we're going to shift the focus more broadly out to the European market, that doesn't come with any investment in the product. That is only like a marketing focus. We see also that we have clients from countries like Germany, Switzerland, Spain already. And we are right now kind of figuring out precisely where to target. But what is important to be aware of is that when it comes to private wealth, that is not really a geographic market as much as it's a segment. It's the same people that you meet in London, that you meet in [ cities ] that you meet in Singapore. It's a same family offices. It's a same kind of -- the market is not defined as much by geography as it is for retail as it is by type of investors, type of clients.

And the K33 is known for its research-driven approach, how can you capitalize on this competitive edge.

So on the 1 hand, it gives us a lot of visibility and also credibility. Where we differentiate ourselves is that we are willing to call Bulls***. If we think a project is bad. We're going to write that we think is bad investment. A lot of the other providers, who I think so-called research are more writing in the tone of voice that the project itself would want. They're more presenting the token or the investment opportunity from the point of view of that project to not step on anyone's toes. Long term, we don't believe that we can build credibility that way. We have to give clear advice to our audience, and that gives us also credibility over time. The other is, as I mentioned in the presentation, is that the research both gives us a way to see, which institutions have employees that are following us, where do we have the best possibility of kind of starting a sales process, but also is a way to secure partnerships. I mean we had Boards sitting in smaller wealth management companies asking for or ordering a bespoke market mapping reports from us. So when we do the mapping of the market opportunity, we present that to the Board, who do you think they will ask when they are ready to actually go live with the product.

Okay. Let's shift to market trends. the big question. How do political figures such as Donald Trump reportedly supporting digital assets. How does that shape the market and the regulations in the market?

So I think it's accelerating the development. But I think it's also important to be aware that Trump didn't switch to be positive to crypto because his changed his view. He switched to being positive of crypto because of the number of users has already been invested. Because of the size of this industry, that underlying driver would have been there regardless of who won the U.S. election. That underlying driver is there regardless of whether regulatory update is kind of good or bad for industry. So that underlying momentum is there regardless. That said, when you see those type of figures embracing this and taking seriously, it clearly accelerates the process of taking crypto from something obscure, something retail-driven into an institutional asset class. And it's interesting to notice that not only have Trump declared that Bitcoin shall become a strategic reserve. The U.S. Federal Reserve Chairman has recently answered that he views Bitcoin as a volatile asset with a proper asset like gold. And we also see leaders of other countries like Putin in Russia talking about Bitcoin as survivable alternative to dollar reserves. This would not have been the case a few years ago. And this really represents the massive shift that we are about to see in the industry.

The MiCA regulations, you mentioned them in your presentation, the regulations in Europe, they are seen as a turning point, obviously. But could you briefly explain a little bit first, what is MiCA? What does it entail? Also what opportunities does it create for K33?

So MiCA is a comprehensive regulatory framework for service providers engaging in the digital asset industry. Before MiCA a lot of people would say that the industry is unregulated. That's not true. There's a lot of regulation that's applied, but there was no specific digital asset regulation. And that really made it hard for banks to their dealing with the industry. With MiCA, they will actually dare to move into the industry. And the framework is very similar to MiFID II that we have for securities. And the fact that it is so similar and so comprehensive, really accelerates, call it, a regulated part of this industry. It may push part of the unregulated truly decentralized parts out of Europe. But at the same time, it will really accelerate the institutional adoption. Also of particular interest before MiCA, if you were a bank or wealth manager, I want to do a crypto product, you would have to apply for a separate license under the AML groups. Under MiCA, they don't need a new license. They only need to update their policies according to the products they offer. That's also a major win.

And how prepared are -- is the K33 for MiCA and for other emerging regulations?

I mean we built K33 platform with compliance at the heart from day 1. And what really gives us an edge is that we have extremely efficient technology supporting our compliance work, which means that we can scale and continue to stay compliant without having a ballooning compliance department or ballooning compliance costs. A lot of our competitors from the crypto side have been along around much longer. They have legacy issues. They have in-house built tech platforms. They have in-house built compliance solutions, whereas we've been able to really pick from top of the shelf, the best Software-as-a-Service solutions, combining those in a very lean, very efficient setup, which enables us to also be more future-proof for the tweaks that are to come with further regulation.

What impact do you see from institutional products such as Bitcoin, ETFs.

I mean those are also highly legitimizing the sector. I mean, of course, also the appetite for the Bitcoin ETF has helped drive up the prices, which helps accelerate everything in this sector. But the fact that now the Bitcoin ETFs for instance, that of BlackRock is larger than the gold ETF, really sends a clear signal to the whole financial system. Clients want this. There's massive relative needed to be made. And if you don't have a Bitcoin or digital asset strategy, you're going to lose out big time over the next 5 years.

So lets look into risk management and future resilience. Volatility, as you have mentioned a few times in your presentation, is inherent in digital assets. How does K33 protect this client and itself, of course, from sudden shifts in the market?

So volatility is a part of what attracts the investors. So -- there's no kind of protecting like if a client wants to buy and hold Bitcoin. That client also want like has to have that exposure to that price going up now. What they don't want is the risk of losing their funds. So we are at all times keeping full reserves. We have transparency on our management of client funds. We have full segregation, which means that client funds would be fully protected and the Norwegian law should we end up in a bankruptcy for some new reason. And we have security at the heart of what we're doing. And the really powerful thing with digital assets is that we can have the same security as the largest institutions. We're using the same software provider as Robinhood is doing for securing these Crypto assets. On the trading platform, we're using the same training technology as Nomura based digital -- Laser digital is using. So we're using the top-quality products to ensure the maximum amount of security. We add transparency. We are fully audited in Norway. Which -- and we are structuring it in a way that always have the protection of client assets as a core value.

Looking forward, Torbjorn, what is the next expected milestone would you say, for K33?

So very short term, we're going to launch instantaneous bank deposits, 24/7. So that's leveraging kind of PSD2, European kind of payment directive, and which will enable a client to deposit, say, SEK 2 million, SEK 20 million on a Sunday and then enter the market instantaneously. Looking a little bit further ahead at the start of next year, we will launch the staking for those clients that have a vault service with us. And we will launch things like limit orders, leveraging kind of algo setups to enable that. So we continue to strengthen the trading product. Longer term, the kind of the really important milestones to look forward to as an investor in K33 will be the partnerships with financial institutions and the dialogues related to that.

And -- so finally, what would you say to investors looking for long-term growth in the digital assets sector?

While the sector is clearly here to stay, there's no indication that the growth will flow any time soon. Investing in this asset is, of course, 1 way to go about it, but K33 is ready to not only follow this sector, but we continue to outgrow it.

Okay. Thank you Torbjorn for your presentation.

Thank you. Thanks for the opportunity.