Water Tower Research. So today I'm joined by Bakkt's custody experts, Andy Sabola, the Senior Director of Business Development, Ray Kamrath, Head of Institutional Solutions, and Sam Auch, Group Product Manager for Institutional Services. I should mention that Bakkt's safe harbor statements can be found on their website. Well, guys, welcome. Thanks so much for spending the time. Maybe we should just start with some introductions. Can you tell everybody, you know, your background, what got you to Bakkt, and, you know, what's your role at the company? I think, okay, I'll start. Thanks, John. My name's Ray Kamrath. I'm the head of the institutional business at Bakkt. I'm new to the firm, just a couple of weeks. Very excited to be around. I've got a 25-year-30-year career in capital markets, mostly in foreign exchange, e-trading, running global businesses. Did some time running prime brokerage. Got into crypto in 2018, and loving the space and bent on building infrastructure so we can build the ecosystem and that's part of the mission here at Bakkt, and happy to be here. Thanks. Sounds good. I'm Andy Sabola. I 15 years of what we now call TradFi, traditional finance, on the buy side in FX and fixed income. Was travelling 40 weeks a year and burnt out, and so I quit and opened a gelato shop in Austin, Texas, and ran that for some time, until a former boss of mine sent me a white paper to read about Bitcoin and suddenly got very interested and ended up coming back to New York in 2019 to work in the space. Was at Copper before Bakkt and made friends with Sam here, and he had a door open for me, and so I took it. So, excited to be here. Great. Awesome. Yeah. So, Sam Auch, Group Product Manager overseeing institutional services, really focused on our qualified custody product, as well as, developing the trading arm of our institutional services products. My career started in accounting and finance, all crypto-focused, so primarily building out the crypto arm or helping to build out the crypto arm of RSM, the accounting firm's, audit and consulting business. Moving from there a couple of years later into product, helping to develop products at Exodus, a crypto wallet for retail users. And then finally, I've been at Bakkt for about two years. Excellent. So you recently relaunched your custody platform with some enhanced features. Maybe you can give us a little more color or delve into that a little more, what it looks like, and why the market should be excited about this? Yeah, absolutely. So Bakkt, about a month ago, relaunched, like you said, our custody product. The focus there was to create a platform to really build on. Bakkt was originally the custody provider for the Intercontinental Exchange's futures product. We did a lot of really great work around there, there with security and being very Bitcoin-focused. We needed to expand the service offering that product could support through the replatforming and addition of new assets, which we have coming in a couple of weeks. And the idea being that the custody product should be the main building block that everything derives from. Everything starts with wallets on a blockchain. The custody product itself is primarily the management of private keys behind that, but we really wanted to ensure that the way that we had the product structured, we could support more innovative products in the future, and that was really our focus. Great. And what's been the feedback from clients and prospects on that relaunched platform, platform? The entire relaunch was focused on the desires of our clients, so it was really focused on customer feedback before we even got started. It was designed to address a lot of the key issues that we had, primarily not having APIs, creating segregated wallets, and creating an easy way to add assets. And so we addressed all those issues, and we're marching into 2024 with a lot of those enhancements either already done or very close to being launched. Andy, were you seeing any specific in terms of what clients are saying? Yeah, I mean, I think going into what Sam was saying is we had a bunch of, you know, legacy clients who were using us for cold custody. The original product was so purpose-built for ICE's futures product, that people sort of, you know, sort of thought of us in one very specific role, one very specific bucket. And so we've actually been able to attract some folks who maybe passed on us in the past because we didn't have the full feature set that they expected from an institutional custodian. So it's been net positive and, you know, definitely putting us back on the radar, where it's been kind of quiet for the past couple of years. Right. So following up on that, Andy, what other feedback are you hearing, and why are, you know, clients choosing you rather than competitors? Yeah, it's kind of funny. A journalist reached out to me and said, literally, "Are you guys real?" Because, you know, it, it seemed like we came out of nowhere. We have a SOC audit. We have all of our MTLs in the states that require them. We have... We're publicly traded. You know, that, that's been huge, actually, in terms of due diligence from prospects. We check off, you know, we're NYC NYDFS-regulated QC. So, you know, all of these sort of, like, regulatory check marks that take years and years to acquire and achieve, you know, we have. We just have sort of been quiet for a minute. And so, we're sort of coming out, lots of press around the new custody platform, lots of client referrals. So yeah, it's been, it's been really great. You know, we sort of talk about ourselves like we're, we're a baby Coinbase, and we're the only other NYDFS-regulated QC that's publicly traded in the U.S. besides Coinbase. So very positive feedback. Great. In addition to that, you've also got some new relationships, I think, Fireblocks and Unchained, Yeah, yeah Maybe talk more about that. Yeah. Love working with both of those teams. I mean, Fireblocks, their network is massive. But they're not a qualified custodian. And if you're an RIA in the U.S., that's a mandatory piece of your business. So it's a really natural marriage of Fireblocks's workspace and connectivity to all these different parties, but people can still say, "Yeah, wait, wait a second, but I need QC." And so now we're part of their QC network, and they've announced this off-chain or off-exchange product that basically allows customers to stay in cold custody, API to an exchange, lock those assets, trade all day, and then settle. So, you know, those kind of products that sort of evolved post-FTX, where people realized the need to keep assets off their exchange and in cold custody. So, that's been super positive. Then Unchained, based out of Austin, they're a Bitcoin-focused shop that we do collaborative custody with. So it still allows the client who may want to have more control of their keys to sort of take out an insurance policy on themselves. They have, you know, Unchained sort of doing the white glove service piece, and they've got a very broad product set, and the client in the middle, and then Bakkt holding on to one of the key shares. So it allows them to sort of have the best of both worlds, their own personal control, but then two institutions that have their back. Great. Andy and John, if I could just add a little color to the Fireblocks piece. In the RIA space, everybody is watching a potential change in the SEC regulatory requirements for custody. And if the proposed custody rules go into effect, RIAs that manage over a certain amount will be required to leave assets for their clients in qualified custody. A lot of infrastructure and access to markets and liquidity has been built outside of QC, and what you're seeing on it as a trend is infrastructure being built out of QC in front of this potential rule change. Now, Fireblocks is one of the biggest infrastructure providers on the globe and have an extensive, elaborate network, and we're really psyched to be the only U.S. qualified custodian that really can partner with them for off-exchange settlement. In U.S. markets, that's gonna be a real, really interesting developing partnership there for RIAs, particularly, and of all sizes. You know, whether they're just managing family office money or they're running a hedge fund, this is gonna be a big, big thing to keep your eye on. Well, Ray, to follow on with that, maybe you can go a little more into the institutional side and what the capabilities are at Bakkt on the institutional side. So I have a view, and I think everyone at Bakkt has a view, that it starts with, you know, base-level infrastructure. The most important thing is don't lose the assets, and so- Right ... we pride ourselves with our custody solution. But then there's other things that all market participants care about: How do I trade these assets? How do I... What can I do with them to add value to my clients or to my business? And there's a vertical above custody that's really important and value-added. And so now that we have kind of rolled out the new Bakkt, you know, version two of our custody, and it's and that's demonstrating product fit, now we're, from a strategy perspective, our over-the-horizon launches are gonna be related to building capabilities in trading and servicing of assets. Like, if you think about custody in traditional markets, you have custody and then a whole surround sound of products and services that evolve out of that, and those are really important to clients. So on the institutional side, we have a lot of plans to move up in that vertical to become more of a solution, a general solution to all, you know, than just store my assets. So we're really excited about what we can do there, about where the opportunities are. There's still a tremendous amount of sophistication that needs to migrate into digital assets in the trading side to lower costs, make executions cheaper for clients, and this is all the area that we're gonna be bringing some TradFi expertise and some of the things that I've done at Goldman and at Jefferies in previous jobs. But we're gonna do some exciting things there yet. It's a little early to announce that stuff, but that's definitely where we're going. More than an axle, right, Ray? Yeah. I mean, if you're prompting me on that, I kind of see custody as an axle on a car. Really important, maybe the foundational piece of a solution, which the car itself is a solution, but you need all the pieces to really pull it together. And so we've got the most amazing axle, if you need an axle, and a lot of people in the markets do. ETF providers need axles, brokers need axles. You know, a lot of people will want just an axle, but there's a lot of clients in the space that will want solutions. ... And one thing I wanted to mention, too, about- So we- Oh, sorry. So I was just gonna say, we can get these solutions through partnerships and in organic build. That's, like, the idea. Let's build a solution, and part of that will be trading and market access and stuff like that. I was just thinking, John, when you asked about, you know, folks coming to us versus competitors. You know, when I was working on a $9 billion unconstrained fixed income fund for most of my career, we had three different custodians because each of them had an expertise in a different asset class or a different geographical region. I would say that we're friendly with our competitors, like, we got homies at BitGo and Anchorage and everywhere else. So we know, especially going into this ETF approval season, hopefully, that everybody's gonna have two or three vendors that they need. They're gonna need the belt and the suspenders. We are there with our competitors, you know, trying to offer the best solutions possible, depending what the needs are for the client. Speaking of ETFs and regulatory changes, maybe one question for each of you is: what are you most excited about coming up in the custody space? Sam, you wanna start us off? Yeah, definitely. I think kind of going back to that axle analogy, I really think that what's exciting about it is you're gonna see a lot of people coming into the space looking for strong partners in custody. And custody is really the beachhead. It's where things start, and that gives them the opportunity to form a relationship with Bakkt, which is incredibly intimate and trustworthy, which is, like, almost starting with the strongest form of, agreement. You're trusting somebody with your entire fund, your entire company, essentially. So starting from there and then building up and expanding out, I think is incredibly exciting. I also think that what you see a lot of times is a kind of push and pull when it comes to how traditional markets act and how crypto markets are being structured. So you've got a lot of people in traditional markets who say, "You know, we do things this way." And then you've got this crypto mentality where you say, "Well, like, we're the cool kids on the block. We're, like, the new ones. We do the opposite." But I really think what crypto allows you to do, and what's really exciting, is that you can kind of meld those two together. You can take a lot of the massive amount of knowledge from hundreds of years in financial markets that you have in traditional markets and apply some crypto concepts to those structures and come out with a better overall process and products. Specifically, I'm thinking about segregated wallets. I think having the ability to validate on chain that your funds are at a particular place is super powerful for trust, for trust but verify, for the actual accountability that these firms have to undergo. So I think, you know, summarizing, the potential that custody provides for broader products and then also the merging of the knowledge in traditional markets and in traditional finance with some of the amazing features that the blockchain and crypto technology allows you to have. I think tagging onto that, Sam, too, a lot of the crypto tourism is over. You know, people that couldn't sweat it out during the bear market. You know, Ray, remember how many people from, like, the trade tech conference in FX ended up in crypto for a minute? And, you know, maybe two-thirds of them then went back to TradFi. And so I think there's gonna be more institutional credibility in this next round, and I think it's gonna be more institutionally driven than the retail market the last time. For me, I mean, the macro backdrop, very exciting. The upcoming halving in Bitcoin, which will, you know, create a bull scenario, very exciting. But from our business perspective, the ETF adoption in the U.S. is going to be a significant opportunity for us as a business, but also for the market as a whole. Because what the ETFs are gonna do... I mean, everybody has kind of already mentally worked through, okay, this is a well-trodden circulatory system into U.S. capital. This will allow new capital to enter the space. Bitcoin, other assets will go up. Okay, that's, pretty much everybody has that. The way I get excited about is the next order effect of that, which is the whole market structure's gonna change to adapt to that. That's gonna create opportunities for, you know, a forward-thinking, regulatory, you know, sort of friendly type of place like Bakkt. But it will also be good for all the consumers and all the participants in the space, because not only do the ETFs give everybody permission to participate, they're gonna be big, and they're gonna have needs. And when their needs are gonna be met by solutions providers who are gonna be focused on them, instead of the, what was a little bit more of a retail-focused solution back in previous cycles, this is going to be the biggest elephant in the room will be the U.S. ETF providers, and people will be trying to solve their problems. That will have second- and third-order effects on the industry, which will be very positive going down the road. If we're there, and we can think about these things and partner with these companies and solve their problems, it's good for us, too. That's what I'm really focused on. Great. Well, gentlemen, I think we're gonna have to leave it there 'cause we're kind of running on the edge on time. Andy, Ray, Sam, thank you so much, and I appreciate you joining us here with today's Fireside Chat. Now, to learn more about Bakkt, you can visit their website, or you can go to our research at WTR's website, which is www.watertower.com. I wanna thank everyone for joining us. So I wanna let everyone know, the views expressed in this Fireside Chat may not necessarily reflect the views of Water Tower Research LLC, and are provided for informational purposes only. 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