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

Thank you again for joining our webinar the REIT 2 crypto regulation and how we stay innovative. My name is Samantha, I'm the Director of B2B Marketing here at Bakkt. Bakkt is a technology platform for crypto loyalty in commerce, and we have a few leaders from our team joining today's webinar, along with our guest presenters here, Coy Garrison from the firm, Steptoe & Johnson. Before I hand it over to Lauren here and we introduced everyone, I just wanted to go over some quick housekeeping items. First, as you might have noticed, logging in there, the webinar is being recorded. So we will be e-mailing that out to you after the webinar. We're going to be sharing some data here today, and we'll be e-mailing that out as well with some of the resources that we shared. And then finally, there will be time for some questions at the end. So if you have any questions throughout the webinar, feel free to submit them in the questions section, and then we'll get to them at the end time permitted. All right. And without further ado, I'm going to hand it over to Lauren here.

Thanks, Samantha. I'm Lauren Post, Head of Communications at Bakkt. Thank you for joining today's webinar on the race crypto regulation. I'm joined by Coy Garrison, partner at Steptoe & Johnson, which serves as a public policy adviser to Bakkt. Coy served more than 8 years at the SEC as counsel to SEC Commissioner, Hester Pierce as lead adviser on cryptomatters and to former Director of SEC's Division of Corporation Finance, Bill Hinman, where he coordinated and advised on reviews of all proposed registered offerings by crypto exchange traded products and token offerings. And Marc D’Annunzio, Bakkt General Counsel, Marc has more than 25 years of legal experience and is responsible for our legal, regulatory, compliance and governance matters. Marc joined Bakkt in 2019 and shepherded the company through our IPO. So with that, we're going to jump into the conversation. So there has been a lot going on in crypto regulation from enforcement actions to even today, the House Financial Services Committee holding a joint subcommittee hearing on the future of digital assets. So a very timely conversation today.

I thought that we would start with a question for Coy the top of the conversation here. Given your role as someone who has been paying very close attention to all the movement in the space, I thought it'd be helpful to unpack what have we seen so far as far as enforcement actions and movement by the SEC and CFTC. Can you give us an overview?

Yes, certainly. Thanks, Lauren, for the question and for having me here today.

And Coy I don't think we can hear you.

Okay. How about now? -- good. Okay, great. So the congressional hearing today is a great starting point, and it's -- we certainly applaud Congress looking at this space intentionally because I think what we see now is a bit of a rain of confusion amongst federal agencies of who has a direct authority over which crypto assets and for which activities. And that's not altogether surprising if we think and take a step back, right, of crypto assets are relatively new assets. It's a new industry. And until Congress steps in and tells direct agencies to act in a certain manner, there's going to be a bit of confusion. And then -- and when you add to that, the fact that the U.S.'s financial services regulatory regime is intentionally by design, fragmented, right? So amongst the banking regulators, you have at least the FDIC, the OCC, the Fed not to mention all the state banking regulators. On the capital market side, you have 2 primary federal regulators. You have the SEC that oversees securities markets and the CFTC that oversees derivatives markets. And then you, of course, add on everything like everything else. There's taxes involved, the IRS and money transmission laws and sanctions to OFAC. -- a full alphabet soup of agencies that have had to get their arms around crypto in the last decade and try to apply their existing frameworks to this new asset class -- and so with that and absent congressional direction, you're going to see a lot of stepping on toes between the agencies. And I think nowhere is that more evident than between the SEC and the CFTC. So the SEC, the rhetoric coming out of the current leadership of the agencies has been quite clear that they believe many crypto assets are securities and have been imploring folks engaged in certain activities to come in and register and they've been using very heavily their enforcement arm. And I think since November, there's been almost 10 enforcement actions by the SEC and the crypto industry alone, which is a stunning pace for any specific industry and just shows how seriously the SEC is looking into this space. Now at the same time, the CFTC has been bringing enforcement actions at a record clip themselves. -- against sometimes the same entities or slightly different activities. So you have a situation where 2 agencies are both trying to assert their jurisdiction and I'd be remiss if I didn't mention that the CFTC has taken the position that Bitcoin and East are commodities and the likes of Bitcoin and East represent a huge amount of volume of trading in the crypto asset space. So figuring out which agency has jurisdiction over which activities is something that just has been increasingly difficult but increasingly important in todays.

Thanks, Coy, a really complicated environment to navigate for sure. I thought the next question we could go to you, Marc, and just get a little bit more information on how you're thinking about approaching regulation of Bakkt in your role during this very complicated and interesting time.

We're happy to, Lauren. I think just to sort of orient viewers a little bit about the origin story of that because I think it's pretty instructive in terms of the way that we look at the space and the way that we try to run our businesses. So a little before I joined this company in late 2018 Intercontinental Exchange, which onset operates commodities, clearing houses and exchanges across the world. They also own and operate the New York Stock Exchange for Bakkt. And really, as I see the investment thesis behind the company then, and I think it remains the case today is primarily this digital assets have tremendous potential. We hear about that all the time. But as an asset class, that space, I think we could all agree, is not really fully mature. And I think it was ICE's view in the beginning, and I think it's something that we've seen kind of the word out, particularly over the last several months is that the space isn't really going to reach that potential if it doesn't have a clear regulatory framework that everybody has held to. I mean, institutional investors, in particular, the partners with which Bakkt goes to market, all of those individuals and entities really think the same way, which is to say, I need to see a framework that looks something like what I would see in a traditional finance capacity. Maybe it's not exactly the same because the assets are different and the potential is different. But I need to know that when I deposit crypto in a custody operation, it's going to be there tomorrow or if it happens to encounter bankruptcy, I know what happens in the bankruptcy, right? And those fundamental questions, and it's been 4 years for me here, several of those fundamental questions really remain unaddressed or at least are not addressed in a comprehensive way yet. And so fast forward to 2023, and we still sit in a space where there are several companies that either set up overseas or set up here under a kind of minimum footprint of compliance, if you will. And we've seen a lot of bad things happen as a result of that. Some of those things are not really crypto-specific failures. Having audited balance sheets and not commingling customer funds with your old none of those are crypto-specific ideas. But some of those ideas haven't yet really made their way fully through the crypto space and consumers and partners alike don't yet have what I think is the requisite comfort level that would be provided by a clear regulatory framework to be able to transact in crypto assets. And so the way that we get Bakkt to think about the space is really not dissimilar from the way I thought about it when the company was initially formed, which is we want to be on the right side of the law. We want to be able to demonstrate that compliance, that transparency, that security, that trust because we think it's really important. It's a really important almost predicate really for the kind of growth and the kind of potential that this space still has. Coy mentioned very briefly, there was a joint hearing this morning among House Financial Services and I think agriculture committees with a lot of chatter about that. And it's interesting. You see lots and lots of different attitudes on Capitol Hill towards crypto, including, I think, some of the skeptics will say, well, obviously, this can't be used for anything productive because it hasn't been. It flipped that around and say the use cases aren't really going to mature until the regulatory framework exists. There aren't clear ways for people to use bitcoin to pay for things. There are clear even accounting rules for what happens if a company puts crypto on its balance sheet, right? And so those factors, I think, are slowing adoption of a lot of interesting use cases. Certainly, you can buy it and hold it and sell it. And if it goes up -- take those profits. But I think there's a lot more potential within the technology and within the space that we're not yet seeing because of that lack of clarity. So bringing it around to the way that we think about it, again, again, I think we're very optimistic about the space, and we're very optimistic about the U.S. potential to be a leader in the space, but that's going to require, I think, some pretty concerted discussions, not just on Capitol Hill, but also between the regulatory agencies themselves to decide who's in charge of regulating this space and really make all of the concepts that those regulators care about fit together in a way that makes sense.

Absolutely. And I think that -- the voices are getting louder asking for that same thing. So fast follow for you, Marc, we have seen some movement from the SEC in a while making capacity like the proposed rule on safeguarding of customer assets, which Bakkt submitted a comment for an earlier this week. I was wondering if you can share some of your thinking on both the rule and then also on the comment that we provided.

Yes, I'd be happy to. So the SEC has been active on a lot of fronts lately. As Coy mentioned, the majority of it has really been almost an enforcement first strategy. I think enforcement certainly has its place and there are actors in the space that we needed some enforcement actions brought against them. So again, it's -- I think it's a necessary piece of a well thought out and well enforced regime, it's not the only piece. And so what we have today in a lot of instances is -- it actually reminds me a lot of, I don't know how many lawyers are tuning into this webinar. But in law school, you end up discerning what the lines by reading a lot of different cases, right? And it's sort of like clubbing around dark room with a flashlight. It gets a little brighter with every case that you read. And then from that, you put all these fragments together and say, I guess this is really where the law sort of has ended up, right? In law school, they do that as a thinking exercise as much as anything. In a lot of ways, that feels like where the crypto space is today. There isn't a person I would wager on this call in this audience that can give anyone a clear answer as to exactly what crypto assets our securities in which are commodities. A lot of opinions. A lot of them are very well thought out, but there is no clear answer. So you've got -- on the one hand, you've got the sort of enforcement first approach. The proposed changes to the custody rule are a little different than that, and that is more like what we are used to seeing from a traditional rule-making process, right? SEC puts out a rule as for comments. There were a lot submitted the last I checked yesterday, we were among them. The thrust of the rule is actually, I think, perfectly fine, which is that there are special rules for investment advisers and broker-dealers who hold funds on behalf of their individual customers to keep those funds with a special kind of custodian, what's called a qualified custodian it has to meet certain requirements. That rule is not new. That rule has existed for a while. I think what Chair Gensler and the SEC are now proposing to do is to make that rule applicable to crypto assets as well. Again, at a high level, that's exactly the sort of thing that Bakkt stands behind. I think we believe that custody is a very important, perhaps the most important functionality that underpins crypto operations because if the crypto is not there, then basically all the other use cases fail, right? So having a very strong custody operation is really important. It's the first thing that we did when we started the company. The first thing we did was build a custodian and got it licensed by New York DFS. So from our perspective, I think I broadly agree with the thrust toward federal attention to our custody. I also think that the rule broadly is good. One of the things that I think we honed on in our comment letter was there is an open question about whether or not state charter trust like our back trust company, the DFS regulated I mentioned, ought to have a path to being a qualified custodian. Unsurprisingly, I believe that answer should be yes. We have a very good relationship with DFS. We've been regulated by them, as I say, almost since the day I showed up a year, it's a very stringent regime. And DFS has been in this space about as long as anybody else. Go could probably be more precise about that. But the bit license came out 8 years ago, I believe, and they're very well staffed. They're very thoughtful about the way that they approach cryptoregulation. It's not to say that they do a perfect job. I don't know if anybody does or would. But I do think that -- it's a very good regulatory regime. It's one that we picked on purpose because we felt like it was robust, defensible and really ought to assure our customers that we play by the rules that we say that we do. And so for me, I think the most important piece of that proposed rule is really preserving that pathway so that state charter trust can continue to be qualified custodians. If that is not the case, then I think we have a real problem in this space because as Coy mentioned, the federal banking regulators are now among the fray in terms of those who are seeking to regulate crypto. And I think there's a lot of dissidents among the federal regulators about whether a Federal Bank can even be a crypto custodian. There are a couple of companies that got charters when Brian Brooks was Head of the OCC, he's moved on. I think the attitudes have changed. And so if state-chartertrust aren't in play, not really sure who would be lacked, candidly. And again, I don't -- one of the SEC's primary objectives is investor protection, and I don't think you could serve that without having a reasonable assortment of custodians to choose from to meet that minimum of standards...

So something we will be watching very closely. I'm sure in others as well. My next question is for you, Coy. With all of this in mind, we see movement from other countries and creating regulation around crypto. There was BECA approved by the European Parliament, a regulatory approach put forth by Hong Kong recently, along with MVMT in the U.K. and also Korea. Are other countries moving just as quickly, more quickly and where does America sit in comparison?

I think the U.S. is definitely behind a lot of other nations right now in developing a workable regulatory framework for crypto. So I think the [indiscernible] is a great example, right? The markets in crypto assets. It's a substantive piece of legislation that I won't go through every last detail, but it's very thorough, right? It breaks down, it creates clear definitions of what different types of tokens it's regulating. So it looks at stable coins. It breaks us down into are you regulated as a one-for-one stable coin. Are you holding a basket of multiple assets and you have a different set of rules depending on what you're doing? Or are you a token that is neither one of those? And if you're in that bucket, the larger bucket of crypto assets, then there's a whole set of disclosures that have to be made through a white paper, a noticing requirements and the like. And then for third-party service providers in the EU, that either that's a crypto-trading platform or if you're providing custodial functions or perhaps your dealer in trading in these assets, depending on the activity that you're engaged in, this legislation lays out a number of requirements you'd have to meet in order to be licensed by a local regulator. These -- I'm sure many people will differ on whether the exact scope of these regulations is reasonable or it's someone I think, would argue that it's perhaps overly intrusive and the like. But at the end of the day, a road map has been provided and there's rules to follow, and a lot of entities are excited by the fact that there's a clear road map to follow. And I think you've seen that by a lot of folks in the crypto industry that have indicated their interest in this type of regulation. And I think that's a key for U.S. policymakers as they look abroad and see what's happening is regulation doesn't have to mean soft regulation or anything like that. And there's many different degrees. It's the mere fact of having rules of the road is what's really important for the industry right now. And you're seeing that in Hong Kong as well, where the -- in June of this year, we're expecting new regulations to be laid out that would allow retail investors in Hong Kong to have access through license trading platforms for at least certain crypto assets. And it's a stark contrast of -- there was a statement that came out a couple of weeks ago from the Hong Kong banking authorities. And the statement was as clear as it could be that they were directing banks to let them know that there is nothing illegal about crypto services that you can provide banking services to entities engagement crypto assets. I mean contrast that to some of the joint statements by the federal banking regulators in recent months here in the U.S., and you see a completely different regulatory environment. And for a lot of folks that are looking at this, it's clear that other frameworks are being established and perhaps are more hospitable. And by more hospitable again, I don't mean soft on regulation. I simply mean having rules of the road to abide by. And I think Marc made a comment earlier that in order for use cases to really take off in this space, we really do need a nice regulatory framework so that those that are looking to build in a responsible manner and do so. And one concern is that are these use cases going to be developed overseas in more regulated markets where they can occur. And then if it occurs overseas, how can that be translated -- brought back to the U.S., obviously, I think we want that type of innovation and forward things may be happening here in the U.S.

I think that's a great point. And we've seen a number of headlines indicating that crypto companies are looking to other jurisdictions who have made more progress on the regulatory front to move operations in some cases to lead the United States. So I thought, Marc, it would be helpful to understand what your views are on companies potentially moving their operations? And how does Bakkt view this environment with the slower regulatory framework to come in the United States?

Yes. I mean there's certainly been, I think, Bakkt or maybe thinly veiled threats of other companies moving overseas, just in response to some of the slowness here. I don't think that's -- from Bakkt's perspective, at least that's not the way that we think about it. We set up here in a reason we've done for a reason, we've done business here exclusively or almost exclusively for a reason. From our perspective, I think there's a lot of interest in crypto and better regulatory clarity in a lot of other jurisdictions. And certainly, we would look to serve customers in those jurisdictions, again, always in compliance with whatever the framework is that's applicable there. That's a different question than saying, are we going to pull up stakes and move to one of those, which is not certainly something that I think we ought to do or that we're talking about. I do think, however, though, that the U.S. has long been a leader in the development of financial markets. And I think in a lot of ways, our ability to balance innovation and safety and soundness is really the entity of the world in a lot of ways. It's one of the reasons why the dollar remains the reserve currency. And I mean, again, New York is a global financial center. And so I'm optimistic about our ability to get this right, even as maybe a little displeased that we're not there yet. But as much as I hated to see some of the failures and scandals that have rocked the space over the last several months, I think maybe one of the silver linings of that cloud is that it's really created, as you said, the voices have gotten a lot louder. The discussions are more frequent. We are active as well in discussing with both regulators and law makers where we think this ought to go and how with Kishel as well. And so I think that there is now really a very growing sense of momentum behind those efforts, which is good. I think this company, this space and this country really need for that to be the answer. Because people are going to transact in crypto whether the U.S. takes a thorough approach or takes a head in the sand approach. And I think we've seen some of the problems with ignoring it and hoping that it will go away. That clearly has not worked, and I don't think it will work in the long term. So there are a lot of smart people in Washington that I think can put their heads together and figured out a were exciting part of that conversation.

Yes, there's a lot of activity. And Coy I think this next question would be for you. It seems that the conversations in Washington, especially this year, have been much more partisan in nature, whereas last year, we did see some more bipartisan conversations or we saw Republicans and Democrats working together. What, in your view, has to happen for us to see these parties really work together to create the progress that we're hoping to see.

Yes. So Washington is certainly a partisan animal, right? There's always those undertones in any conversation. And I think as Marc was saying the one thing that's just vital for this industry is that we keep this out of the partisan back and forth. This creating jobs in America, encouraging innovation and entrepreneurs here while also protecting investors, protecting consumers. These are basic tenets of American regulation that I think both parties support. And that's something that's clear in our conversations with people on both sides of the aisle. So despite some perhaps tensions and tweets that may suggest that this is becoming more of a partisan issue. I still remain hopeful and optimistic just based on our conversations with people. And I think we talked about the SEC CFTC divide. A lot of that stems from congressional authorization, right, of the SEC is overseen by the House Financial Services Committee and the Senate Banking Committee on one side and the CFTC is overseen by the House and Senate ag committees. So when you're thinking about Congress, you're thinking in the crypto context of those 4 committees and the leadership of those committees. And I think in an encouraging way, leadership on both sides of the aisle have been engaged on this issue. It's the House Financial Services Committee and how Ag today is holding the joint hearing on crypto assets. And I think there is a serious desire on both sides of the aisle to do something about this, and there's a willingness to engage. One concern that there is just at this time is -- can this issue rise above all the other significant issues that Washington is dealing with right now, right? You have the debt ceiling going on in the background, which is incredibly important to the entire nation, obviously. You have the midsized bank regional crisis that's been on and off for the last 1.5 months here and particularly for the Senate Banking and House Financial Services Committee that falls within their jurisdiction. And of course, this year is a farm bill year where the ag committees are very focused as they should be on passing a comprehensive farm bill as they do. So it's -- crypto is competing for oxygen amongst these other issues. But the encouraging thing is advocating for a sensible framework that provides basic consumer and investor protections that are so desperately needed in this space while also just providing a road map for entities that are crying out for a regulatory path forward. It's a pitch that does have bipartisan appeal. And I think it's something that we're excited to continue engaging conversations and we think leadership from the parties for their willingness to engage.