Galaxy Digital Holdings Ltd

TSX:GLXY

Earnings Call Transcript 2021-Q4

[Operator]

Good morning and welcome to Galaxy Digital's Fourth Quarter 2021 Earnings Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Galaxy Investor Relations team. Please go ahead. You may begin.

[Unknown Executive]

Good morning and welcome to Galaxy Digital's fourth quarter earnings call.

Before we begin, please note that our remarks today may include forward-looking statements. Actual results may differ materially from those indicated or implied by our forward-looking statements as a result of various factors, including those identified in our filings with the Canadian securities regulatory authorities on SEDAR and available on our website or in future filings we make with other securities regulators. Forward-looking statements speak only as of today and will not be updated. In addition, none of the information on this call constitutes a recommendation, solicitation or offer by Galaxy Digital or its affiliates to buy or sell securities, including Galaxy Digital securities.

With that, I'll now turn it over to Mike Novogratz, Founder and CEO of Galaxy Digital.

[Michael Novogratz, executive]

Good morning, everyone. It's a beautiful day in New York, at least if you're in New York.

Listen, 2021, I think, Galaxy will look back on as really a seminal year in our history. And one, I think, in the whole industry of crypto that really shifted this from being a maybe business to, wow, this is now an institutional asset class. And so we had a really exciting 2021. Our results speak for themselves. Our fourth quarter capped off an amazing year, $1.7 billion in net comprehensive income. If you'd ask me that 2 years ago, that would have seemed like a stretch, but lots of positive things happened for us and for the industry. Partner's Capital at $2.6 billion leaves us one of the most equitized, strongest balance sheets companies in the crypto space.

More importantly, I think it's the human capital we added, right? We've added almost 250 people since January 1, 2020. And that's really where the excitement comes. I know how this works. People look at your last year's earnings, and they say, "Thanks, but what's next?" And so I'm going to actually leave the real analysis of the earnings to Alex, Chris and Damien later on and give you a little sense of what's next.

2022, we came into 2022, and it looks like it should be a more challenging year from a macro perspective. The Fed is hiking rates. I think Chairman Powell will continue to try to regain the credibility of that institution by speaking hawkish and being hawkish. That has created lots of volatility in asset markets. We had a war breakout in the Ukraine, where Russia has invaded.

That's interesting. It creates lots of inflationary pressures through the commodity cycle. It creates lots of risk, risk-off behavior and anxiety, but it also adds to a narrative in crypto, which is really positive and continues to accelerate adoption. What's interesting, this has been a year of push-pulling crypto with macro headwinds and adoption tailwinds. And we continue to see that -- those adoption tailwinds.

Part of its story, like I said, when Europe and the U.S. told Russia those reserves really aren't your reserves, for the first time in my investing career, people said, "Wait a minute. If that could happen there, what about China's $1.4 trillion of treasuries?" Our treasury is really a risk-free rate. And so the story for Bitcoin and other crypto assets got more of a tailwind. I don't think that is going backwards. I think we're in a vulcanized world and where crypto assets fit in is going to continue to be debated, but it's going to grow in scope.

It should not be missed that Secretary Yellen -- Janet Yellen in her last comments took a much more sanguine approach towards crypto, right? The political winds in DC are changing. I think Democrats who had been more opposed to crypto are realizing that voters really like this asset class. And so you're seeing a shift in regulatory front.

Let me go to BitGo. We remain committed to integrating BitGo and becoming an institutional crypto platform, period. In keeping with that, we've extended our deal to the end of the year with BitGo. We adjusted the deal sum for progress that BitGo has made. They've hired close to 150 people or more than 150 people since we originally signed. And so it's a bigger and better company. And we'll continue to work on integration side by side until we close the deal.

Regarding our U.S. listing, as previously announced, subject to all the regulatory and approval processes, we remain in progress to redomicile to the U.S. We publicly filed the registration statement on January 28. However, we're still in the comment period with the SEC. And while we certainly expect this process to be completed at one point, we're not -- and we're going to make every effort as we can to be a U.S. public company. We can't really provide a great time frame, given that it's in negotiation with the SEC.

We said in our release, between the second and fourth quarter. That's a pretty broad window. And I think we're going to hope for the best, and we're going to continue to engage with the SEC. They're very thorough and expect this to get done.

Now let me tell you about the future. We continue to invest for growth, period. And so we raised $500 million in a convertible in December. And when we went on the road, we told investors that money was going to be to build platforms, and it continues to be.

How do you invest for growth? You hire, hire and hire. And I think what gets me most exciting is human capital, right? We're coming with innovative ways to recruit, to attract young talent. We came up with new training programs, a FLAG program. There's a big engineering focus. We brought in Alex Field to run our engineering team. He's got -- he's been -- has had his plan approved. It's a big increase in engineers across our firm.

We also brought in a new CMO, Sebastian Benkert. He came from ARK, where he did an amazing job building out Cathie Wood's brand. You can't be more excited to have him. We've added Felix Cua on our risk management side; Tom Harrop, to optimize our balance sheet; Eddie Schwartz, to be our Chief Security Officer. The list goes on and on. And so when I think of what makes a great company, it's people, and I couldn't be more proud about the people we've brought in and the -- both the work ethic and the quality of talent.

And so when I look, going forward, we put an early release on what Q1 looks like at a first glance. I would tell you that all our businesses are profitable. All our operating businesses are growing. Our balance sheet is going to continue to be volatile with the crypto market. We continue to hopefully outperform the crypto market in balance sheet. And I think, when I look forward from here, I'm pretty optimistic crypto. I had said originally, I thought this would be a rangy year, right, $30,000 to $50,000 in Bitcoin and whatnot. But given the adoption cycle I'm seeing and given the way markets trade and how I just see new people wanted to get in, the innovation we're seeing in Web3 and in the metaverse space, I've gotten more constructive than I was at the beginning of the year. And so it wouldn't surprise me to see crypto significantly higher by the end of the year.

With that, to talk more about our actual earnings in the quarter, I'm going to hand it over to Damien.

[Damien Vanderwilt, executive]

Thank you, Mike. Good morning, everybody.

Before I jump into performance highlights for our Asset Management and Investment Banking segments, I do want to contextualize a few of the macro trends specifically impacting how our clients are investing in early 2022.

Venture capital invested more than $33 billion into crypto and blockchain start-ups last year, more than all prior years combined. Just think about that number, with much of that happening in the second half of the year at a pace of over $1 billion per week. 67% of that total went to fundraising rounds with deal sizes above $100 million. And at least 43 companies that raised venture capital in '21 are unicorns.

Pre-seed deal counts continue to decline, while Series A and [ Leyda ] are growing, a sign the company's built in the 2018 to 2020 crypto bear market are maturing. And I'm seeing that play out substantially in conversations with our clients of our Asset Management division. Allocators specifically continue to put money to work in our sector, predominantly, as I mentioned on our last earnings call for the moment through allocating to venture and other early-stage fund management product.

Turning internally to our business segments and beginning with our Asset Management business. There remains strong demand for our fund products across our passive and active strategies. And we launched some exciting new products during the quarter and saw AUM growth across our business. I'll also highlight I'm seeing growing demand specifically for our active product suite, which indicates a maturation of the space is starting to occur.

During the fourth quarter, we saw strong inflows into our fund management suite. Assets under management increased by 29% from the end of the third quarter of '21, reaching $2.9 billion, which represents AUM growth of 256% for the full year.

Net client inflows in the quarter exceeded $500 million, confirming that the investment case for cryptocurrencies in a fund structure remains very compelling. Looking year-over-year, that is nearly $1.7 billion of net inflows. So even in a quarter where crypto asset prices were rising, backing up the impact of price increases, we continue to see net new capital coming into the Galaxy platform.

Now quarter-to-date, against the backdrop of a modest market contraction in digital assets, we've seen AUM decline to $2.4 billion as of the end of February, consistent with the reduced total crypto market cap over the same period. Even with that reduction in overall AUM, a key element of Galaxy's strategy is providing our expertise in volatile and trickier market conditions, demonstrated in our over 3-year investment management track record.

On the new product front, we were excited to launch the Galaxy Solana Funds during the fourth quarter, which are passively managed funds that seek to track the performance of the Bloomberg Galaxy Solana Index fund. And in February of this year, in a continuation of our long partnership with CI, we launched the CI Galaxy Multi-Crypto ETF, which is designed to capture the upside of investing in both Bitcoin and Ethereum whilst maintaining the volatility of these assets by systematically managing portfolio allocations between the cryptocurrencies and cash.

We are also thrilled to continue our partnership with Goldman Sachs as Goldman has made our Ethereum funds available to their clients. This is just one of the many ways Galaxy is working with Goldman, and Chris will touch on other examples in a few moments. Goldman Sachs and Morgan Stanley continue to be first movers in offering their clients access to Bitcoin and Ethereum through Galaxy passive fund structures, demonstrating the amount of demand clients have for exposure to the asset class.

Turning now to our actively managed funds. I'll start with our fund-of-funds business, which is actively raising its third fund, a diversified multi-manager fund of funds, investing in leading global crypto and blockchain venture firms, giving our clients access to a diverse portfolio of crypto venture specialists when it comes to geography, stage and sector focus. We look forward to updating you on closes with that fund shortly.

Additionally, our Galaxy Interactive strategy had the first close of its third fund, growing total strategy AUM by over $70 million to $735 million. This fund will be dedicated to immersive virtual worlds and investing at the intersection of content, social commerce and technology.

We were also excited to announce the launch of NG+, a new co-investment consortium focused on the Web3 gaming space, our Galaxy Interactive partnership with Republic Crypto and Alameda Research. NG+ will continue to invest and cultivate the next generation of tokenized video games. These investments will flow directly into Galaxy Interactive's third fund.

And it's important for shareholders to remember that the Galaxy Digital will retain a large LP interest in all 3 of Galaxy Interactive's funds and in our Vision Hill fund-of-funds strategy, providing our shareholders with collective exposure to some of the most exciting areas of private, early-stage crypto investing.

All in all, we are now proud to offer our clients 15 different fund products to choose from across our passive and active strategies. And last but certainly not least, we are really thrilled to welcome Chris Rhine to the team as a new portfolio manager focused exclusively on long-only active strategies. Chris was previously Head of Strategic Equities and a portfolio manager at Cohen & Steers. I look forward to sharing more details on the strategies Chris is focused on during our next earnings call.

Turning now to our Investment Banking business. We continue to build on the momentum we've demonstrated over the prior few quarters. We announced a number of deals for the quarter and, as of last week, have an active pipeline of 8 deals, representing mandates of more than $1 billion in potential transaction volumes.

Among the significant deals announced were 2 deals for Blockdaemon, a leading institutional-grade blockchain infrastructure company for node management and staking, for their acquisitions of Gem and Anyblock Analytics. Our banking team acted as the exclusive financial adviser on both of those transactions, building on a strong relationship with the Blockdaemon executive team.

Our team, again, served as the exclusive financial adviser to BRD on their acquisition by Coinbase in November. This transaction will further accelerate Coinbase's capabilities within their coin-based wallet business and allow BRD while it uses the opportunity to migrate their assets to Coinbase's wallet.

We were also involved as placement agent on a bridge financing convertible debt for a payments infrastructure provider in December, demonstrating the wide breadth of offerings provided by our advisory team. And last month, our team worked on 2 fundraising rounds, Qredo's $85 million Series A financing, where we were exclusive financial adviser and sole placement agent, and Compute North's $80 million Series C financing, where we advise Compute North and their teams on the equity financing.

Notably, over 2021 in full, our team closed 8 transactions, more than we've closed in all previous years combined. And given our 2022 pipeline, we expect our Investment Banking franchise to continue growing at this rapid pace. Proving that point just last week, our team closed another transaction where we acted as financial adviser for the Thunder Bridge IV SPAC and its merger with Coincheck, set to close and list in the second half of this year.

And building on Mike's earlier comments, staffing up to serve both our asset management and advisory business is critical. We are constantly looking for a top-tier talent and have brought on the likes of Blackstone executive, Bill Burt as COO of our Asset Management business; Chris Rhine, as I mentioned earlier; and one of my old Goldman colleagues, Daniel Johnson, who most recently was Head of Venture Capital Coverage at Credit Suisse, to join our advisory business as Head of Capital Markets. We're really pleased to welcome Bill and Daniel to our ranks.

I'll now hand the call over to Chris Ferraro, who will walk you through details for our trading and mining businesses as well as give you all an update on our portfolio companies and our areas of focus for our investments.

[Christopher Ferraro, executive]

Thank you, Damien. I'll cover the performance of our trading, mining and principal investing businesses.

Our trading business finished off 2021 in strong fashion, benefiting from both increased trading activity and the increased depth of our relationships across spot and derivatives, lending and market-making services.

To start by providing greater visibility into the reported results, recall that IFRS disclosure of our trading results includes, one, our core net long treasury holdings; two, our own proprietary trading around that core net long as well as; three, all of our market-neutral counterparty-facing and liquidity provider activities.

The latter bucket, our market-neutral counterparty liquidity activities for full year 2021, contributed approximately 10% of the total GDT net revenues, which we define as realized and unrealized gains for the entire trading business after netting associated funding costs and interest expenses, some of which show up below the line in operating expenses.

Now let's look at the business performance from our execution desks within those results. Counterparty spot trading volumes increased by just over 60% quarter-over-quarter, broadly in line with the record volumes we saw during the second quarter of 2021. And while February and March have definitely seen dampened activity across the market broadly, volumes through most of the first quarter have remained in line, if not ahead, of third quarter 2021 levels.

Derivative volumes saw similar strength in the quarter, rising over 50% sequentially to mark another record for franchise activity. And furthermore, with the notable uptick in volatility in Q1 2022, our derivative franchise has had its best quarter lifetime to date. We've noted for several quarters now that derivatives and structured products remain a cornerstone to our differentiated approach for meeting increasingly sophisticated demands from institutional investors, and hats off to the entire team effort for a strong finish to 2021 and into 2022.

Turning to lending. We've continued to add new and deepened existing client relationships. As a reminder, we believe originations tells the clear story for growth given the volatility of crypto asset prices that can cause notable shifts to the size of our overall loan and yield portfolio at any point in time.

We added roughly $1.5 billion of gross counterparty loan originations in the fourth quarter, a roughly 7% sequential increase, which put full year originations at over $5 billion. This drove a 20% sequential increase in the size of the counterparty loan and yield book to $736 million as of year-end. That's a greater than 500% increase in the size of our loan and yield book versus the end of 2020. And as of earlier this week, that book stands at over USD 900 million, having delivered over $2 billion of net originations year-to-date in 2022.

To reiterate, our focus on building a strong risk-adjusted financing business is core to our DNA. And doing so with a nonretail institutional counterparty base is what we believe will add the most enduring value to the Galaxy franchise over the long run.

And finally, I want to touch on GDT's ability to not only differentiate against crypto competitors but for its role as a reliable execution desk for TradFi standard bearers. We announced just last week that GDT executed the first OTC nondeliverable options transaction with Goldman Sachs, building on our strategic partnership from last year, where we were chosen as a liquidity provider for Goldman's Bitcoin futures block trades on the CME Group.

While it's still very early and these trades are not material drivers of our business today, they do provide evidence of an increasingly open door to the traditional financial world for established platforms like Galaxy. And what's more is it speaks to our position as a trusted partner for and beneficiary of TradFi adoption, not as a target for disintermediation.

Now moving to our Principal Investments business. We've continued to aggressively pursue and invest in the most compelling opportunities across the ecosystem. Excluding our portfolio companies' interactive business, we now have 122 investments across 86 portfolio companies on balance sheet.

Throughout fourth quarter 2021 and year-to-date in 2022, our team continued to grow our strategic portfolio with new investments initiated in the Polygon network as it has gained traction around gaming NFTs, smart contract verification and evaluation firm, Certora and Airdrop Labs, which provides crypto-enabled experiences for e-commerce like NFT receipts.

We continue to see record-breaking fundraising with over $33 billion of venture deployment around the sector last year. And several of our portfolio companies have benefited as investors look for exposure to the most innovative platforms in the ecosystem. For example, Fireblocks, a leading custody technology platform we supported from its earliest stages, successfully completed its Series E fundraise at an $8 billion valuation. Other notable examples include our early investment in interoperability protocol, Axelar; on-ramp technology services platform, Ramp; and leading zero-knowledge-based developer platform, Aleo, which just raised at a nearly $1.5 billion valuation.

And Galaxy has been a differentiated supporter and investor taking lead or co-lead positions over the last year in other highly coveted and fast-growing companies, such as smart contract simulation security tools provider, Chaos Labs; compliance tool developers, Sealance; and DeFi execution platform, Skolem as well as making notable later-stage strategic investments in platforms like Acorns, where we see significant opportunities for mass crypto adoption in which the broader Galaxy platform can play a meaningful role.

Importantly, our primary focus on being largely early stage with our deployment and partnering to support the scaling of these businesses also means we're doing far less riding of the increasingly crowding investing ways in later-stage growth companies, which has led to private company valuations gapping out relative to now-lower public market valuations.

Turning to mining, where the team continues to build momentum in both prop mining and its minor finance offerings. In proprietary mining, we have remained on track for previously disclosed orders that will bring us to nearly 2 exahash per second of delivered orders by year-end 2022. And in December, we added another set of orders, which will put GDM's total purchase capacity at just over 2.5 exahash per second delivered by the year-end. We expect to use that capacity to fuel both proprietary and minor finance operations and will apply hash rate opportunistically where it makes the most sense for the business.

While cost to mine has increased across all miners, our sales included, due to growing network hash rate and increased cost on machine orders amidst supply chain constraints, we continue to mine Bitcoin at an over 65% discount to fair market value using our full cycle cost of mine, including equipment costs. And given Bitcoin is hovering around 47,000, that is pretty remarkable operational efficiency by the team through different -- throughout different Bitcoin price and hash rate regimes.

Turning to our client-facing business. We achieved nearly $300 million in new mining-related originations. Our mining and lending teams continue to provide miners with a comprehensive suite of financial services and products, including asset-backed loans and leases, project and equipment financing, treasury management, capital optimization, hedging and other trading solutions. We think these facilities and lending arrangements speak to the growing demand for the offerings across our business as institutions look to manage price volatility, improve their treasury management strategies and shore up access to funding amidst turbulent capital markets.

So all in all, Q4 was a very strong quarter that included some record results, continued positive signals for institutional adoption and more examples of how our mix of businesses can reinforce and hedge the value of one another. And while year-to-date has undoubtedly included some volatility and tougher market macro conditions for crypto and for traditional markets, we don't run the business for any individual quarter, and we feel as optimistic as ever about our positioning within the sector and our ability to serve institutions in a differentiated way.

With that, I'll turn the call over to Alex to walk everyone through the specifics of our financial performance. Alex?

[Alexander Ioffe, executive]

Thank you, Chris. Good morning. Galaxy earned a remarkable $1.7 billion last year. We earned $521 million in the fourth quarter, a nice finish to the year. Due to market volatility, we give up approximately $110 million to $130 million in the first quarter of this year.

Our equity capital was $2.6 billion at the end of the year. This was up from $800 million at the end of 2020. In addition, in December, we raised $500 million of convertible 5-year debt with a 3% coupon. This continues to position Galaxy to take advantage of abundant opportunities in this rapidly developing market.

Our equity capital tripled in 2021. This was driven by our long-term strategy of maintaining a long digital assets portfolio, our diversified principal investments in this sector and our growing operating businesses, capital markets, investment banking, asset management and mining.

To elaborate, digital assets, taking realized and unrealized gains together, digital assets gained $1.5 billion in the year. Excluding gains from noncontrolling interest liability, which is money from outside investors in funds that we consolidate, our gain on digital assets was $1.3 billion for the year. Please note that we renamed noncontrolling interests to noncontrolling interest liability and moved the position of this line item on the balance sheet and the P&L statements. This did not change the nature of the line item or our earnings

[Audio Gap]

represents money from outside investors in the funds that we consolidate for technical accounting reasons.

Investments. Private investments continue to be a great part of our story. We gained $780 million on investments this year. Our portfolio grew to include 86 companies and was valued at $1.1 billion at the end of the year. Please note that many of our investments are made at early stages and are not immediately liquid or trade publicly. We record investments at cost or a discount to market value. We have a rigorous internal process supplemented with third-party valuations to make sure that reported values are reasonable.

Recurring revenue. We have seen rapid growth in our operating businesses, trading, advisory, mining and asset management. We expect this growth to continue and for these segments to take over as key revenue streams for Galaxy over time.

On the cost side, compensation was $114 million for the year, up from $34 million in 2020. The large increase was driven by growth in headcount from 89 to 280 people in 2021 and higher cash bonuses per employee this year versus last because of outside results -- outsized results. Similarly, equity compensation was $75 million for the year, up from $12 million in the prior year. This was also driven by a large increase in head count and from roughly doubling of the 2021 grants from the time they were communicated to the employees in the beginning of the year to when the blackout period associated with our BitGo acquisition was lifted and the grants could be made in the second quarter of '21.

General and administrative fees were $35 million, up from $15 million in the prior year, driven by increased spending for technology, marketing, higher depreciation from mining equipment, and we've wrote off our old lease in New York City having moved to a larger and nicer space in New York.

Professional fees were $53 million for the year, driven by expenses from BitGo and Vision Hill acquisitions, U.S. listing and convertible notes. We expect continued elevated legal and audit costs related to the U.S. listing in 2022 but a drop off in 2021 -- in 2023 and additional reductions in future years.

Balance sheet. We held $800 million in cash at the end of the year. This included $500 million in convertible notes raised at the end of last year. Equity stood at $2.6 billion at the end of the year.

Digital assets are large parts of our balance sheet. Digital assets, including digital assets receivable and excluding noncontrolling interest liability, other people's money, were $2.3 billion at the end of the year. Further, removing digital assets borrowed and collateral received from counterparties, net of digital assets length and collateral posted, net digital assets were $1.1 billion. Removing stablecoins takes us down to $900 million. We use this measure to assess our net exposure to digital assets. We removed stablecoins from the mix because they typically maintain a one-to-one correlation to fiat currencies. We use stablecoins to facilitate operations because they can be settled 24/7 on digital asset market centers, which trade 24/7. Private investments were $1.1 billion at the end of the year.

Accounting changes. As part of moving our public listing to the U.S., we retained KPMG as our auditor starting in the third quarter of 2021. As I mentioned earlier, in consultation with our new auditor, we renamed noncontrolling interests to noncontrolling interest liability. This is money from outside investors in funds that we have to consolidate in our financials. We now display noncontrolling interest in current liabilities section of the balance sheet. And we display gains and losses attributable to noncontrolling interests in the expense section of our P&L. The earnings and equity that belong to the company remain the same.

With that, I will turn it back to the moderator for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Mark Palmer with BTIG.

[Mark Palmer, analyst]

Yes. Could you provide an update on BitGo's recent performance, including assets under custody? And tell us a bit about the integration activity. What is feasible in terms of integration ahead of the deal close?

[Damien Vanderwilt, executive]

Mike, thanks for the question. We're not going to provide with this earnings release an update on BitGo AUC or other operating metrics. You can look forward to those in coming months.

I would tell you the way we're thinking about navigating what is clearly a prolonged closing of the transaction is to really focus on making sure that both companies are delivering on the products that we're building for our customers in a way that has the least amount of distraction possible.

And so we have an integration plan that we architected very clearly in the back end of last year. That plan exists. We continue to refine and optimize it, but we want to make sure that we're continuing to deliver, particularly on the BitGo coin support and downstream services on all of the different products that we're hearing from our customers that they need from us.

And so the simple way to think about it is we're going to continue to build, maintain our integration plan, and as soon as we get through the process with the SEC and close the transaction, we'll be really well positioned to swiftly integrate both firms. Along the way, we're really going to operate as best we can as a combined unit for our customers. And we already started that in the third quarter of last year where we will provide the front-end liquidity, derivatives, lending and other services to lots of customers from our Galaxy entities, downstream custody solutions, customers need from BitGo. And so we have a process for onboarding that minimizes any disruption or friction as best we can on that approach.

[Mark Palmer, analyst]

And one more question. Obviously, you had a very strong performance in the current quarter with regard to derivatives. What are you seeing in terms of client flows onto the platform? A lot of the figures that we see have to do with trading volumes and the like. What can you tell us about the adoption of digital asset by institutions as reflected by client flows?

[Christopher Ferraro, executive]

Yes. So on the derivatives side specifically, I would say it is broad-based growth, some key themes we've seen there. We've seen a pretty significant uptick in activity on the -- in the Bitcoin mining sector and using derivatives to hedge treasury positions, which we think is actually natural. And we were pretty far ahead of in terms of making sure we had a mining business and relationship managing group to make sure that we were able to see those flows. The mining sector has exploded in terms of big, large public companies who have raised money. And those companies naturally build net long Bitcoin treasuries as part of their core business.

And so using our derivative desk or using derivatives in general, but our derivative desk, specifically as a way to either get liquidity or hedge those positions or color them up the way sort of a lot of other analogous businesses outside of crypto in the commodity space would do, has been a pretty big driver. We've also seen a fair bit of activity from institutions who had begun their digital asset adoption in 2021 now either hold core long positions and want to hedge those positions, wanted to sell call overwriting strategies to enhance yield on -- when they have a view that there's a trading range for a period of time. And so that's a pretty specific update in terms of market color that we've seen on the derivative side.

And then in general, in terms of spot trading we have seen general uptick in traditional hedge funds. 2021 was a big adoption year for crossover funds taking their first position in spot coins, Bitcoin, Ethereum to start with. And so yes, I'd say that's pretty much the landscape we're seeing.

[Operator]

Our next question comes from the line of Deepak Kaushal with BMO.

[Deepak Kaushal, analyst]

Just a quick question on regulations for everyone to take it. Mike, I think you said last quarter that you're going to be spending more time in Washington. When you look at the activity levels of regulators, how big of an effort is responding to Biden's executive order in terms of how distracting it is -- is it to other efforts that the regulators need to do in general?

[Michael Novogratz, executive]

So I think there's a bigger story, and it's a combination of -- it really started with the infrastructure bill when Washington woke up to a barrage of phone calls from crypto-loving voters from powerful, wealthy contributors to retail. Yes, the lines of senators and congressmen. And I have made it a personal mission as well as lots of our competitors to start reaching out and talking to politicians more often. And I really do think there is a change in mindset on both parties that you can't be anti-crypto and you've got to figure out, we can't kill innovation. If you're in a Democrat, you can't kill innovation. And this really does -- it is a technology that can really help the little guy, right? The retail investor, the -- in the long run, when you think about $1 and $5 now in remittance payments are happening over crypto rail. So that's a huge increase from where it had been.

And so I think on the Democratic side, there's a shift. And that got through to the President's directive. You saw that with Yellen when she came out. She had always been anti-crypto, and she came out very balanced last time. She said, "Hey, I'm still worried about some things. But crypto has a role to play, and it's now an asset class." And so I thought that was the single most important thing that came out of any -- I won't call Janet Yellen a regulator because she runs treasury but someone with lots of influence in what's going to be the landscape.

And so how that flows into actual regulation will be seen. There's still some tension between the CFTC and the SEC, and the SEC continues to march to their beat. But I have to think as the political landscape shifts, regulators pick those -- regulators are political-led, just like everyone else. They pick those cues up.

And so I'm more optimistic today than I was 2 months ago. And these efforts are really just getting started. And you're going to see -- I've had 3 Democratic congressman come through the office within the week or on Zoom, and it was shocking how well-versed a few of them were in our space. And I would have told you 6 months ago, there was almost no one who was well-versed in our space.

And so again, there's nothing specific to point to in a regulation that makes me excited. But the whole tone in D.C. has shifted.

[Deepak Kaushal, analyst]

Yes. No, it seemed pretty clear with the order. Good color. Just sticking with regulations, we didn't get any immediate clarity, and you mentioned SEC marching to their beat and kind of in contrast with CFTC. How does that impact Galaxy's business in the interim while we don't have that clarity? Is it a benefit or a hindrance as compared to some other players that perhaps offshore?

[Michael Novogratz, executive]

We are trying to build a company that is an institutional crypto company, and that's our commitment. And that means working within a regulatory framework. And so the faster we get regulatory clarity, the better it is for us.

We probably take less risk than our offshore competitors in lots of aspects of this business, which you can even let it frustrate you or you can see it as, "Hey, this is our superpower. We're going to figure out how to operate." Because in the long run, the deal with institutions to get institutions into the space, which the space needs, that's essential. And so I stop letting it frustrate me and say, "Okay, how do we actually become part of the solution?"

[Deepak Kaushal, analyst]

Got it. And then I've been struggling to try and get a sense of what kind of percentage of the industry is kind of on the -- closer to the compliance side of regulations versus the Wild West side of market. Pretty hard to gauge, but do you have a kind of a gut feel of, if I could call it a cleanup factor here? Is it something that you guys kind of gauge or kind of get a sense of it [indiscernible] percent of the market is kind of in excess, how much have to clean up before things kind of move back to [indiscernible]?

[Michael Novogratz, executive]

It's a slippery slope because all this stuff is very judgmental, right? I mean if you think of trading on DeFi, what KYC and AML platform should do it versus is it retail?

One thing we have going for us that makes our decisions easier, so we don't deal directly with retail. And so if you're in retail, there is a separate set of decisions you've got to make. And so the people are making their own risk judgment on where they're going to see that balance. And we'll see how the cards fall in time.

I don't think of the players that you read about, there are people taking wildly stupid risks, and you're going to see this breakdown of our industry because they're going to haul people off in paddy wagons by any stretch. These are very subtle decisions, and it would help a lot to get clarity around some of them.

[Deepak Kaushal, analyst]

Okay. That's helpful. Regulation is a big topic. So I'll leave it at that.

[Operator]

Our next question comes from the line of Owen Lau with Oppenheimer.

[Kwun Sum Lau, analyst]

So I have a broader question in 2022. So looking ahead this year, which business client Galaxy is most excited about? Where would you -- where you will invest more money into and you think can expand materially this year compared to last year? And how do you approach these opportunities in 2022?

[Michael Novogratz, executive]

Yes. I'll start. Maybe I'll let my colleagues chime in. Listen, I think our biggest investment this year is going to be in and around engineering, building out product for our customers, and that's both in BitGo and in Galaxy, right?

I said at the beginning to our firm is like this is more challenging macro headwinds. We're not exactly sure where markets end up. I'm more optimistic, like I said now than I was at the beginning of the year. But I know one thing: we need to build, build and build. And so most of that investment is engineering.

The second place, I think there's opportunity for great growth is in the Asset Management business. We've developed a platform, a very institutional platform that we now are going to put different investment strategies on top of. And so Damien talked a little bit about that with some of the new hires and some of the new strategies. But I think 2022 for us, you're going to see our Asset Management business really grow, and I'm optimistic about that.

I guess the last piece I'd say is -- and credit to Michael Ash and his team in Investment Banking, they are way ahead of my mental schedule of where they would have been at this point in terms of establishing a real credible voice in the advisory side of crypto. We have great domain expertise. We are doing far more deals than we had budgeted in our minds. And that business seems to have a great tailwind to it. And I do think you're going to see consolidation in this space. You're going to see lots of needs for capital raising, and so that business as well feels really excellent.

So it's kind of funny. It's the platform businesses that we thought we'd be investing in. Really, I see lots of optimism in. I'm still, like I said, bullish crypto, but there's certainly more uncertainty around the balance sheet.

[Kwun Sum Lau, analyst]

Got it. And then for your partnership with Goldman, could you please dive a little bit deeper into how [indiscernible], providing [indiscernible] and also your [indiscernible] and then Goldman and Morgan Stanley to do similar trade a key prospect [indiscernible] of this market.

[Damien Vanderwilt, executive]

Yes. I can take that. I couldn't quite get the back end of your question, but I get...

[Michael Novogratz, executive]

Complex. [indiscernible] Morgan Stanley, Goldman.

[Damien Vanderwilt, executive]

Got you. Got you. So we've spoken for the past 3 earnings calls about our expectations of how the banks would start to participate in our sector, obviously, with a close eye on what they're allowed to do given their regulatory status. And you may recall, one of the things we guided early was an expectation that the banks with large wealth platforms would probably be the place that they first dip their toe into the water to start to offer their customers access into the sector. And that's certainly what we ended up seeing. And hence, the product partnerships that are public with both Goldman and Morgan Stanley from our Asset Management business into their wealth platforms.

The continuation of the banks moving into the sector has really culminated with the news recently of the OTC business that we conducted with Goldman Sachs. And really, the way to think about that is whilst the banks certainly -- in the case of the larger firms like Goldman, Morgan Stanley, JPMorgan, et cetera, whilst they're not able to handle coins directly, they will serve the needs of their customers, whether that's in the alternative asset management space, all the way through to their structured products businesses by creating exposures to our sector through OTC derivatives that Galaxy is well positioned to serve them with and hedge on our side.

And so we will provide synthetic exposure to the banks in their markets businesses as they develop products suitable for their customers on the other side. And so really, it's a phrase that you might want to think about coopetition, where the banks are really leveraging our connectivity in the crypto sector, our expertise certainly in warehousing large derivatives risk to provide them with the exposures that they need.

Their advisory businesses are also active in our space. And the one to look for, I think, in the back end of this year is going to be the opening up of different forms of wholesale lending by the banks into our sector, which we're tremendously excited about because it will obviously reduce our cost of capital, not just for Galaxy, but for the sector. And there are some really thoughtful innovative ways that are being manufactured to do that safely for the banks.

[Kwun Sum Lau, analyst]

Got it. And then any pushback from other banks, can you find comment a little bit as well?

[Damien Vanderwilt, executive]

Any pushbacks from banks? No, I don't think so. I mean you have -- if anything, I can tell you from our banking onboarding process since the news of the Goldman transaction, the news that hit the tape about Cowen's entry into a digital service platform in the sector, if anything, we have had acceleration requests for the onboarding of [indiscernible] and trading documentation with a broader range of banks that we were working with to make sure that they are up and running quickly.

So to me, it feels very much like the top of house at lots of Goldman and Morgan's competitors have accelerated the teams that they have focused on digital assets to get moving. And they do not want to be left behind.

[Operator]

Our next question comes from the line of Jamie Friedman with Susquehanna.

[James Friedman, analyst]

Just curious what you might make at the BlockFi and Voyager regulatory developments, at least on a high level. Some perspective there would be helpful.

[Christopher Ferraro, executive]

Sure, Jamie. Thanks for the question. This is Chris taking it. So first off, I would say we do -- we have had and still have tremendous respect for Zac and Flori and the BlockFi team and the Voyager team. I think that they -- they're doing the hard work in their version of the crypto sector to create product and meet client demand and customer -- retail client demand where it's there, and they've done great jobs in building big businesses. As you guys know, we were seed investors in BlockFi and supported Zac and Flori and the whole team all the way through that journey.

Voyager is also a big client customer of ours on the trading liquidity. The -- they chose to go down the retail route because they saw a strong opportunity to grow our platform and there was strong retail demand, particularly across the background of zero interest rates, which we all know sort of what's been driving that. And retail individuals didn't want that, and they wanted to find yield on their money, and so they provide it for them.

I think that the end state now where they are coming into regulatory pressure was kind of inevitable based on their business model. And so I think the BlockFi settlement is encouraging. The more recent news with Voyager should have been expected based on the news with BlockFi. And I think that the challenge for them, and we hope for the industry and back them in figuring out is how do they evolve the business model to serve retail clients in a new asset class and a business model that sort of looks like a bank but isn't regulated like a bank or do they evolve.

And so we've chosen a different path. As you know, we don't run that business model. We have invested in some of those companies, and we partner with those clients as back-end liquidity and financing partners, but we don't face retail directly. And so I think that was just -- whether it's pressure or not, that was an early decision on our part, which differed from theirs. And the net result is regulators are -- we're inevitably going to be more worried first about business models around retail clients. So...

[Operator]

Our next question comes from the line of Rich Repetto with Piper Sandler.

[Richard Repetto, analyst]

First, congrats, Mike, on the progress you made in 2021. My question -- I don't know whether you can answer this, but you did allude to sort of the filing to be a U.S. listing and the negotiations. And again, I don't know whether you're able to disclose. But in broad strokes, can you tell us what are the issues that you're dealing with in these negotiations just in general terms, I guess?

[Michael Novogratz, executive]

Yes, I would just say that the SEC is being very thorough. And that's their right to do. It can frustrate the industry at times. But there's nothing unfriendly about the interactions. It's just they're very thorough, and thoroughness takes a lot longer than people were used to. And so I mean, I think, that's the best way to categorize this whole thing. And so...

[Christopher Ferraro, executive]

And I'd jump in. I would say, for a little more specific color but generally as it relates to our conversations, one of the biggest focus is not just for us but everybody migrating from private markets or non-U.S. exchanges to the SEC processes is accounting. And so as you look at the whole landscape, I think looking at U.S. GAAP and its ability to where it treats -- how it treats digital assets on which line items of the balance sheet and which pieces of the P&L is something that -- so it's not adversarial. It's literally -- we're not sure how this treatment should be -- should flow through yet. And so it's an iterative process in trying to get to the underlying of how this -- or how the new technology did assets work and, therefore, how is the SEC and the PCOB and the big 4 comfortable representing financial statements from a U.S. GAAP perspective because it's new territory.

And so that would be -- that's really the biggest focus for the industry broadly.

[Michael Novogratz, executive]

And in the long run, what's going to have to happen is GAAP is going to have to get revised. The way GAAP is being applied just intuitively makes no sense to anyone who looks at it. And so they're in this weird box. These are the rules, and so you'll see balance sheets and income statements that don't reflect what you had hoped they'd reflect. And that's frustrating.

[Richard Repetto, analyst]

Got it. That's helpful. My one follow-up and we've talked -- you've talked a lot about regulation on the call, and pretty much -- I, at least, pretty much agree with everything you said. The -- I guess what you alluded to, Mike, was the issues of the CFTC and the SEC. It just seems like now at least you got an executive order. I hear you about the politician, about Yellen. But now we go back into sort of the black hole of who does what.

And I guess the question is, where do you see the next progress being made now that the executive order is out there? And you sort of alluded that there's still some debate for tariff, at least that's what it implied to me on the regulatory front in the U.S.

[Michael Novogratz, executive]

Listen, I don't think you're going to see anything coming from Congress right away given the midterms coming up and how Democrats don't have the -- I don't think the stroke of the pen in Congress to pass any legislation that's going to radically change how crypto gets done. This has to be bipartisan at one point.

What's interesting is you're starting to see those bipartisan links show up a little bit, right? Again, no one wants to lose the crypto vote, and the crypto vote is becoming powerful at a speed no one expected it to be.

And so I don't think we're going to see any real progress in the next few months, but the whole tone is shifting. And I think that's really positive. And so like we all sat here always in fear of the tail risk that really something stupid was going to happen. And I don't think anything stupid is going to happen now. And that's a big plus. I don't think we're going to get clarity the way we'd like to, certainly, with the setup we have right now.

And so the effort to educate both the crypto community, educating DC but the DC community educating themselves literally kicked off 3 months ago, and I am impressed at how fast it's happening. Kudos to some of my -- our colleagues and competitors for the efforts they're putting in. Kudos to the people in D.C. for the intellectual curiosity that they've taken. It's usually not intellectual curiosity. It's "Oh, damn, I better come up the curve because this is important." And -- but we're seeing it. So that leaves me much more optimistic. But I don't think there's anything in the short run that we can look to.

[Richard Repetto, analyst]

But Michael, you addressed, I think, the political sort of divisions or debates, and maybe they connected, but the agency -- at least, I sort of view that there's some agency debates on territory as well. Maybe that's how do you -- what you call it, straight them out as to the political side. But you got the SEC -- like you mentioned, the SEC and the CFTC sort of viewing things a little bit differently as well.

[Michael Novogratz, executive]

Yes, I'm not smart enough on that chessboard to understand how that plays out. I do think it becomes a political decision in the long run.

[Damien Vanderwilt, executive]

I do think -- the only thing I'll add to Mike's comments is there is work happening in the industry, which I think stands a chance of making some decent progress, which could see the CFTC take a broader role than they are currently in regulating some of the products. And so I would keep an eye on that.

[Operator]

Our last question comes from the line of Chris Allen from Compass Point.

[Christopher Allen, analyst]

I guess, first, I just wanted to start a follow-up. There's a comment before about different forms of wholesale lending coming into the sector because I've understood that it's been held up by the lack of regulatory clarity. Do you -- what's the catalyst for wholesale lending to come into the sector? But what do you think the impact is going to be? Because I know there's a lot of players out there that are kind of waiting for improved financing, which would -- what I would think is going to help drive spreads down over time.

[Christopher Ferraro, executive]

Yes, I think -- I'll take the first crack at it, and then Damien can jump in, too. A couple of point -- things I would point out from my perspective. I think, one, market volatility declining. And sort of safer and safer and more institutional custody and back-end operations and processes to be able to hold store track and recognize digital assets is kind of a core piece for wholesale funding to come in because as a financier, you need to be able to understand your collateral, get to it and believe that you can sell it to get your money back, or else, you wouldn't provide wholesale financing.

So I think reduced volatility so that the risk of losing money and all the core guts of being able to recognize and hold digital assets has to sort of get there, and it's getting there very fast. I think regulatory capital treatment is going to be another one that we haven't got there yet, but a wholesale financier's ability to provide capital against collateral that gets treated one way or not on the -- from a capital treatment standpoint is probably a pretty big hurdle from the cost of capital and the provision. So I think those are probably 1 and 2 on my list of additional dominoes and sort of maturation you have to see happen for, in big ways, wholesale financing to come in.

And look, as a business in the interim, our role has been to create new -- create structures, be the wholesale financing provider for the industry as a bedrock to cementing ourselves as a key player in the industry before that happens. And so that's been a big opportunity and will be a big opportunity for us as we see it come in. And as we see the money come in, our expectation is that, that wholesale financing, if we do our jobs right, should flow into us as the -- one of the key nodes or gateways into the industry to then provide additional financial solutions to the industry. And so that's how we've positioned it, and that's how I think about it.

[Damien Vanderwilt, executive]

The only thing I would add -- I think Chris summarized it perfectly, but that the cost of capital in the sector is increasingly looking very attractive to lenders in the traditional financial world. And so I would say there's a lot of innovation taking place on their part to figure out how they can be comfortable lending into a sector where the predominant collateral, which is Bitcoin and Ethereum, can be utilized effectively in a scenario where they can't touch those coins physically if collateral gets called. And so liquidation agents and such and innovation around that are providing a mechanism for people who have evolved a credit view that seeks to take advantage of where spreads are to be able to participate, and that will continue.

[Christopher Allen, analyst]

Understood. And then I just wanted to ask on trading. You noted for the full year 2021, the client-facing trading lending was 10%. That was mid-teens as of the September quarter. So I'm just kind of -- I'd love some color just in terms of what happened in the fourth quarter to bring that down. What could be a pretty material amount? And then any way you could actually give us any dollar amounts around that?

[Christopher Ferraro, executive]

Sure. Yes. So I had the first question more specifically. The percentage is kind of -- is a -- because our entire sort of digital asset holdings and treasuries are all kind of together and our trading around the treasury is kind of together, the more we outperform just in our holdings -- or the market outperforms, by definition, they lower the percentage, but the actual notional dollar amount of revenues and net revenues in the counterparty-facing business is continuing to grow and has grown quarter over quarter over quarter. And so it's a function of the total number growing faster than the actual gross dollars, but that's not to say, so yes, there isn't growth involved because there is.

[Christopher Allen, analyst]

Got it. Any color just in terms of what the actual dollar amounts from the client-facing businesses?

[Christopher Ferraro, executive]

Yes. I mean to get there, I would go into where we report segments, right? And so this is meant to -- if you go to the trading segment and you look at the net revenue results minus the direct costs that we each outlined times our guidance, you'll get there.

[Operator]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Mike Novogratz for closing remarks.

[Michael Novogratz, executive]

Guys, thanks for your time today. Listen, I think the takeaway message is we are optimistic on our prospects. We are growing. We continue to grow. We are ready for a volatile year, if that's what we get given the headwinds in macro. But we're certainly excited about getting through the SEC process and getting BitGo integrated with us as fast as we can. We really think the combined entity is going to be a powerhouse in this field. And our real focus is talent. And we're going to continue to build our culture and cultivate our people. We think this is a long-term battle, long-term revolution that we're part of. And so that's -- we're taking that long-term view. And thanks for your time.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.