Thank you for standing by, and welcome to the CoinShares Q2 earnings broadcast. All participants dialing in are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. You can submit your questions via the post box below the video on the platform. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Jeri-Lea Brown. Thank you.
Thank you, operator. I would like to welcome you all to the CoinShares 2023 Q2 earnings call and webcast. Speaking from management today will be Jean-Marie Mognetti, Chief Executive Officer, and Richard Nash, Chief Financial Officer. All those joining today are encouraged to log into the live event, where you'll be able to view the accompanying presentation during today's call. Alternatively, the results and a copy of the presentation are available to download from the Investor Relations section of the CoinShares website. A replay of the webcast will be available for 30 days following the live call, and a transcript will be posted on the company's website as soon as it is available. Following the presentation, we will host a short Q&A via the webcast platform. Should you wish to submit a question to the management team, please provide your name and company affiliation.
We will do our best to get to as many of these as we can in the allotted time. Lastly, our safe harbor statement. CoinShares would like to remind everyone that, except for historical information contained herein, statements made on today's call and webcast that constitute forward-looking statements are based on currently available information. The company assumes no responsibility to update any such forward-looking statements, I would like to point you to the risk factors associated with our business, which are detailed in our prospectus. At this time, I will turn the call over to Jean-Marie.
Thank you, Jeri. The digital industry landscape experienced major changes during Q2, 2023, particularly with 2 significant developments. The 1st development was a series of regulatory action by U.S. bodies, particularly the SEC and the CFTC, against key industry figures. These lawsuits and enforcement action are poised to reshape how the U.S. perceive, regulates cryptocurrency exchanges, custodians, token issuers, and to some degree, even software programmers. The SEC new stance indicate all crypto platform must align their regulatory positions with the rest of the financial system. The era of exemption is far gone. Despite the recent Ripple judgment, for which appeal can be expected, the impact of these lawsuits could reach far and wide throughout the crypto industry. The changes could potentially limit access to already regulated entities, like traditional financial institutions, who are used to navigate complex legal and regulatory environments.
This could result in a form of regulatory gating, potentially preventing newer, smaller players from entering the space. Consequently, the crypto industry might lean more toward TradFi institution, drastically altering its core nature and crypto as we knew, know it. Some would say it is a necessary imbalance to accept in order to progress towards mass adoption. Some big players, like Coinbase or growing and ambitious challengers like CoinShares, are well placed to convey and drive this mutation. The second development is an increased willingness to get involved by TradFi institution. By the end of Q2 2023, BlackRock, Invesco, WisdomTree, VanEck, and others all filed or refiled in the US to offer a Bitcoin spot ETF. This is clearly a sign that the institutionalization of the digital asset industry is a reality. This trend validates our pioneering role at CoinShares and support our initial thesis.
By blending together the best of RegTech and blockchain innovations, CoinShares is a perfect conduit for investors to effortlessly incorporate digital assets into their portfolios. We don't sell fixed income or equity strategies at CoinShares. We are focused on our crypto roadmap and our journey. We are not satisfied to be only the European leader. We want to be the global alternative asset manager specialized in digital assets. We predict that digital assets will be widely adopted through our traditional financial instrument, designed by financial institution and available on preferred broker platform. CoinShares has been proud to lead the way in Europe, hoping this will unlock opportunities in other European markets where crypto has mostly been acquired to date through unregulated platform.
Looking forward, we expect increasing digital asset adoption among investors and anticipate higher demand from institutions and sophisticated investors, not only for better products, but also for liquid alpha allocation. The world in general has overstretched toward illiquid private market allocation, and it feels like the time is right, supported by the overall global macro context, to see a shift back to liquid alpha. With that regard, last quarter, we announced the launch of our active asset management unit in response to this demand. Progress on this new business is well underway, with groundwork laid for the first strategy, which is already being run to gather data and establish a track record prior to a formal launch before the end of the year. Okay, I'm already getting into the business item.
Let's first look at our financial as it is customary, and I will share with you further update in my second part. For now, over to Richard, our CFO, to speak about our Q2 2023 financials.
Thanks, Jean-Marie. With a good part of 2023 already behind us, we are happy to report that the first half of the year has been positive. Unusually for the industry we operate in, things have been relatively stable over the last few months, and this stability in the wider market is reflected by the Group's performance, which has been consistent year to date. We reported in our Q1 earnings that following the turbulence of 2022, we had seen our best quarter in a year, and Q2 has further improved on this, bringing us solid financials thus far for 2023.
Our two core business units have both performed very well, evidencing the stability of the group's underlying business model. Solid fee-generating AUM within our within our asset management products, supported by a capital markets team able to leverage the group's balance sheet to generate further gains in income within the evolving market. Over Q2, the group generated revenue gains and other income totaling 20.3 million GBP, an improvement of approximately 30% on our Q1 figure of 15.3 million GBP. Q2 performance was split largely equally between asset management and capital markets. Importantly, this quarter-on-quarter increase in our top line has occurred against a stable cost base, thereby improving our adjusted EBITDA, EBITDA margin, which stands at 60% year to date.
As we've always stated, we aim to keep tight control over our costs in order to allow the growth of the wider market to have as close to a direct impact as possible on our bottom line performance. Our adjusted EBITDA for the quarter stands at GBP 12.8 million, bringing our year-to-date figure to GBP 21.3 million. While we're not yet back to the levels of performance we saw over the course of 2021, we are busy diversifying both our product suites and activities to fully benefit from the market. Direct costs of the group comprise custody fees, trading fees, and issuer expenses incurred by the two issuing entities of the group's ETPs.
These showed a quarter-on-quarter decrease in 2022. Moving into 2023, we are seeing very consistent quarter-on-quarter direct costs, reflected by the relative stability of digital asset prices and therefore our AUM, and therefore our custody and trading fees. Admin expenses of the group, which were relatively consistent throughout 2022, at an average of approximately GBP 1.8 million per month, have remained stable and largely at this level, moving into 2023 at GBP 11.6 million for the first half of the year. We've managed to keep the level of underlying costs of the business relatively consistent since mid-2021, against a backdrop of aggressive inflation and pricing pressure. The main cost for the business, representing approximately 70% of our admin expense, is, of course, our staff base, which currently stands at 86 individuals across our four locations.
Looking more closely at our asset management platform now, and as a reminder, the components of this business unit are our XBT Provider ETPs, our CoinShares Physical ETPs, and the CoinShares Blockchain Global Equity Index or BLOCK Index. The price recovery seen towards the end of Q1 brought us to levels that were largely maintained over Q2, leading to management fees arising from the group's asset management platform in Q2 of 10.6 million GBP, showing a small increase on Q1's figure of 9.2 million GBP. We have now seen management fee growth for three consecutive quarters. The CoinShares Physical product suites generated inflows over Q2 of $27.9 million, bringing year-to-date inflows to just over $47 million.
On the XBT side, we've previously acknowledged that the trend within XBT of the outflows being largely stemmed, we saw minimal net outflow in the quarter of GBP 29.2 million and outflow year to date of GBP 56 million. The flows for both ETP product suites and those of our key competitors is published in our weekly Digital Funds Flow Report, which is available on our website. Additionally, the level of AUM held within each of our products is disclosed and subject to daily attestation by LedgerLens, an independent firm solution embedded into our website, designed to provide additional transparency and comfort to all of our stakeholders. The overall gross profit margin of the group's asset management platform remains very healthy, as can be seen on the slides.
As a quick summary, as at the end of the quarter, the level of AUM across our two ETP platforms, XBT and CoinShares Physical, stood at approximately GBP 1.7 billion, with an additional GBP 484 million of AUM within the BLOCK Index. This total figure of GBP 2.2 billion is up approximately 48% from the end of 2022 and up marginally from the end of Q1. Onto capital markets now. The performance of the group's capital market business over Q2 2023 demonstrates the benefit that diversification of activities can bring and has resulted in total other income and gains of just under GBP 10 million.
With the turbulence of 2022 behind us and the ongoing enhancements of the group's internal controls framework, we also achieved a relatively consistent performance month-on-month and a stable gross profit margin for the quarter, which averages out at 80%. Our staking income has yielded strong results for the quarter at just short of GBP 6 million, bringing the year-to-date total to approximately GBP 10 million. delta neutral trading strategies of GBP 1.9 million have brought the year-to-date figure to approximately GBP 4.4 million, with the group taking advantage of opportunities arising from trading CME futures. Fixed income activities are also showing a market increase on 2022. These levels have been achieved even against the backdrop of a far more selective approach to our lending counterparties following the events of 2022.
Liquidity provisioning of GBP 0.7 million, arising from supporting the group's ETPs, are down on Q1, due to decreased levels of flow on XBT. This, as stated before, is due to the outflows being heavily stemmed when compared to previous periods. Just while I provide some closing comments, as we usually do, we can take a look at the quarterly performance of the group since the start of 2020, which helps visualize the quarter in context. 2023 performance has been solid. We managed to navigate without issue the banking turmoil that hit the sector in the first part of the year. We're continuing to make constant improvements to our internal controls and our risk framework....
We've always been focused on ensuring that our range of products and activities continues to evolve, with a product suite of 19 ETPs and a capital markets team that's continually diversifying its reach and its partnerships, we believe we are placed well to reap the benefits of what the remainder of the year may bring. Finally, before I hand back to Jean-Marie, I'd just like to remind everyone that the information we've touched upon here and more is obviously included within the full earnings report that we released this morning.
Thank you, Richard. As usual now, let's take a look by business line. First, let's dive into our passive asset management business. In 2023, XBT is showing a robust performance in the Nordics, with a rising number of active clients. Year to date, and in Sweden more specifically, which is the only country where we can get granularity, XBT Provider attracts an average of 3,500 new clients per month, creating a solid brand narrative and reflecting its strong resonance with these demographics. However, there has been a trend of redemption from professional investors on this very same product in the U.S. and the rest of Europe, which we are closely observing. Whilst AUM is showing outflow, user data is showing more and more people coming to our products.
CoinShares Digital Securities, or CSDS, saw significant growth in Europe, with $40 million of net inflow year to date. CSDS expanded its offering for European professional investors, now presenting the best product in the market. Among this new offering is a production and the introduction of zero management fee staked index product, positioning CSDS as an attractive option for professional allocator, looking at more than just a single coin exposure. After introducing 2 new indices in Q1, Q2 was really focused on marketing and distribution for CoinShares Physical and XBT Provider. This included hosting dedicated event in Germany, Amber, Munich, and Switzerland, Geneva, and Zurich, educating investors on cryptocurrencies and exchange-traded products. A comprehensive digital assets roadshow was launched across Italy, aiming to connect with institutional investors and brokerage platform. Finally, a new website was launched, dedicated to our ETP platform.
We centralize all educational content for investors and enable monitoring and tracking of user activities, facilitating the measurement of campaign success. Still, on the passive side, let's take a look at the CoinShares Blockchain Global Equity Index, which sustained strong performance during the quarter, primarily within the technology sector and specifically the Bitcoin mining subsector. This growth was driven by increased fee reward and stronger market value for cryptocurrencies. Hot money in term of allocation shifted interest towards AI thematic. The Invesco CoinShares Blockchain UCITS ETF experienced outflow amounting to $14 million. Despite these outflows, year-to-date, the flow remained positive, recording a net inflow of $8.6 million. Despite this thematic shift and interest shift, CoinShares retained market leadership in terms of year-to-date inflow and in term of overall AUM on this product.
Overall, our passive asset management business confirms its capacity to generate recurring revenue for the group. With regards to our capital market activity, an important part of our profit comes from our CME futures trading activities, providing an appealing risk/reward ratio. This strategy allow us to tap into potential returns while retaining the ability to operate at an institutional scale in a regulated or well-regulated market environment. The effectiveness of these strategies have been heightened by the introduction of new futures contracts like Coinbase Bitcoin and Coinbase Ether futures contracts. We're also closely monitoring development from the Cboe in the U.S. and other initiative in Asia, notably Singapore. We continue to attract interest at favorable rates from our growing lending book and proactive treasury management, boosted by a resilient dollar yield.
Despite the relative low volatility in Bitcoin and Ethereum price over the quarter, our pro trading strategies have effectively counterbalanced a decrease in liquidity provisioning income. Our strategies have been crucial in capitalizing on promising price appreciation, while maximizing stability and consistent return. We persistently adapt to market condition to deliver the best result for our stakeholders. All right, time to conclude this review. To sum up, we are on an exciting journey towards acceptance and participation from the mainstream financial sectors. When Larry Fink and Janet Yellen start contradicting each other, it's time to pay attention. This journey completely validates our initial strategic hypothesis and investment in our regulatory and compliance infrastructure. As we handle these dynamic changes, my optimism for our future is unwavering. I'm confident that our foresight will not go unnoticed by the industry, our peers, and our existing and new investors.
Our strategic positioning and dedication to growth should start reflecting in the valuation of our stock as we gain further recognition. This is closing CoinShares Management Q2 2023 remarks. Operator, you can now open the call for question, please.
Our first question comes from Nick Wakefield of Somerston. He asks: AUM is currently up 50%, but Bitcoin and Ethereum are up much more, suggesting that you are losing market share. The arrival of TradFi poses a new and material competitive threat. Please, can you provide some color on the dynamics and how we should think about this?
Okay, I can take the first half of this question in respect to the AUM. Yeah, you're right. The overall AUM of the group, when looking at the last six months, i.e., from the end of 2022 up to June 2023, is indeed up 50% from around about GBP 1.4 billion to about GBP 2.14 billion. If you look at the back end of the report we released, there's some historical quarterly data that lays it out. What you will see from looking at that is, obviously, there's three component parts to our asset management platform that drives AUM, XBT Provider, CoinShares Physical, and the Block Index.
If you look at the increase in XBT Provider and CoinShares Physical, which are obviously the ETP programs that issue product referencing digital assets, they've increased by about 75% and 80% respectively, mimicking the price increases from the start of the year. It's the, the BLOCK Index, which is actually referencing underlying blockchain-related equities, that hasn't increased so much. That's gone from around GBP 430 million to about GBP 490 million. When taken all together, the, the overall AUMs increased by approximately 50%.
When looking at it, in comparison to Bitcoin and Ethereum, and if we just look at the XBT Provider and CoinShares Physical AUM growth, they, they, they effectively mimic the price increases we've seen since the start of the year, so there hasn't been any, any loss of market share, as you, as you, as you state. The second half of the question in relation to TradFi posing any new and material threat, I'll hand over to you, Jean-Marie.
Your conclusion is, like, no loss of market share?
Correct.
Going back to the question around TradFi, is it a problem? Is it good? Obviously, it's good news to see more big names coming in our direction. Is it posing a threat? I think the way to think about it is, like, the pricing point. We saw where all the TradFi participants come in term of pricing. There is some existing participant, like WisdomTree, and CoinShares is not really worried by that pricing angle. The second potential threat is on the distribution capacity. I would say that there is a couple of way to look at that distribution capacity. First and foremost, people who are working for our competitors in TradFi don't just sell crypto. They sell plenty of other stuff, and it is much easier today to sell a fixed-income ETF than to sell a crypto ETC.
The sales distribution team, which is performance benchmark, will always sell what is easy and not what is difficult. On that hand, we have a key comparative advantage. I think the second advantage for us, and that's come for the team we put together, is, like, the team we put together is coming from ETF Securities. ETF Securities was the kind of number one in Europe player with regard to niche ETF or thematic ETF, which is exactly what it is right now, a thematic, well, a crypto-specific ETF platform. I think we are equipped with the right resources, i.e., in term of team, but also in term of research and content, to foster something which is quite unique and offer our user a service they won't get from any other ETF provider.
On that note, I think TradFi is good for the narrative, but is also good for CoinShares to differentiate themselves from the competition.
Okay, thank you, folks. We have a few questions from Milosz Papst from Edison Group. The first being: do you experience any difficulties in your operations from the infrastructure gap left by the collapse of some service providers, such as Silvergate?
I can take this one. First of all, CoinShares was out of Silvergate way before it collapsed. So we were kind of, like, already operating on the basis that service provider like Silvergate or Signature, won't be able to keep operating in some condition or some form. So we have replaced them effectively. Now, it is true that the U.S. banking infrastructure and the non-U.S. banking infrastructure is suffering and is not as slick as it used to be. However, there are solutions put in place, and we are learning to live in this new environment. The nice signature without, I told my team they have to go back and live in the 2016 market environment.
Some of them remember very well that date, so we are lucky to have people with long enough experience in crypto to remember the old days, and we are back at it. You know, the, the, the short term was painful, and we are back on track right now, in a way which is fully operational, so not for your concern.
Thank you. The next question: How do you generate yields on your cash that is not invested in your capital market strategies? Is this done off-chain or on-chain?
I can take this one. As you may well have seen, if you look kind of historically over our previous results, the level of cash at bank, or cash and cash equivalents, that we, we tend to hold is quite low. The reason why it is quite low is 'cause all of our free cash flow is put into our capital market strategies to generate more yield for us that we than we would get elsewhere. Obviously, this how this cash is deployed and the strategies that we, that we are involved in changes over time, and, and we have to assess what's the best, you know, from a risk and reward standpoint, what's the best pathway to put our cash into to generate some yields.
I guess the question is arising 'cause the, you know, the level of cash at bank or cash and cash equivalents as at 30 of June is a little higher than normal, at GBP 45 million. The reason for this is 'cause we are holding some treasury bills as at the end of June for fairly short duration, 3-6 months, and, and, and generating yield in that way. While it's not being deployed into the capital market strategies in, in so much as it's being converted to digital assets, it is still, you know, the cash out bank there, it still does form part of our wider capital market strategy. It just so happens that as at June, we're holding T-bills to generate yield via that, via those means.
Thank you very much. The next question from Milosz is: Does the interest in your active asset management strategies mostly come from family offices or also from larger institutions?
I'm gonna do this one, Richard.
Sure.
We didn't communicate specifically on that yet, so we're not gonna use this call to communicate further on that format. We have some announcement to make first and some proper launch to make first. However, from a pure standalone point of view and from experience of capital formation, you know, you start with smaller, smaller allocator in terms of, you know, clip size, and as you even grow your allocator profile grow as well. So it's kind of, you know, you're not gonna get large, large, large institutions day 1, but they will come eventually over time. So it's a growing pattern, not a starting point.
Thank you very much. What could the implications of the recent ruling in the Ripple case have for the broader industry?
Oh, that's a question for Townsend. He's not on this call, unfortunately. No. With all jokes apart, I think there is a very good piece of research which has been posted on our CoinShares website by Townsend. I invite you, Milosz, to read this research piece, which is written by a securities lawyer, so which will be definitely better than my analysis.
Something a bit more recent, regarding the Terraform Labs court case, funny enough, the judge refused to use a Ripple precedent to act on the Terra case, which mean that what we were saying in substantially in this Townsend article, which is to say that actually everybody was dancing, saying, oh, the big victory is not such a victory and should be taken a bit more carefully, and court finding should be, you know, read a bit more carefully. Again, all the detail in this analysis was posted online.
Thank you very much. Now just a couple of questions from Kevin Dede, from H.C. Wainwright & Co. He asks: Noting the difference in professional investors and others, we're wondering if you can offer a mix on the Q2-2023 split, institutional versus retail, on ETP product sales versus the Q1-2022... 2023, or even Q2-2022.
Okay. Look, the narrative here is very simple. As we always said, our investor base is effectively living on a diagonal from Stockholm to Milan, with a very strong concentration on the DACH. Now, in term of profile of these investors, they remain, you know, for the vast majority, retail investors. We have, a, a growing number of institutional, investors, and the institutional quality signature, or signature quality, sorry, is also increasing from a medium kind of, and or smaller institutional, investors, such as family offices, to much larger allocators. It's a, it's a journey. We can see that, growing, and we can see the demand, eating of sell desk, changing and, I would say becoming much more qualified.
Great. Thank you very much. Next question: Why do you think there remains such strong interest in XBT Provider in the Nordic region, despite the management fee gap with physical?
Richard, do you want?
Yeah. I don't mind.
Yeah, go for it.
I think the way to think about XBT Provider is, first of all, the interest in XBT Provider is 2. There's 2 line on XBT Providers, XBT, SEK, Ethereum, SEK, and the same equivalents in Europe. Where we see the trends is really on the SEK line, which is the Swedish krona line, which is a kind of one of the key Nordic currency. I think XBT Provider, in that sense, is serving single market, which likes to trade in their own currency, which allows them to avoid getting a bad FX rate. What we have seen before, taking example in the UK, we had some UK clients before the ban by the FCA. We used to buy the product on some UK platform.
They were filled, on the mid-price, on the mid-field regulation, and then they were looking at the statement, and the FX costs were astronomical. I think for Nordic investor, being able to transact in SEK, is a very, very strong value added for them, which makes an investment in CoinShares XBT Provider product interesting, despite the expensive fees relative to the physical line, as you mentioned. You know, net, net, I think people make the math and realize it's a, it's a good product for them.
Thank you very much. How has MiCA changed thinking among professional investors throughout Europe, and have you seen it influence the results versus Q1-2023?
I think MiCA has a lot of importance for institutional adoption in general. I don't think it's just my view, it's the view for distribution team. I think reasoning just on a quarter-to-quarter basis, when you are dealing with institutional investors who make several quarters to make a decision is a bit misleading.
If I look at effectively what we see in terms of qualified institutional demand versus, or, or people doing their due diligence, versus what we have seen before, MiCA has definitely served as a line in the sand, a line in the sand, sorry, where institutional investors are using that as, "Okay, once MiCA is there, we have no more excuse not to be part of this journey." That's kind of what we need to know, that we can defend to our risk committee and our investment committee, any investment in crypto. It is a very positive thing which is happening in Europe. I know there is a discussion around is it, is it worded the right way, and is it not too limiting or anything? It is a first step.
There will be evolution of MiCA, but when it comes to institutional investors, it will definitely give them the necessary regulation to start participating.
Thank you very much. With the council markets activity generating circa $10 million in the quarter, we're wondering if you're considering building that aspect of the business or whether you're content with the investment you have there. What were the dominant strategies in the quarter, and how do you see the business playing out in the flattish Bitcoin pricing environment that we've seen so far this year?
Oh, okay. That's again for me? Sorry, Rich.
That's fine.
I think, look, the, the strategy we outlined at the beginning of the year, and we share with a lot of people, is not so much to build capital market, but how we use the know-how we have in capital markets since 2017 now, to go back to our roots, which is active asset management. If anything, what we're doing in capital market is we're trying to do innovative things and do stuff which are, you know, you know, think, think in a, in, in an orthogonal way to whatever people will be doing traditionally in the market, so that we can package that into investment product. We don't really have plans to, to build that as a service or build as a specific business.
We want to keep doing what it's doing and use it as a basis for our active asset management platform.
That's right.
Okay. The next question is, what are your strategists telling you about the state of crypto pricing world heading into the halving next year, and how has the team presented its marketing strategy to address this?
I'm not gonna, I'm not gonna, you know, front run the Bitcoin report, which is coming out, and the research papers are coming out specifically on this topic. Now, we have been living through a number of halving, and we know how a shock on, on the offer side can have a strong impact on pricing, especially in an environment where the demands start to be increasing and can become institutional. Net, net, we know that the halving will be positive, and we believe that the halving will be positive for that. How do we position ourself and our marketing strategy to address that?
Well, our marketing team is fully built, and they work hand in hand with our distribution team to be able to go to client and make sure our client are fully aware of the narrative around the halving, how the halving is working, and what the impact in term of shock on offer and demand.
Thank you very much. Finally, why do the marketing efforts continue to support the XBT product suite?
Very good question. XBT Provider is our legacy product. It is still presenting a serious amount of revenue of the group, so supporting it is not a bad idea. It's on the contrary, what we should be doing. It has an extraordinary presence in Sweden. It's a very, Nordics, it is a very well-known brand, so we need to keep protecting this asset and keep defending it. And if we can grow it to limit the, the amount of legacy outflow, we should definitely do it. You know, on a side note, it's also a way for XBT Provider and CoinShares, which is not a company very much present in Sweden, to also make the headline about CoinShares. It's a, it's a win-win for CoinShares and XBT Provider.
Thank you very much. With that, that wraps up our list of questions. We'd like to thank everyone for joining us today and wish you all a great afternoon.