CoinShares International Limited

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 postbox below the video on the platform. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host, Jerry Lee Brown. Thank you.

Thank you, Operator. I would like to welcome you all to CoinShares 2024 Q2 Earnings Call and Webcast. Speaking from management today will be John-Marie Magnetti, 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 as we can within 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 would constitute forward-looking statements are based on currently available information. The company assumes no responsibility to update such forward-looking statements, and I would like to appoint 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 John-Marie.

Good afternoon, everyone. Thank you for joining us today to discuss conscious performance during Q2 2024. As it is our custom for now 13 consecutive quarters, I will begin with an overview of the digital asset market landscape before dwelling into our business performance. So let's start. The digital asset industry has continued to demonstrate remarkable resilience and evolution this quarter. We have observed strong investor interest in spot Bitcoin ETPs with Q2 inflows for our industry reaching 2.75 billion US dollars. As of early July, cumulative total net inflows year to date had reached 16.84 billion US dollars. It is interesting to note that this number is tracking fairly well the projection made by the company when we launched Coinshare Physical back in January 2021 in Europe. We have also seen significant, yet at this time unexpected, momentum towards the approval of spot Ethereum ETPs in the United States. This has been driven by the SEC's shift in stance on this topic. We are not US agency experts, but there is no other explanation but a political request for such a dramatic acceleration. This could potentially, and in due time, open doors for a wider range of other crypto-based investment vehicles, In short, a very positive development for industry and coin shares. Interestingly, Bitcoin showed again its hyper-macro asset characteristic recently, with the price dropping sharply during the Iranian weekend attack before surging on the back of prediction of a Trump prediction victory following a failed assassination attempt. This trend is linked to Trump's perceived crypto-friendliness and proposed economic policies. Since then, the Democrats are now also quoting the crypto audience, again, who are not US politics expert, but common sense indicate that crypto should be a bipartisan topic and not the monopoly of one camp. It is important for industry to remain balanced and above parties. On the global regulatory front, we have witnessed notable progress across the various jurisdictions. As an example, Hong Kong made a significant move by approving its first spot Bitcoin and Ethereum ETF, making a crucial step in integrating cryptocurrencies into the Asian financial landscape and certainly one day into mainland China. In Europe, we have seen advancement in the implementation of MICA rules, but also redefining the regulatory framework for digital assets in the region, especially around the question of stablecoins, something I will briefly touch upon later in the discussion. In what used to be Europe, the London Stock Exchange has taken a step forward by listing Ethereum and Bitcoin ETPs, providing institutional investors and only these ones with regulated access to these digital assets. This move to date has not been a successful one, but it's not surprising given the regulatory constraint imposed by the country since 2019. Meanwhile, in the US, the House passed the FIT Act, which aimed to provide much needed clarity on crypto market regulation. These progresses across different regions are expected to bolster investor confidence and market stability. These developments continue to validate Coinshare's initial investment thesis about the institutionalization of digital assets. To conclude this broad market update, I'd like to highlight a significant achievement for Coinshare this quarter. We successfully completed the sale of our FTX claim, which yielded a positive result for the company and its shareholders. Our patient and strategic approach paid off, resulting in a recovery rate of 116% net of broker fees. In concrete terms, we wrote off from our balance sheet 26.6 million sterling in November 2021 and generated an exceptional revenue of 31.32 million sterling in June 2024. This outcome is allowing us to, at last, turn the page of the FTX saga and focus on the future. Now, before we go any further in business updates, let's turn to our financial results. For this, I'll hand over to Richard Nash, our CFO. Richard, over to you.

Thanks, Jean-Marie. So the group started 2024 with extremely strong performance in all areas of the business, with Q1 posting the highest quarterly EBITDA in the group's history. And the performance of the underlying business in Q2 has actually been largely comparable to that of Q1. That being said, during Q2 and specifically in June, this was the occurrence of two key events which have both had a material impact on overall group performance, one being positive and one negative. On the positive side, we have the sale of the group's FTX claim, while on the other hand, we elected to impair in full our holding in FlowBank. Our combined revenue gains and other income for Q2, inclusive of the flow bank impairment, stands at £8.9 million. But excluding this amount, the top line performance for the quarter stands at £30.6 million. Having said that, despite the impact of the impairment, the year-to-date top line performance of £52.8 million still sits comfortably ahead of the comparable period of 2023, which is at £32.5 million. Even so, at the adjusted EBITDA level, the impact of this impairment is more than offset by the FTX claim sale, which is classed as an exceptional item to align with the treatment when these assets were initially written off during 2022. So adjusted EBITDA for the quarter stands at £26.6 million, which remains solid and at stronger margins than last year due to our ongoing focus on ensuring cost control amidst the backdrop of market swings. On the cost side of things, we've seen some increases when compared to 2023 due to a variety of factors. On the direct cost side, the increases are primarily driven by increased custody fees due to larger AUM held across the group. While on the admin expenses side, we've seen increases primarily due to larger bonus accruals driven by stronger performance and increased costs following the acquisition of Valkyrie that completed during Q1. Michael Kenyon- Total comprehensive income for the quarter of 25.8 million pounds has brought our year to date bottom line performance to 59.9 million a number which is already well in excess of the entirety of 2023 which landed at 38.4 million. It's also noted that this quarter, our adjusted EBITDA is largely comparable to our overall total comprehensive income due to limited impact on our below the line items. The currency translation differences that arise on consolidation, which historically have had quite a large impact at times, have been very limited thus far in 2024 due to the fact that USD GBP rates at the end of H1 are comparable to those at the opening of the year. So now looking a little bit more closely at the main business units of the group and starting with the asset management platform. And just as a reminder, the components of this business unit are the CoinShares XPT provider ETPs, our CoinShares physical ETPs, the CoinShares blockchain global equity index or block index, and from the end of Q1, also now the four ETFs within the Valkyrie product suite. So the story within asset management is very consistent with that of the previous quarter. Strong top line performance, continued diversification of management fees, coupled with cost control and very solid margins. As can be seen from the table here, the overall gross profit margin of the group's asset management platform remains very healthy and very stable. Total management fees for the quarter of 22.4 million pounds are the group's second highest on record behind Q4 2021. This was a statement we also made last month, and we hope to be able to surpass our best quarter by the end of the year as a result of price action supported by inflow and continued diversification of our products. It's also noted that we've more or less equaled our entire 2023 performance within asset management just in the first six months of 2024. CoinShares XPT provider fees for the quarter amount to 17.7 million. And this performance has been achieved against a backdrop of net outflow of approximately $131 million over the quarter. And also the price declines that we saw at the end of Q1 have brought the overall AUM within CoinShares XPT provider from around 3.7 billion to around 3.15 billion. Coinshares Physical has posted again one of its strongest quarters on record with management fees inclusive of the revenue generated from staking fees of 3.7 million pounds. A core driver for this performance, as we mentioned last quarter, is the introduction of staking capabilities on the CS Physical Ethereum product, which has brought a material benefit to both coinshares and note holders alike. And this performance has, of course, also been aided by ongoing inflow into the product suite. Inflow during the quarter amounted to $66 million. Despite the positive flow performance seen during the quarter, the price movement saw AUM within the CoinShares physical product suite decrease by around 12% from $1.66 billion to the closing AUM for the quarter of $1.46 billion. And this is predominantly driven by the price declines we saw at the end of the quarter. Valkyrie fees of £435,000 represent the group's first full quarter of management fees from the Valkyrie product suite that joined the group at the end of Q1, and the closing AUM across the four ETFs within the Valkyrie product suite stands at $317 million as at the end of June. And as we always like to remind everyone, the flows for our ETP product suites and those of our key competitors is published in our weekly digital funds flow report, which is available on our website, along with our usual daily proof of reserve solution for our main products. Now onto capital markets. So the top line performance of the group's capital markets business unit in Q2 continues to demonstrate the benefit that diversification of activities can bring resulting in total other income and gains for the quarter of 11.2 million pounds, which is nicely up on last year's Q2 performance of 8.5 million. This brings our year to date top line performance for the business unit to 28.5 million, which is over double what we saw for the same period in 2023. The overall performance at an operating profit level for the business unit for Q2 is notably higher than recent quarters at 37.7 million pounds, but this is due to the exceptional item recognized in the period following the successful sale of the group's FTX claim. The agreement we entered into, which allowed us to ultimately sell the claim, yielded a recovery rate of 116% net to broker fees, resulting in a total return of 28.8 million pounds. So looking a little bit closer at the different activities within capital markets, liquidity provisioning started the year very strong due to the high levels of flow experience on CoinShares XPT provider. This has decreased somewhat moving into Q2 with total gains of 0.9 million pounds, albeit this is still well ahead of the prior year, which was at 0.2 million pounds for the same period. Looking at delta neutral trading strategies, so we stated in the Q1 report that we expected these to improve moving into Q2 following the deployment of a variety of new strategies towards the end of Q1. This has indeed been the case, with performance for Q2 of £5.6 million bringing year-to-date performance up to £6.2 million. Fixed income activities continue to show consistent performance, with income of £2.1 million for Q2. This consistency arises from the fact that our digital asset lending capacity is largely driven by our robust risk framework and the fact we continue to only interact with a very small number of high-quality counterparties in order to minimise the risk of credit losses at all times. The main driver for the business unit, however, remains consistent with that of previous quarters, so our staking income. The total value of staking yield generated over Q2 amounts to approximately £6.1 million, and this remains driven by ETH prices, yield, and our capacity to deploy, which we are constantly reviewing. Just in closing, before I hand back to Jean-Marie, we can take a look at the quarterly performance of the group since the start of 2021, which is always nice to do to help visualize this quarter in context and our recent performance as a whole. And as can be seen from the graph, this clearly shows the offsetting impact of these two key events of the quarter, which I've already mentioned, FTX and FlowBank. But behind these exceptional items, we've got an underlying business which is consistently posting solid EBITDA, and we are hoping that 2024 will ultimately look to rival 2021 in terms of overall performance. Finally, I'd just like to remind everyone that the information we've touched upon here is included within the full earnings report released earlier today. Now I'll hand back over to Jean-Marie.

Thank you, Richard, for this financial review. Okay, so now let's get back to our business lines. And as usual, let's start with our asset management business. I'm pleased to report that European physical ETP platform, also known as CFDS, achieved its third best quarter in terms of net flows since its inception in 2021. The platform attracted $67 million of net inflows. Particularly noteworthy is our Coinshare physical Bitcoin ETP, which led the park with $55 million in net inflows, the highest among all Bitcoin ETPs in Europe for Q2. These results are especially encouraging as they indicate the fear reduction we implemented in Q1 was the right decision. We believe this, coupled with our product structure far better than our crypto-native competitor, is resonating well with our client base and client needs. It's worth mentioning that while our Ethereum ATP saw some outflow, this was a trend observed across the industry rather than specific to our product. Our legacy XBT provider platform continues its transition phase. We saw 131 million in outflow as investors realized gains, but this represents a significant slowdown from Q1, where we observed $238 million of outflow. We anticipate this trend to stabilize as the market continues to trade sideways. Shifting our focus to the United States, we've made substantial progress following the Valkyrie acquisition. Our efforts have centered on product development and refining our marketing and distribution strategies. Our spot Bitcoin ETP, BRRR, brought an additional 44 million of inflow this quarter. While this is a decrease from Q1, it is in line with a broader industry slowdown. We remain confident in BRRR's competitive positioning in terms of fees and liquidity. This is really a table stake product for CoinShare. However, we didn't join the Ethereum race as staking is a critical component of Ethereum protocol. As such, we abstain and early results from our competitors, combined with the fee pressure, is supporting this decision. Our Bitcoin mining ETF, WGMI, or We're Gonna Make It, continues to attract investor interest, putting in $14 million in net new inflows in Q2. This performance is particularly encouraging given the specialized nature of this product and the fact that for the time being, we didn't engage in any active marketing for it. Moving on to our capital market and H1 solution division, it's encouraging to note that our capital market team successfully navigated the quarter's challenges. Despite a non-trending market, they effectively capitalized on basis trading and market making opportunities. The team demonstrated agility in managing two significant but offsetting market events, the downward pressure from the Iran-Israel conflict and the upswing driven by anticipation of Spot Ethereum ETP listing in the US and a potential Trump addiction. Our hedge fund solution division maintained performance within our risk parameter, so they didn't outperform the underlying asset risk water. However, with macroevent risk declining and the prospect of Spot Ethereum ETPs on the horizon, we remain optimistic about the long-term potential of our BIS and EIS products. A notable development this quarter was the successful launch of Matrix, our new trade execution and risk platform. This sophisticated system, equipped with advanced algorithms and enhanced risk management capabilities, represents a major step forward in our operational infrastructure. We anticipate that Matrix will drive growth and increase sophistication across our capital market and H1 solution divisions in the coming quarters. So let's turn our attention to our principal investment and dividend policy. We faced a significant challenge this quarter with cloud bank holding SA. Following regulatory action by FINMA as a Swiss regulator, we have made the decision to impair this holding in full. While this is undoubtedly a setback on which we have very little control, I want to emphasize that our investment portfolio remains diverse and resilient. Our key remaining investments are Comino Holdings, a long-standing and valuable commercial partner, and WAO Holdings, which resulted from the merger of Choice and WAO Holdings late last year. The latter has already yielded a cash distribution, and we are optimistic about its future performance based on its portability to date. Coming back to shareholder value and how to translate the business success into shareholder value, our board has approved an exceptional dividend following the successful sale of our FTX claim. We believe this balanced approach is particularly important in the current economic environment characterized by high interest rate and market volatility. We want to provide value to our shareholders through dividend while simultaneously reinvesting strategically with our close eyes on ROI in our long-term growth initiative. This dual focus allows us to maintain our competitive edge in the rapidly evolving digital asset space, whilst also acknowledging the loyalty and patience of our investors during these dynamic market conditions. Lastly, I'd like to highlight our progress in investor relations. This quarter saw tangible results from our strategic investor relations efforts, with coverage initiated by respected Nordic firms like ABG Sundial Collier and Redeye. Their analysis presents an encouraging outlook for coinshares. We have also launched a new comprehensive investor relationship website to enhance our communication with the investment community and be more in line with the standard Nordic investors are used to and expecting from us. As we conclude our 13th quarter as a public company, I am filled with optimism about our prospects for the rest of the year and beyond. Despite the challenges we are navigating, Coinshare has evolved into a stronger, more focused and continually growing enterprise. Our diversified business model, strategic investment and unwavering commitment to innovation position us well for future success. I think that's it for today, so thank you for your attention to this Q2 2024 earnings report. We are really looking forward to keeping you updated on our progress in the quarter to come as we continue our mission to deliver value to our shareholders. On that note, operator, you can now open the call for questions, please.

Thank you, Jean-Marie. We've got a number of questions to get through today, so we'll get straight into those. The first, which comes from Milos Paps from Edison. And the question is, what is your plan with respect to your principal investments portfolio going forward? Do you intend to focus on existing holdings or expanding the portfolio over time? If so, what businesses would you be interested in? Richard, I think that one's for you.

Sure. Thanks, Gerry. So, yeah, I'd say there's more of a focus on existing holdings rather than expanding the portfolio. As we saw in the presentation over the course of this year, we've seen a fairly sizable reduction in the size of the portfolio, firstly through the impairment of FlowBank and secondly through the successful sale of 3iQ, which was completed in Q1. After taking into account those movements and looking at the rest of the portfolio we have, as Jean-Marie noted, it's fairly diverse. We've got a couple of larger holdings in there still in WAO Holdings and Kamainu and a number of smaller investments. But in terms of exploring new opportunities, we haven't added anything for a while, nor have we actively looked at anything for a while. But as with every potential opportunity, we'll continue to assess opportunities on an ongoing basis.

Great, thank you. The next one's for you, Jean-Marie, from Milos again. Do you see any indication that some of the larger European markets, which are currently closed to retail crypto ETPs, such as the UK or Italy, could introduce these products for retail investors in the foreseeable future?

Thanks, Jerry. The UK market has been open now for a bit longer than a month. The stance of the LSE and the UKLA of this market has been to keep it open only for institutional investors and so far the uh adoption has been pretty uh insignificant uh on that side so until the market is opening for retail i think we'll not see some real adoption in the uk uh another something for italy where there is a very dynamic market when it comes to private banking sector perfect thank you another one for you generally from village um what is the potential impact of the recent market movements on your training activities within cs yeah um Yeah, okay, so we're talking about yesterday and the day before. Look, the disk was positioned, the disk was not taking directional risk, our margins were in place, everything was running as it should be, our new metrics platform was redeployed and fully operational, so we kind of weathered that as a normal BAU. The BAU just happened to be overnight, so it was a bit of a long 72 hours, but outside of that, Everything is working, banking part is working, exchange part, counterparty part working, and our lending partners are all in good shape as of last night. So nothing more to report in terms of issues or potential issues.

Great. Thank you. We've got a few questions now from Kevin Didier at HCW. He mentions that you refer to product development for the US market, and he understands that you'd obviously prefer to keep some of the information closer to your chest. But he'd love to know what your thinking is, how you believe new funds would be differentiated, how much management involvement would be required, and what fee range differential would be applied to such asset growth.

Kevin always likes to teach me like this. That's his style. But you know very well we are bound by the market abuse regime and there is only information we can disclose to the entire community as when it's ready and also we need to be aware of competition. So there is a We're doing that on purpose, not because we want to keep it close to our chest. It's very well socialized in turn, actually. The way we think about our US expansion, more specifically to come back to your question, Kevin, is that we have zero chance to compete with BlackRock Utility, and we're very lucid about that. However, at the same time, we know the American market is housing 50% of the asset management in the world. So the idea is for Gochea to be able to capture a crunch, a big crunch or a bigger crunch, which will make a difference and impact on our profitability, on our revenue first and our profitability second. To do that, we are not looking at fighting on an interior ETF, for instance, especially if there is no staking that's going against the value of the protocol. We don't want to support that. For 20 basis points, when you see Invisco raising $12 million in the first day of trading, that doesn't really cover your cost of legal. When we approached that, I said, okay, we have already a mining ETF, which is a unique product worldwide. It's called WGMI. We're going to make it. It is performing extremely well and is the only product giving access to Bitcoin mining and Bitcoin miners as a investment vertical and that's pretty cool and the idea is like okay how do we create more differentiated product like this one in the us what at the same time playing within the framework which is the one giving to us by the acc and set time of course this framework is going to evolve following the US presidential election and probably a new regime at the ACC or a new leadership at least and we'll see from there so we want to be ready we're also looking how we can benefit from the I would say bridging between our European business and our American platform and see if there is some value add which can be created. As an example, CodeShare was the first one to introduce in the U.S. a proper ETN back in 2018. Mr. Ryan Radloff called CXBTF, which was an F-share program. So there is plenty of innovation we can bring from Europe to the U.S. and we're looking at that very closely.

Thank you, Jean-Marie. Richard, one for you from Kevin. In preparing for a potential US listing, what regulatory and accounting changes must be addressed? When should we expect to see these manifest in reported figures?

Thanks, Jerry. So if we were to list in the US from an accounting perspective, given we currently present under IFRS and we are not, from a US perspective, a domestic issuer, there wouldn't actually be any requirement for us to change our accounting standard. But I think a kind of wider point of this question is perhaps whether or not we could benefit from the new accounting standards under us gap and specifically for digital assets that are active from january 2025 but available for early adoption now which isn't the case under ifrs and as many people on this call probably know we've long since suffered for from this accounting treatment as it you know distorts our our p l very heavily the treatment of digital assets as intangible assets. So I think regardless of whether we're looking at a listing in the US, what we are looking at is ways in which we can either adopt or transition accounting standards to US GAAP to benefit from the digital asset accounting treatment that's now being introduced. Whether that involves a full transition of accounting standard and we move away from IFRS, or whether we explore other ways in which we can benefit from that presentation, I can assure everyone that's something that we're looking at very actively at the moment.

Raj, can you save us from Kevin's next question? It's going to be about the functional currency.

Sorry, say again?

Can you save us from Kevin putting another question which is going to be about functional currency so we stay on the same question?

Sure, sure. Yeah, so another thing that we are considering on an ongoing basis is whether or not we transition our functional and presentational currency from GBP into USD. as time goes on, it's becoming more and more apparent that that would be more beneficial for us and more suitable for the presentation of our financials. The more eagle-eyed amongst you will notice from time to time, we have a very large movement through other comprehensive income, which is FX on consolidation, which is driven by the movements between GBP and USD. And because the vast majority of our assets are in a subsidiary presented under USD and with a functional presentational currency that is USD, there's an argument there for transitioning the entire group in that direction, thus mitigating those larger movements we see through OCI. So it's quite connected with the accounting standard question. And I think just broadly speaking, we're always looking at the best ways under whatever standard to make sure that the presentation of our financial performances is understandable as possible to the reader.

Thank you, Richard. Back to you, Jean-Marie, another one from Kevin. Why would CoinShares choose to dividend the value of the FTX recovery to shareholders when that money could be used to build CoinShares' business, either through acquisitions or geographical spread, i.e. Asia and the Middle East?

All right, that's a fair question, Tony. So when FTX happened, I'll stop whispering at the ATC's sake. We recovered that money and our stock is still trading as of today. It was in the red a couple of minutes ago at 52nd. The shareholders, which are with us for a long time, have demonstrated a very strong loyalty to the brand and a loyalty to the management and what they were doing. And as such, they've been enduring coin share pay, so it's also normal to reward them for enduring the pain with management, which has been kind of in the trenches for that long. So that's the first point. The second point is it seems to me that coin share balance sheet is quite bloated to some degree and quite heavy on asset and as a result on data set value at least, and that the market is not paying for that. So dividend in some of it is also a way to reduce this balance sheet, I would say, bloating. And so before, on the question about author acquisition and author expansion, A, we have all the ways to fund this acquisition through debt. We have countless providers happy to bring us debt structure, whether through private lending, through big credit hedge funds, or through banking infrastructure, so two avenues there. And then at the same time, if we ever want to raise money from shareholders or from other shareholders, the fact that we are able to also give them back money will incentivize them even more to give us back some money. So it's a question of being able to get and to give at the same time and not just like the only taking from shareholders. So it's kind of a balanced approach, I would say.

Thank you, Jean-Marie. Another one for you from Kevin. How are you thinking about unifying the coin shares and Valkyrie brands? Would it be through increasing marketing spend or potentially other promotional activities?

So unifying marketing brands is a plan which is in full deployment. I think we have our new website uh starting to be deployed uh for the you which will include the us into it uh and coming up online uh during the current summer uh and the idea is by the end of the year uh to be in a position to be uh done to have a fully uh harmonized and unified branding for co-chair both in europe thank you

Can you provide a little more colour on what exactly happened at Flowbank? What do you expect to come from these bankruptcy proceedings? And whether there's any chance of any clawback on the investment?

Yeah, so we'll be careful here about what I said, because obviously, I'm expecting there would be some It's interesting to be careful about how we make these statements, but the Finland came out and the Swiss government, the federal government, came out in 2017 with a very forward-looking law when it comes to crypto and how to make crypto a very, very prominent industry in Switzerland and the zoo crypto valley. As we said last week, feedback came out with a new kind of set of measures about how to regulate crypto, which is basically killing crypto in Switzerland, or pretty much making it appealing. So, ProBank, in this situation, has an unfortunate uh a characteristic to a key shareholder uh which was uh anti-public information now who was the sister of uh shenpeng zhao uh flowbank had a very successful business development with finance and many others stablecoin provider and many other kind of crypto company and that definitely didn't float well uh with switzerland and as a result uh the bank was put in liquidation um I can't pronounce myself on our chance to recoup some of the rights that Richard put in the books. However, what I can say for sure is that we are studying all the possibilities which are at our disposal to be able to recoup this investment.

Great, thank you very much. Again, from Kevin, for you, John-Marie, can you provide some more detail on the Matrix platform, when it will go live, and what sort of efficiency gains or de-risking capabilities you expect to see from it?

Yeah, I think the idea to what you think about metrics is the current platform was built by our friend and colleague Pierre Porto since 2014. It was built for a single user. It was built without thinking about crypto becoming akin to security, at least in the way it is regulated in Europe and the MECA. So plenty of things were moving, like pre-trading, both trading and conciliation. account management, audit trail, all this kind of stuff you want to get, redundancy, system maintenance windows, kill switch, all the kind of stuff you would expect from a proper grown-up EOMS platform was not there. It was really designed as an algorithmic platform to be run from the terminal by people who understand how to manipulate the terminal. So, this is really kind of like taking to the next step where we can deploy tools at much scales and give our traders an opportunity to make sure the algorithms are in the market, deploy to the market, multiply, parameter, multiply, and be able to effectively have a better understanding of the ROI of every single strategy and not just look at the book as a big, big book and just say that's what it is. So it gives us a much more fine-tuning of our operation, a much more fine-tuning of our cash management, of our margin management, of our lending counterparties, and overall a better copy visibility of our entire business from a capital market point of view. So that's what we are.

Thank you. I'll let you take a breath now, John. Richard from Kevin again. AUM declined across the board from Q1 to Q2. What's the best explanation for this and how influential were the outflows and asset price declines?

So the easy answer to this question is it's basically all asset price decline. So we moved from 4.7 billion GBP AUM as at the end of Q1 down to 4.2. So a decrease of half a billion. And if we look at the flows in the various products, we had about 100 million GBP outflow on XBT. That was more or less offset in full by 50 million GBP inflow on CoinShares Physical and then inflow across a selection of the Valky products. Jean-Marie mentioned, we saw 14 million USD of inflow in the quarter on WGMI. So largely speaking, the flow across all of the AUM is kind of neutralized inflow from all the products with the exception of XBT. So the reduction that we saw with the poor is purely price related.

Great, thank you very much, Richard. Another one for you from Kevin. Admin expense was up almost £1.7 million sequential in Q2. What was the reason for this and should we expect that to continue throughout the year?

So there's probably three main reasons for that increase. First of all, Q2 is the first full quarter in which we've had Valkyrie in the group joined right at the end of Q1. so there's an element of increased cost there and but that's largely offset by the by the management fees that are that are coming in there which were around 500k for the quarter and then the other two factors that drive that are predominantly an increase in the um the bonus accrual which is a function of our performance the better we perform uh the more we accrue to remunerate the staff and make the performance possible And also there's a share option expense within there as well, which is driven by the price of the share. So in terms of, do we expect that to continue through the year? A portion of it, yes, but being offset by higher management fees from Valkyrie. And then the other two are dependent on the overall performance of the group and the share price itself.

Thank you very much. Moving on now from Kevin's questions over to Albert Brook from ABG. Richard, if you could take this one. Do you expect net working capital to increase when the AUM grows, or will it be mitigated by expected realisations in the XPT provider products? We appreciate that there are many moving variables such as price and net flows, but any colour would be helpful.

Sure. So I think the one thing to remember as AUM grows, it's growing because of the products that we issue that are collateralizing heads. So you'll have an asset that's moving largely in line, almost entirely in line with a liability. So that's not really going to have an impact on your networking capital. uh realizations in xbt provider because of the structure that actually release cash um but having said that when aum grows and we've got a larger balance sheet and we've got more means to deploy within capital markets that's going to indirectly impact working capital because you're we've got more firepower to deploy and therefore we're going to make more gains and and realize more cash

Thank you. And another from Albert for you, Richard. Costs were slightly higher in Q1 2024. Is this a new run rate, temporary investments, or just seasonality?

So, similar answer to Kevin's question, which focused on admin expenses, but if we're looking at costs in their entirety, we also had an increase in our direct costs, but that is largely due to higher custody fees because of higher AUM when compared to previous periods. On the direct cost side, if our AUM stays where it is, we can expect to see these being fairly static. And then on the admin expense side, that's just referring to my previous answer to Kevin.

Great. Thank you, Richard. One for you, Jean-Marie from Albert. Is there any information on the AUM inflows into the hedge fund solutions? Are we building a track record before onboarding any external clients?

That's a simple point. So we are building a track record before onboarding external clients. And in the same vein, we hired a lady in the US.

uh to be focused specifically on starting to approach lbs and disability buildings about this way to monetize and uh this hedge fund solution product and to bring lbs on the platform so work in progress thank you very much back over to you richard from albert there's a partial reversal of the fx slash other gains in the capital markets division is this a zero income line over time or should we expect a slight positive contribution

The other line within capital markets tends to be a catch-all for some of the smaller activities that are undertaken by the capital markets team, inclusive of FX. So the FX element will tend to ebb and flow over time and more or less neutralize over a longer period. because of the the trading activities undertaken by the team but also within that number we'll have other things such as um airdrops for example or short-term digital asset gains on some of our prop assets so i would say a slight positive contribution over time um but similarly as the activities sort of change over time in the capital markets as they always do and there will be elements of that other line that merit their own disclosure on their own line that will grow out of that other that other line and be presented separately great thank you and we've received a few questions from rashmus jacobson from red eye uh richard's first one for you did you receive the ftx proceeds within the quarter That's a nice, easy one. Yes, we did. When we wrote those assets off back at the end of 2022, despite having received over the intervening period multiple offers to sell the claim, et cetera, even though we knew that it was a receivable amount there, we elected not to recognize any of that until the cash had hit the account in the interest of prudence. So, yes, the gain is reflected in the accounts. occurred concurrently with the receipt of the funds.

Sorry, there was an issue with the mute button there. Another one via Richard from Rasmus at Redeye. Is the current delta neutral earnings level deemed sustainable? What are the underlying factors resulting in this performance?

The underlying factors that result in the performance are the capabilities of the team, the volatility of the market and factors in the wider market and what we have available to deploy. Some of those things are within our control and some are not. We made a point at the end of Q1 because the the delta neutral trading activities were muted over q1 we made a point in the previous earnings announcement to say that we expected them to be higher in q2 um given uh we knew we deployed a number of new strategies and just looking at the activities of the market i would It's hard to say exactly where they will land on an ongoing basis, but what I can say is the team is poised to take advantage of the market when it moves in certain ways. And I would like to think that we are always able to maximize that number, although it's very difficult to say what that number will be.

Thank you. Another for you. Can you confirm whether the reported AUM is as at the end of the quarter and not on average for the period?

Yep, can confirm that. So we were talking about our level of AUM before. It moved from 4.7 billion at the end of Q1 down to 4.2 billion at the end of Q2. And that is indeed the month close number.

Thank you, Richard. Over to you, Jean-Marie. How do you think the fact that staking rewards are not accessible for Ethereum ETF investors will affect the demand in your products?

I think they are accessible. They are not accessible on the SVT provider right now. They are accessible on Coinshare Digital Securities. They are not accessible in the US plug. So if people want to get a Coinshare product with staking, it is available. So I don't see it as a problem for... people accessing our product.

Okay, thank you. Can you give us some more information about Hedge Fund Solutions? What has been the response from potential LPs?

We're already on to this question, which one would you like?

Oh, that makes sense. Okay, fine, we'll skip that one. Do you see any acquisitions on the horizon? What areas do you see the most potential in?

so obviously we are bound by market abuse regime again so we can't really make any forward-looking statement but it's fair to say to the myself and the ex-co and to some degree uh sometime the board are reviewing opportunities on a fairly regular basis and we always have a few opportunities we're looking at. So it's a question of finding the right opportunity and not to make a fast move for a fast move. So we are very agile, we are very aware of what is going on in the market. There is a few of our competitors for sale right now in the market. That means we need to buy them, but we can also look at them. So we are very, we'll say, pragmatic when we look at it, and we're doing this on a one-to-one basis, and give them their own variance.

Thank you. And I suppose, in connection with the previous question regarding Ethereum products, do you have any plans to offer Ethereum-related ETFs in the US?

I would say that earlier that we were not doing it because there is no staking in the U.S. available, and that would be a shame for this protocol to be launched in the U.S. in 2024 without staking. And that's why probably you have such a low adoption right now in the U.S. So we will only do it if there was a way to get staking done properly. And again, at that time, it will be reviewed with other lenses in terms of market demand and product market fit, not just staking.

Perfect, thank you. That brings our list of questions to a close. We'd like to thank everyone today for joining the call and wish you all a lovely rest of the day.