The Launch of GalaxyOne with Zac Prince

0:00Alex Thorn:Welcome to Galaxy Brains.

0:26Alex Thorn:Welcome back to Galaxy Brains. As always, I'm your host, Alex Thorn. head of firmwide research at Galaxy. Bitcoin, not zero. And we have a great episode for you this week. Zach Prince, managing director of Galaxy One at Galaxy, former founder of BlockFi, is our guest. I'm going to talk with Zach at length about Galaxy's new retail-focused investing product, Galaxy One, and everything that goes into it. It's a fascinating conversation with Zach, who now works at Galaxy. Welcome, Zach. Before we get to that, I need to remind you to please refer to the link to the disclaimer in the podcast notes.

0:58Alex Thorn:and note that none of the information in this podcast constitutes investment advice or an offer, recommendation, or solicitation by Galaxy or any of its affiliates to buy or sell any securities. Let's hop right into it. Let's go now to our guest, Zach Prince, managing director of Galaxy One at Galaxy. Zach, welcome to Galaxy Brands. Alex, great to see you, man. We've known each other for a while. I'm really happy to be here. We have known each other a long time. We're not going to regale the audience with the first time we hung out. It was a long time ago, though. And we'll get into that because we've known each other since you founded BlockFi.

1:34Alex Thorn:And my old fondant Fidelity was a seed investor in BlockFi. That's how we met. That was a long time ago. 2017. So that was eight years ago? Yeah. Wow. Well, you're not at BlockFi anymore. You're now at Galaxy. How did you get from BlockFi to Galaxy? So I've known the Galaxy team since the early days of Galaxy, which coincided with the early days of BlockFi. Galaxy was actually a seed investor on the equity side at BlockFi and also maybe more importantly for BlockFi's business gave us our first ever credit facility, which supported our first product of crypto-backed loans. And Chris Ferraro, president of Galaxy, was on the board at BlockFi through the Series B.

2:14I developed a relationship with Mike and got some great advice from him on certain things over the years. And the BlockFi investment worked out really well for Galaxy. The credit portfolio, the loan portfolio that they financed performed perfectly. And I've stayed in touch with Mike and Chris. BlockFi ultimately ended in tragedy and bankruptcy, which I'm sure we'll talk more about later. But when they reached out to me and brought up the idea that we're here to talk about today of Galaxy One, I got incredibly excited, not just about the business opportunity, but about potentially joining the team here at Galaxy and working with you and a lot of the folks that I've known for a long time.

2:56Yeah, BlockFi was the biggest consumer app in the prior crypto site.

3:03Alex Thorn:I mean, it was, how many users did you guys have at the peak or whatever? Certainly, I think in the lending category, we were the market leader. We had at our peak, north of$14 billion in client assets on the platform, 650 ,000 funded accounts. We, you know, in 2021 did over$650 million in annual revenue. And on the equity side, our valuation got up to a little over$3.5 billion. It was, I mean, I remember you guys were a cycle leader and, you know, the category collapsed. It wasn't just BlockFi. Let's talk a little bit about the collapse because I think Hardians will remember well, we tend to have very smart crypto knowledgeable people who watch.

3:48But in 2022, FTX collapsed.

3:52Alex Thorn:There was the Luna Unwind. All of the category retail-focused lenders had problems. Most of them collapsed. Some of the CEOs, obviously not you, went to jail, are now in jail over this. Alex Mashinsky at Celsius in particular. Now, he just stole people's money. A lot different than what happened. But what did happen at BlockFi? what happened. I remember well. There were three big things. So the first was we had a kind of regulatory showdown, kerfuffle, whatever you want to call it, with initially state-level securities regulators. But ultimately, it concluded with a settlement with the SEC where we agreed to register our interest account product.

4:34But as part of that, we had to turn off the interest account product for U.S. users for a period of time. So that was February 2022 where we reached that settlement. Second big thing that happened was some of our competitors, Celsius, Voyager, in May after Terra Luna, they collapsed and shut down their platforms, froze people's funds. And that caused a massive outflow of user funds from BlockFi. We went from, you know, at the time, we had drifted down from over$14 billion to around$12 billion in client assets on the platform. But within two weeks of Celsius blowing up, we went from$12 billion down to$2.5 billion.

5:12Wow. So, you know, basically kind of a run on the bank type scenario, which we weathered. And we kept our withdrawals going the whole time. You know, our platform kept working. But the markets were not in a great place at that point in time. Coinbase stock was down 90%. FinTech in general was a rough category. And we knew looking out at a 6, 12, 18, 24 month projection that we were going to need to bring more capital into the business. And so ultimately we did a capital markets exercise that concluded with us deciding to sell to FTX. And so we consummated that deal at the end of June of 2022. And for a while, things were fine.

5:54We were working on rolling the company under the FTX umbrella for a few different reasons that hadn't fully completed yet. And then when FTX blew up in November of 2022, BlockFi was still technically an independent company. And so we had to file our own bankruptcy and go through that process. And you were CEO of the company through the bankruptcy. I stayed on as CEO through the confirmation of the bankruptcy plan, which took about a year. Wouldn't wish the bankruptcy process on anybody. but you know myself and the block fight team did everything we could every every step of the way to try and generate the best outcome possible given the set of circumstances for for our clients i

6:34Alex Thorn:always respected how you and the block fight team were very forthcoming about the situation the whole time yeah um let's talk about galaxy one i've been at galaxy now for five years and which actually you know in crypto time that's like 20 years totally it's not like the whole time that I've been to Galaxy. I've known Galaxy to only service institutions. That's now changing with Galaxy One, isn't it? That's right. Earlier this week, we launched Galaxy One, which is a platform that's available for individual investors to access a variety of products all in one place. And what we're doing is we're taking the institutional strength and quality that Galaxy is known for and making that available to individual investors.

7:19It's available on the web. It's available on iOS or Android apps. We're at the starting line, but we already have what I think is a really compelling product offering for folks. So this is a retail-focused investing app. Is that right? That's right. Yeah, and we're combining the best of crypto with traditional fintech or traditional markets as well. So in the Galaxy One app, you're able to access a checking account, a brokerage account, crypto trading, and a product that we're calling Galaxy Premium Yield where folks can earn 8 % on their cash if they're an accredited investor. That's pretty cool.

7:59All in one place. Is this like a Robinhood competitor basically? I don't know that I would say right now that we're trying to compete directly with Robinhood. I do think there will be folks out there in the market who say we're trying to compete with Robinhood or we're trying to compete with Coinbase. And I think there's elements of that. But really what we're trying to do is build something that's differentiated and relevant to who we think of as our target user. And so if your starting position is Galaxy, who's been purely institutional focused, we're not really trying with this app to go all the way down to the, for lack of a better term, the smallest type of retail investor.

8:39We're building something that we think is going to be relevant for a mass affluent type of consumer. The premium yield product is available to accredited investors, which is roughly 20 % of the U.S. population. So we're going to be building things that help folks grow their wealth, reach new levels of net worth and delivering a level of customer service that I think is analogous to like private banking. So it's an elevated experience, I would say, versus a Robinhood type of platform.

9:11Alex Thorn:It is going to be really interesting to compete in this fintech space. I guess this feels like a fintech company that also has crypto. It's not a crypto company doing stocks. It's more of a genuine fintech play. Like how do you see, you know, BlockFi was a huge fintech company. You built these from, you know, seed to huge. How do you see the competition here for Galaxy One? Like how do you think about the competitive landscape for this application and product? So, I mean, we're competing with everyone. So like anybody that has consumer financial services, whether it's DeFi, CeFi, traditional fintech, we're competing for Mindshare.

9:50we're competing for attention. And some of the core principles that worked well at BlockFi I've brought here, the two that I would highlight the most are we need to create value for our clients. And how do we do that? We do that by building products for them that will help them grow their wealth, take care of their finances in a way that hopefully they're not able to do as efficiently or at as good of a price or with as high of returns in other places. And then we couple that great product experience with market-leading client service. So we're going to have, we already have, you know, a wonderful team in the U.S.

10:28We have a phone number that folks can call. We're, of course, on social media. And we have, you know, chat available in the app and all of that good stuff. But you can call and talk to someone that works at Galaxy who's familiar not only with crypto, but also traditional equities and banking products and all of the things that we're going to bring to this platform over time, and they can help you with whatever you need.

10:47Alex Thorn:Yeah, there are some, I'm not going to disparage anyone, but there's some major players where you really can't get someone on the phone, and that is strange. You know, not a fidelity. Of course, you can get a fidelity on the phone, but some of these fintech apps, like there's nobody to call. It's very interesting. Yeah, and that can be, you know, that's not a good experience. No, and you guys had this too at BlockFi, I recall. You could call BlockFi as well. You could talk to a person. Yeah. So we're blending all of these products together. We're not the first to have done this. We're not the first to have done this, but there's some unique stuff here.

11:18So I'll give you a couple examples. So our checking account is a high-yield checking account. It has a 4 % interest rate associated with it. This is a normal checking account, FDIC insurance, all that good stuff. But it's the highest-yielding checking account, as far as I know, where you can auto-reinvest the interest that you're earning into Bitcoin. And I think that's a wonderful option for folks who are already heavily investing into Bitcoin and understand DCA-ing into Bitcoin is an incredibly smart thing to do. But it's also, I think, attractive to people who are waiting for the right way to dip their toe into Bitcoin investing.

11:57Yeah. Everybody carries some spare cash in their checking account, and our checking account not only has a high yield, but it's coupled with that ability to select a reinvestment option of the interest that you're earning. Similarly, our premium yield product, if you're an accredited investor and you can access our premium yield product, we're bringing crypto capital markets to crypto investors or normal investors with a really attractive yield on cash, 8%. And we're delivering it in a super easy to use way. And just like the checking account, you can take that 8 % interest that you're earning and auto reinvest it into Bitcoin or other blue chip cryptos that are on our platform.

12:38So this isn't lending and borrowing crypto.

12:41Alex Thorn:It's cash. It's cash only. But the yield is coming from where? Where is that yield coming from? So the yield is coming from Galaxy's institutional lending activity. So I've read your research reports. You've put out some phenomenal research reports lately on the lending markets and crypto. So what I think is interesting about the crypto credit markets and crypto lending markets is that there is still to this day a lack of U.S. dollars at the same cost as traditional markets available in the crypto market. And as a result, I think there's a compelling risk-adjusted return profile of providing cash into this market.

13:22And so what we're doing with Galaxy Premium Yield is making this available to folks in a super easy-to-use, easy-to-understand way.

13:28Alex Thorn:This is something that, by the way, cash investors have known about and have been making money on institutional size for a long time. Yeah. The lack of dollars in crypto has made the dollar borrow rate in crypto much higher than it is in traditional finance. Absolutely. And a couple of things I would call out from a risk management perspective. So Galaxy's institutional lending business has been around for a long time. It's had great performance. this capital is primarily going to be used for Galaxy's institutional lending activities. But if you read the PPM, and please everyone read the disclosures, and I'm sure there's a disclaimer on this, but nothing we say is financial advice.

14:09That's right. We also have written into the documents that it can be used for general corporate purposes for Galaxy. And alongside that, Galaxy has put a guarantee onto this product. So it's, yes, the yield is being generated from crypto lending market activity primarily, but also this is kind of like you're facing galaxy. Right. And you're taking corporate credit risk to galaxy. Right. And there's a capped size on this. So that was one of the biggest things from a risk management perspective. We have to size this appropriately. So the product is capped at$250 million of size for now. That may change over time.

14:52We might launch different versions of the product over time. But in this initial one, 8%,$250 million cap and a 60-day duration. So if you participate in this product and you want to exit the product, it's a 60-day process to go from being invested in it to getting your funds.

15:09Alex Thorn:I think it's really compelling. And there's a stack of ways to earn interest on your money in life, right? You've got the checking account. That's, I mean, to be clear, most banks are just keeping that 4 % themselves, right? I mean, technically, every savings account at every bank is supposed to be yielding. I remember Jamie Dimon and other bank CEOs were in Congress like last year maybe, and they were getting grilled on this. But some member of Congress was saying like, oh, your Chase bank account holders are only getting half a percentage. Where's the other three and a half? They were like, oh, our bank profits.

15:48Alex Thorn:But those are FDIC insured. The checking account is FDIC insured. Maybe a checking account is among the lowest risk cash investments. A lot of people like – because most people's banks don't yield any rate really, a lot of people have fled banks over the years into money market funds, which pay a blended treasury bill rate basically. I think right now most money market funds are like 3 % to 4 % annualized. Not FDIC insured, actually buying a security, but a very liquid. SIPC insured though. Yes. And a very liquid cash product. Sure. 3-4%. And you can do that on the Galaxy One platform too. So we have a brokerage account.

16:30Alex Thorn:Well, that's sort of what I was going to say here. So an investor could say, well, I've got cash in my Galaxy One cash account. That's giving me a yield that most banks wouldn't give. So that's good. They could say, well, I want a little more. So I'm going to go into my brokerage account, buy a money market fund. they could say, I know how to roll treasury, so I'm going to go in and buy the 30-year fixed at 5.5%, get a little bit more. They could go, but that's sort of what I'm getting at here is you're adding to the curve here, right? Different levels of risk tolerance and duration and yield appetite.

17:06Alex Thorn:You've now added this, and it's 8%. That's right. But importantly, this is not a publicly traded security, which means that you don't have to deal with like in publicly traded corporate bonds. They can trade at a premium or a discount to their face value. That has an impact on the yield. But importantly, you could buy a bond and it could be down 10 % or 20 % for a period of time. And if you wanted to get out of it, you've lost some of your principal potentially depending on how it's trading. This is not a traded security. This is only available at Galaxy One. You enter and you exit. Your principal has that guarantee on it that I mentioned from Galaxy.

17:48And I think it's a really compelling opportunity for folks that have a short-term cash position where they're looking to get a high yield on it.

17:57Alex Thorn:So why cryptos next to stocks, generally speaking? Like why are, you know, Cash App does this. I think Cash App can do stocks in crypto or in Bitcoin, not other cryptos. But obviously Robinhood famously does this. I think there was a point in 21 or 22, I haven't looked in a long time, where like 70 % of their revenue was like Dogecoin related specifically. Robinhood, big player in crypto. But a stocks app thought of it that way. Many others are doing this, the blending of the two. One, why is that? And two, are we going to see more of that? Well, if you think about this target market that we're looking to address, you know, the mass affluent consumer in the U.S., and you see what's happening in crypto markets, things are blending.

18:41And we want to be able to deliver to our customers a holistic platform. It's part of where the name came from, Galaxy One. One platform, you've got your cash, your brokerage, your crypto, and we're going to be introducing a lot more products too over time. And one of the things that I think is most interesting about this platform, zooming out a little bit and thinking about how it fits in within the broader Galaxy story is the countless synergies that can be created and unique opportunities, not only for Galaxy, but for clients on the Galaxy One platform. So don't get me wrong. We're talking about Robinhood and there's other fintechs.

19:22I think there's a massive opportunity for Galaxy One to contribute significantly to the enterprise value growth of Galaxy Digital over time as a standalone. But it's not a standalone. There are going to be synergies that are realized for our clients and for Galaxy Digital from having this platform here. So if you think about that, I would say at its core, this is a new distribution channel for Galaxy Digital. whether it's staking infrastructure, asset management products, trading functionality. The things that Galaxy has been known for and has developed for the institutional business, we're going to be looking to package and deliver now on the Galaxy One app to individual investors.

20:04And I think that's where over time you're really going to see some clear differentiation and some product launches where people go, oh my God, I can't do that thing anywhere else. And that's what I get really excited about. And there's, you know, categorically in other things that I think are interesting, you know, in the news, Galaxy has been in the news recently for, you know, Ford, the Solana treasury. I think there's a world where over time as opportunities, whether it's digital asset treasuries or other things like that come around, we can bring retail distribution to Galaxy Digital and unique compelling investment opportunities to our individual investor clients on the Galaxy One platform that are not available anywhere else.

20:49Alex Thorn:Yeah, that's really interesting. And I think talking about it from Galaxy's perspective as a new distribution angle is really interesting because as a longtime Fidelity employee, the story of Fidelity is quite similar. They have a core product, which was the mutual funds, which they were a pioneer in and used to have to mail them a check. And they would mail you when you want to withdraw or like redeem, they'd mail you a check. And that's literally how it started. Eventually, they built Fidelity.com, the Fidelity retail brokerage business, the 401k retirement business. All of those today are big businesses in their own right, but they really did kind of start as a way to make it easier to distribute their core product, which was actively managed funds.

21:34Alex Thorn:So I do think these distribution lines matter for core companies, right? And we didn't start as a retail company the way BlockFi had started as a retail – or that Robinhood started as a retail company. but you can sort of see, I mean, I would expect the retail launched focused ones to move into institutional and the institutional ones to move into retail. I mean, even Goldman had their Apple card. That was like their retail play at the time. Right. And I think what we do that's unique, very few people can interact with, you know, we mostly have served hedge funds and pensions and endowments and investment advisors over the years.

22:12We still do, but we can package that in a way for