Vito (00:06):
Hello and welcome to Strategic Alternatives, the RBC M&A podcast. In each episode, we explore trends that are shaping tomorrow's global mergers and acquisitions landscape. I'm Vito Sperduto, co-head of global M&A, and I'm joined by Larry Grafstein, deputy Chairman of Global Investment Banking. Welcome to part two of our FinTech conversation with special guests Jason Gurandiano. Jason is the head of US Technology, investment Banking and Global head of FinTech coverage here at RBC Capital Markets. He's also a member of RBC's Crypto Committee for a number of years. Now, let's dive back into the conversation as we think about some of the biggest headlines, the crypto world, you know, blockchain as a result certainly get a ton of attention just given the dollars, the fanfare, some of the more noticeable areas in terms of the whipsaw of the volatility on the pricing of the digital currencies. But underlying all that, there is a sound technology, and I think you've spent a lot of time around this in terms of evaluating it from BC's perspective and then also for your clients. And so you're in a unique position to kind of see what does the go forward look like? And so would love your thoughts in terms of how do you see that space evolving in 23 and beyond?
Jason (01:28):
Crypto has obviously, you know, has seized the imagination of a number of folks given the headlines, which on a daily basis become more and more unbelievable as you look at various forms of malfeasance and some of the characters that dominate the news cycle from that perspective. But to your point, I think everyone loves to talk about the price of Bitcoin, the price of Ether. People love hearing the unbelievable details of FTX and Genesis and Three Arrows and you know, a little bit of chat freta around that stuff. But, you know, what gets lost in the whole shuffle is, to your point, there is a fundamental underlying technology that is going to change the way that we transact across a number of different areas, whether it's, you know, on a consumer to consumer basis, whether it's on a business to consumer basis, whether it's on a business to business basis. And it does remind me at the risk of dating myself, although I think I am the youngest on this podcast, no offense to you guys, but uh, I
Vito (02:27):
Think you are.
Jason (02:28):
Yeah, yeah, there you go. I'll take it. You know, it does remind me of the internet bubble, right? When, you know the internet bubble was happening, there were a number of companies that were what I'll call products as opposed to companies that were attracting outsized capital valuations. And low lo and behold, when that, uh, bubble ended, they all fell down. But what came outta that was the underlying web technology completely transformed the way all of us interact in our daily lives and, you know, flip the world upside down. Do I think crypto slash blockchain has that same capability? We've seen the term Web 3.0 being thrown around to describe some of it. I I don't think it's gonna be as revolutionary, but pretty close. And you don't wanna throw the baby in with the bathwater when you talk about Bitcoin or you know, as I said, some of these more consumer facing enterprises cuz the real beauty or the real value creation is gonna happen around leveraging that decentralized ledger, distributed ledger technology, you know, that seamless permissioning to revolutionize a number of areas and friction points that exist not just in financial services, but across industries.
(03:39):
We at R BBC have been at the forefront of this, not the forefront of Bitcoin trading or ether trading, but really at the forefront of blockchain, which is a reflection of the fact that I think we're the only financial institution I'm aware of that has a computer scientist as our C E O. And so leveraging technology, especially for 150 year old bank that is growing aggressively in established markets like the United States, you know, the uk the only way we're gonna do that is through technology. How do we leverage technology is through best in class technology. And so blockchain is something that we're applying and layering in across a number of our divisions. I think the most notable example out there is the fact that we've moved, you know, the vast majority of our loyalty programs for credit cards onto a blockchain based technology, which has been quite cost effective for us and speaks to the strength, uh, and robustness of the technology that doesn't have to have a coin at the front end or some store of value as being the primary methodology that underpins the technology.
(04:40):
So while I am cautious in the near term around crypto, I do believe that once we have bad actors move stage left, which seems to be happening, once we have regulations step in at scale, then I think we're gonna see crypto move to the forefront of a number of different transactions, not just in financial services, but across different industries. For example, tracking carbon emissions through the blockchain on behalf of energy companies. There's just a number of different applications that are just being flushed out today that I think drive long-term value across the board and, and frankly validate the technology.
Larry (05:17):
That's some great points. If the allegations prove to be true, then even though crypto is a very exciting new technology, in some respects it's the oldest story in the book, which is misusing customer funds for, uh, for other purposes. And there's nothing particularly modern about that. It's very true. I think we can all see those of us that work in finance, those of us that, you know, deal with documents, people that work in trade, people that work in supply chains, the room for efficiency in blockchain and the, the reduction of friction costs as you put it, is just so massive that regardless of the ideological, you know, for a given cryptocurrency against the whole idea, there's clearly elements of blockchain that will be critically important over the next really century as we evolve the, you know, financial and industrial economy. And so it's, it's interesting because you do have different things going on at the same time.
(06:18):
And you know, let's also be honest, there's a reason that cryptocurrencies have grown o over the past decade or so, and it has to do with the relatively unusual period in fiat currencies that we've all lived through the zero interest rate environment of the last 15 years. The extent of the financial crisis, the, uh, bursting of asset bubbles going back several decades, you know, has led to an understandable degree of concern and skepticism sometimes about the workings of the current financial system. But if you separate the, you know, the political overhang in a way from the underlying functionality of a blockchain in particular, you can see the tremendous benefits. And, and one encouraging thing about the collapse of FTX is that it hasn't yet spread beyond the kind of crypto ecosystem. I don't mean to be obtuse, I mean people that lost money, real money or who have their assets frozen during the reorganization process and the bankruptcy process that, you know, that's, that's very painful, but at the same time it hasn't really fed its way through to create a system-wide financial crisis as we have seen in other, other situations like this.
Jason (07:30):
I think you need to be careful since you mentioned the three letter word, uh, we'll talk about ftx. Yeah, I think you need to be careful when you sort of equate the state of crypto with ftx, right? Because FTX garners disproportionate men headlines because the allegations are so tawdry, <laugh> and unbelievable. But when you look at the real sort of players in the broader crypto space, you're talking about very well run, very well established financial services firms like Fidelity, BlackRock, who continue to innovate and drive use cases and applications and frame out the industry in a constructive way to the benefit of all. And so we often get distracted by some of the noise around an FTX or Genesis or some of the stuff that's happening with Gemini there. There's just a number of cases, but you know, this is not deterred even the most conservative of financial institutions from pursuing further innovation, leveraging this technology, like I mentioned, fidelity, BlackRock, blueman, r, bbc, these are enterprises that have risk management and controls at the core of their franchises and they're continuing to push on why do they push on because they do see a real value proposition that could either benefit their underlying customer franchise or alternatively provide outsize efficiencies versus their technology stack today.
(08:57):
Very important point.
Vito (08:58):
Totally agree. When I think about sort of what's gonna drive activity in that space from an M&A perspective, I mean there's two really important items for me as, as I look at where we stand today. One is valuations of anything crypto related have declined much more than the overall market. And so there's opportunities to pick up assets that have had significant investment that are in some people's views undervalued today. And so if you're a more traditional financial services firm looking to extend into the technology or pick up a specific point solution, I think there's an opportunity there. And then as you mentioned, regulatory concerns. I do think that as regulation increases, as there's more standardization, that it's gonna be easier to get your arms around the space and the companies in the space. And as a result there'll be transactions that occur because there's gonna be greater regulation and maybe the smaller companies that don't have the ability to comply with that regulation sell to a larger party that has the tools in place for that compliance.
(10:07):
And then also there might be situations where you're buying an asset that helps you comply. So again, I think these are all positive from an M&A perspective and we certainly see it as a class of companies that are going to be around, that are gonna be a significant impact. I think, Jason, you put it, well when you look at sort of the, the internet bubble bursting, if you go back to some of the companies that were there at that point, some of those technologies, they're obviously an essential part of everyday life today in a lot of cases. And you're gonna see elements of this, of the crypto world, the blockchain world certainly permeate quite a bit. And I do agree completely that you can't think of what happens with bad actors in one situation if that is proven out that to impact the overall market cuz that's a different situation.
Jason (11:02):
Part of the reason why we haven't seen as much activity in crypto M&A as one would expect has been twofold. One given how frothy the crypto market was, you know, companies could basically set their price and people would just sign up and you know, we saw, saw that play out to the negative on FTX with a number of very sophisticated blue chip investors getting burned. And so there wasn't real price discovery in the sector for the last couple of years. And so it's hard to do M&A when, you know, there's no real price discovery that underpins the value that you're transacting against. So I think that's item number one. Item number two is a lot of the valuations were almost viewed as lever plays on the price of the underlying coin. So whether it's Bitcoin or Ether, once again, not true price discovery, but a way to play Bitcoin without buying Bitcoin.
(11:52):
And there's a number of examples that we can point to there. What I think is going to provide the building blocks for M&A to actually happen in the broader crypto space is as the, what I'll call the picks and shovel companies, you know, the companies are providing the infrastructure that drives the crypto universe, whether it's data and analytics, whether it's risk and compliance, you know, a number of the really unsexy parts of an ecosystem that, uh, really underpin an ecosystem. Once those start to season and mature and we see real price discovery and pricing around those, I think that's gonna lead to a wave of activity as people really understand what is the value proposition. People look at it in more of a traditional corporate finance way as opposed to some of the momentum type approaches that we saw really drive valuations over the last couple years in particular.
Vito (12:42):
Jason, maybe comment a little bit on the different portions of the sort of crypto blockchain economy. Like where do you expect to see greater activity? I mean we obviously, if you break it down, there's sort of the, there, there's the exchanges, the different marketplaces you just mentioned some of the infrastructure players, whether it's the, the folks that are creating the development tools or the infrastructure on which a lot of these operate. Is it N F T related? Is it payments related? Like what are some of the themes you're seeing as to where people are focused from an M&A perspective?
Jason (13:15):
Well, I I think it's really where can you leverage distributed ledger technology? Where can you know you can provide this seamless permissioning to solve a pain point? You know, when I look at a financial institution for example, what are the big pain points? K Y C A M L are probably top of the list where there are a number of efficient processes that you can put in place through that rules-based decision making that could be handled in the blockchain as opposed to having teams of people that fit in various locations that are fraught with potential human error or even malfeasance by those people.
Larry (13:51):
Yeah, K yc, uh, is know your client and AML is anti-money laundering and those are things that we live with in banks because it's critical for financial institutions to understand their clientele. Sorry for the interruption.
Jason (14:05):
I like the public service announcements. That's awesome. <laugh>, those are obvious pain points where that technology could be brought to bear. I think the ability to audit transactions, uh, through the chain. One of the biggest misconceptions about Bitcoin, uh, was that it was the domain of bad actors because it was untraceable, but lo and behold, it is traceable <laugh>. We now have the tools to do it, which is why we've seen almost perfect recovery across a number of different situations where Bitcoin has been used, you know, for malware or you know, stolen or extracted. And so I think the auditing of the blockchain is an area of tremendous growth and focus. You mentioned, you know, the exchanges when we talk about exchanges once again, you know, people tend to focus on the consumer facing element of it, but you know, I think the more exciting pieces around the institutional dynamics and how do you sort of see crypto as an asset class interplay with other more traditional asset classes and you know, the associated trading that happens in between those different groups.
(15:10):
I think that's an area that's still on the come and being explored. And we talked about some of the enterprises and institutions that are pushing aggressively down that way. NFTs is, is an interesting one, uh, NFTs and the Metaverse, just to throw more terms into the mix, I think that's the area where we saw probably the most amount of hype without associated return or sort of underlying metrics. Uh, I still believe in both. Uh, to be candid, I think they're gonna take much more time to develop and really flesh out the economic use case versus, you know, traditional blockchain. But I, I think they're here to stay. But I think you need to sort through the actual traditional framework. If you can use, use the word traditional crypto before you sort of see broader expansion into the adjacency that we just talked about, be it NFTs or Metaverse or otherwise.
Vito (16:08):
Jason, thank you for joining us today. You've been listening to Strategic Alternatives, the RBC M&A podcast. Join us for more analysis about what's moving the M&A market in our next episode. Until then, thanks for joining us and if you like more information on any of the topics discussed today, please contact us directly or visit our website at rbccm.com. This podcast was recorded on January 20th, 2023.
Speaker 4 (16:41):
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