Managing Directors' Report 2023

“It has been another momentous period for digital assets and it would be hard to summarise all the activities, but one thing is clear: the digital asset economy is thriving.

The record-breaking success of the US Bitcoin Exchange Traded Funds (“ETFs”), with now more than half the assets under management of US Gold ETFs has undoubtedly put pressure on UK regulators to make a move. There is added competition globally from Hong Kong which has already authorised launches of local spot Bitcoin ETFs alongside spot Ethereum (“ETH”) ETFs. Historically, London benefitted tremendously when embracing financial innovation when the US hesitated. Eurodollar money markets and derivatives are good examples of this, and appropriate regulation of digital assets could benefit London again if the City acts quickly.

We have worked hard in recent years with relevant policymakers and other relevant organisations such as CryptoUK, the FCA and various political representatives across both parties to communicate what is holding the UK back from realising its ambition to be a global crypto-asset hub and stay competitive in the field. Recent highlights for the Company have included progressive meetings with MPs at Number 10 Downing Street, participation in relevant FCA roundtables as well as co-hosting a roundtable with our new communications and advocacy firm SEC Newgate, which was attended by several large global financial institutions. Through all these initiatives we established and strengthened KR1 as a leading voice in this endeavour. We are confident that there is a shared will across the broad spectrum of industry players for the UK to remain competitive by how they regulate digital assets. We believe that positive regulation will make the UK a world leader in the space, not a follower, resulting in the creation of more crypto unicorns in the UK, which will help develop a flourishing developer and entrepreneur community.

As a leading voice of the crypto industry and to position the Company for a more senior public listing, once admission criteria allow digital assets, it is essential we operate to the highest standards of corporate governance and meet our responsibilities to shareholders. Over the past years, KR1 has implemented numerous initiatives toward achieving this goal. The Company has established a strong and independent board, with the appointments of Rhys Davies, Mona Elisa and Aeron Buchanan, as independent non-executive directors. In addition, we engaged PKF Littlejohn, one of the UK’s largest auditors, to further bolster our in-depth financial reporting and oversight. Furthermore, we onboarded Formidium, a specialised digital asset fund administration company, to help us release unaudited monthly NAV updates, providing shareholders with superior levels of transparency and disclosures on a timely basis.

Following the recent EGM, the Company also received shareholder approval to carry out ordinary share buybacks. This authorises the Company to buy back shares if the directors believe that, to do so would be in the best interests of shareholders. This initiative has been well received by our shareholders and became relevant due to the divergence of the share price from the underlying net asset value per share. Of course, we will continue to allocate capital to new investments as the Company has done successfully since its inception.

KR1’s standout performer in 2023 was Celestia, which we seed-funded after meeting Mustafa Al-Bassam; Celestia’s co-founder, in 2019 when he was still completing his PhD at University College London. Armed with nothing more than a whitepaper at the time; Celestia has since launched to become a ‘decacorn’, taking the top spot in KR1’s portfolio, and returning the Company many magnitudes of its initial investment. Celestia changed the game for blockchain architecture with its new modular framework, akin to a ‘Lego-stack’ approach. This architecture fits in perfectly with the latest developments of how blockchains such as Ethereum are scaling and, thus, made Celestia the most exciting crypto project launch of the year.

Other ecosystems, which we seed-funded and continue to support, including Polkadot and Cosmos, are still growing and have had a lot of recent positive updates. This is especially true of Polkadot, which has become more accessible to developers and has established a strong technical roadmap for how it transitions out of its previous parachain-dominated system into an even quicker, more secure and more flexible protocol through the releases of ‘Asynchronous Backing’, ‘Agile Coretime’, and Gavin Wood’s recent ‘JAM’ protocol proposal. We believe these innovations are very promising for the digital asset ecosystem as a whole and, subsequently, could result in this being the catalyst for stronger Polkadot adoption and activity.

Lido continues to be one of our major positions and remains one of the strongest contributors to Ethereum’s staking ecosystem, with the protocol cementing itself across the entirety of Ethereum and its various rollups as detailed in Lido’s most recent roadmap. The Company also maintains a strong Ethereum position (staked through Lido), as Ethereum underpins the now rapidly expanding ‘Layer 2’ and ‘Layer 3’ rollup ecosystems.

We are looking forward to further portfolio projects that have yet to come to market and launch their networks. Anoma pioneers another generation of blockchain protocols with “humanised” programmable settlements while Tanssi aims to simplify and enhance appchain deployment like never before. Superchain helps developers to create more responsive decentralised applications through superior data indexing and handling. Redstone is seeing rapid growth of its innovative modular multichain oracle solution and recently also started supporting Mode, another recent investment, which is a new ‘Layer 2’ project, built on and supported by Optimism, that creates new on-chain economic systems to enable developers to scale their applications to users more easily.

Throughout the previous year, the Company’s staking activities, where a range of portfolio assets are contributing to the security of respective blockchain networks, have remained strong and expanded in scope, especially with Celestia’s launch towards the year-end. This resulted in material income from digital assets where rewards in the native network assets are increasing our respective holdings in the underlying blockchain networks. The Company’s core staking activities remain Polkadot (“DOT”), Cosmos (“ATOM”), Ethereum (“ETH”) through Lido staked Ethereum (“stETH”), with the recent addition of Celestia (“TIA”).

We believe that the launch of the US Bitcoin ETFs, the recent Bitcoin halving and an array of market indicators signal to us that we are at the start of a sustained bull run. While it can be exciting for many newcomers, this is often an adrenaline-fuelled time filled with euphoric highs and immense volatility. It is at these times that our thesis of investing early in the most innovative decentralised projects with world-class founders at fair valuations keeps us in good stead.

As we continue into 2024 and beyond, we want to thank you for your continued support as we keep building out a high-quality ‘long-only’ portfolio of innovative digital assets. As in previous years, KR1 plc remains at the very heart of the thriving crypto ecosystem, fully focused and taking advantage of the disruption that this exciting technology will bring to society.”

Excerpt taken from the annual report and audited financial statements of KR1 plc for the twelve months ended 31 December 2023, published in the investors’ section of the Company’s website and available as an announcement here.