Figure's Blockchain and the Impact on Capital Markets

"Buckle up because...the cuffs are off."

In this conversation, Nik Milanović interviews Mike Cagney, co-founder and CEO of Figure, discussing the company's recent IPO, its innovative product Democratized Prime, and the implications of the Genius Act on capital markets. Cagney shares insights on the evolution of Figure, the role of blockchain in financial services, and the potential for decentralized finance (DeFi) to disrupt traditional banking models. The discussion highlights the importance of regulatory changes and the future landscape of financial markets as they adapt to new technologies.

00:00 Introduction to Figure and Mike Cagney

04:23 Understanding Figure's Corporate Structure

05:57 Inspiration Behind Figure's Founding

11:37 The Value of Decentralized Finance (DeFi)

14:31 The Genius Act and Its Implications

26:27 The Future of Banking and Capital Markets

31:55 Democratized Prime: A New Lending Paradigm

46:16 The Role of Blockchain in Future Financial Systems

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Transcript

SPEAKER_03 0:00

I was at a Goldman event over the summer, and you know, they invited some companies to go out and talk to a handful of investors. And, you know, I talked about what we were doing with Democratized Prime. And I gotta tell you, virtually nobody understood what the hell I was talking about. Cause, you know, I'm like, we're doing this thing on blockchain. We have these blockchain assets, we're trying to connect these first keys to capital. And everyone's like, oh my God. You know, there's like a paper packaging company that presented before me. Everyone got that really well. And I I'm talking about this stuff. And at one point, David Solomon leads over to David Loving and is like, hey, I think he's talking about getting rid of our prime brokerage business. Like, isn't this really bad for us? And Lovelig's like, yeah, you know, Mike's a visionary.

SPEAKER_01 0:43

Who knows if this is ever gonna happen? The views expressed in this podcast are the speaker's own and are not the views of This Week in FinTech or any other person or entity. The content provided in this podcast is for informational purposes only and should not be construed as legal, business, tax, or investment advice or recommendation, solicitation, endorsement, or offering by me or anyone else for the sale, subscription, or purchase of securities or for investment advisory services of any kind.

SPEAKER_04 1:13

Thank you, everyone, and welcome back to this week in fintech's monthly podcast. We've been setting this conversation up for a while, and so I'm incredibly excited to sit down here with Mike Cagney. If you follow anything to do with fintech, crypto, or digital currencies, you probably already know who Mike is. I first met Mike when he was the founder and CEO of SoFi back in early days of fintech. But that was just the first company that he took public. Today we're gonna be talking about the second company that he just took public, Figure. He started Figure eight years ago and is the executive chairman, co-founder, and CEO. And we're gonna be focusing especially today on Figure's product democratize prime. Mike and I were talking a little bit on Twitter right after the Figure IPO, and I said that Figure is a blockchain HELOC story. But Mike actually corrected me and said what Figure is doing goes very, very far beyond blockchain HELOCs. It's a blockchain story using HELOCs as the first example of why blockchain will overhaul capital markets. But there's a much, much bigger picture here, and it's a really interesting time to be building in the space. So there couldn't be a more relevant conversation. Mike, thanks so much for coming back and joining us.

SPEAKER_03 2:28

Oh, thanks for having me. I appreciate it.

SPEAKER_04 2:30

For the maybe 2% of this weekend fintech subscribers who don't already know who you are, um, would you mind just sharing a quick intro and some backstory on uh yourself and figure?

SPEAKER_03 2:41

Sure. So and and figure is seven years old. So when you say eight, it it it sometimes it feels like eight, sometimes it feels like eighty, but seven years old. So I'm I'm one of the co-founders and the exec chair at Figure. And the the way that I ended up in the exec chair role was uh last year I was trying to take Figure public, and you know, the regulatory environment was very difficult. And I felt if I split the company in two and put the blockchain and crypto heavy stuff in one side of the business and the you know, sort of the core lending ecosystem in the other, uh I'd be able to execute an IPO. And in doing so, I got a chance to bring my Tanabaum on as CEO, the other side of figure. And Mike and I have worked together for a long time. Um, you know, he was the chief revenue officer at SoFi when I was running in SoFi. And uh he I've been trying to hire him out of BREX for a couple of years. So when I split the company, it gave me an opportunity to lean in and get him in that role. And then we still weren't able to go public for a whole host of reasons, you know, mostly the regulatory headwinds. And so when that changed, uh, we made the decision to recombine the business. And as part of that recombination, I decided to stay on as exec chair, and in that capacity, I'm still doing the same thing I was always doing, which is I'm driving product strategy and direction. Um, I just don't have the organization reporting to me, which is my preference. And you know, Mike loves having that organizational construct behind him, and and I like just you know working with small teams and getting a lot of stuff done. So the way we describe it is I'm the zero to one person, and I'm going and basically doing a lot of the initial development and figuring out what what product market fit is there. And then when we have that, he's the one to a hundred, right? Where he goes in, puts the organization behind it, and scales it out. Uh, but before uh figure, I was I was co-founder and CEO at SoFi. Before that, I ran a hedge fund that I continue to run through both SoFi and Figure. And you know, I started my career back in the late 90s at Wells Fargo, um, running the proprietary trading and structured product groups there. And so I've been in financial services for a really long time. And that, you know, when I started in the banking side, that really was what gave me my FinTech itch, which was, you know, seeing how how many things don't work the way they should and where huge opportunities for efficiency come into play. Started my first, did my first startup in 2000, wealth management tech software company. I sold to Broadridge, then the hedge fund, then SoFi, and now Figure.

SPEAKER_04 4:57

Well, congrats on the recent IPO. Congrats on Michael Tandenbaum. He was a great hire. My uh wife actually worked with him a little bit when he was at Brex, and she said when he came over to figure out, she said, that's a great hire. Um I know you all had worked together at SoFi before, but it feels like uh everybody talented in my network is asking me how they can get a job at Figure right now. So you all are clearly doing something right. To preview a little bit, we're gonna talk today about the Genius Act and the tailwinds and market gaps it creates, figure's product democratized prime, and how it's changing the landscape and how it benefits customers by cutting out middlemen and what the end game looks like. But just so our audience can get a better understanding first, I know you know there's three, at least three, maybe more than three, effective corporate entities that you mentioned have been reconsolidated here. There's Figure Acquisition Corp. Would you mind just talking us through kind of what the different pieces are and what role they play with each other?

SPEAKER_03 5:50

Yeah, and it's it's actually figure asset management. So there's there's effectively when we split the company apart, figure was was the entity that was providing technology for third parties to use blockchain to originate assets and the marketplace for those assets. Figure markets had all of the crypto infrastructure plus the alternative trading system uh to trade uh securities on blockchain, uh the marketplace ecosystem and structure, and then the the figure asset core, I said asset management, figure asset corporation, um, which holds a lot of crypto. And uh so we've effectively recombined all those into one entity, which was the original business. And again, it was sort of an artificial structure to split that apart. It was trying to fit within what we felt was a regulatory mandate at that point. But the company always belonged together. It was massively synergistic. It would have been very hard to have taken just one element of it out uh publicly because of the interdependency that it had back to the other aspects of the business.

SPEAKER_04 6:49

What was the original inspiration for Founding Figure? You know, you clearly identified a really salient market cap here.

SPEAKER_03 6:54

It really goes back to something that that's been an ongoing theme for me, which is directly connecting sources and uses of capital. And, you know, if you go back to when I was running my hedge fund and I was looking at what Chris Larson was doing at Prosper, um, which was one of the first peer-to-peer lenders. And, you know, I love the idea of that disintermediation of the bank as a capital allocator, right? The the ability for people to directly lend to one another. And I've been thinking a lot about that. And, you know, I had an opportunity to go down to Stanford, do a fellowship at the graduate school business there, and and you know, as part of that created SoFi. And the the original intent out of SoFi was really that thesis. It was we could take alumni to invest in loans from students in the school. There was a direct affinity relationship. There was, you know, both uh an economic but also a social value proposition that was there. And we were really a victim of our own success. The loan grew so rapidly it far outstripped our ability to raise capital from alumni. And we we kind of went and really helped to find what I would call FinTech 2.0, which was the wholesale capital market fintech platform. So with Figure, I had an opportunity to look at it again with blockchain. And you know, blockchain in its core is really um this displacement of trust with truth. So the ability to create native digital assets on a blockchain ledger where I can look to that asset and know for certain the ownership, the composition, the history. And that really changes both how that asset can trade, which you know is bilateral. You and I face off and transact without a marketplace sitting in between us, but also how you finance them, where I can get direct digital perfection to that asset. And to me, blockchain really provided a medium to effectively do this direct connection of sources and uses of capital that I've been trying to do for over a decade. And uh so we launched Figure, and the original intent behind this, you know, we needed a use case to take to market. And we said, well, we'll do securitization because we think we can originate, aggregate, and securitize loans on blockchain and save 85 basis points of cost. And, you know, I went and I pitched a bunch of banks this idea, and universally they're like, yeah, this is great. We'd love to do it. We'll be the 10th bank to do this on blockchain. And and so, you know, it was clear no one was going to be an early mover on it. And and so we created a lending platform. And this is kind of going to your point about, you know, as a HELOC company, the lending platform we created out of necessity because we needed to take the position of first mover and uh de-risk the blockchain for folks with the idea that other people would come in behind that and and leverage the technology once we proved the efficacy. And so we started originating loans on chain in 2018, did the first securitization of blockchain assets in 2020, and then you know, the first triple-rated securitization in 23. But what we were really building into were kind of three value propositions, and the last, which ultimately gets to the source and use of capital. And the first was we felt that blockchain had transactional efficiencies, 85 basis points of value that we felt was there in using the blockchain to originally aggregate and securitize assets. We've actually demonstrated, I think, over 150 basis points of value on that front. And um, you know, that's very tangible. I can point to exactly why that's happening and what we're disintermediating out. There's liquidity, and liquidity is often misinterpreted on blockchain. So, you know, I always joke about how I don't get invited to RWA conferences anymore because I'm like putting an office building in Topeka on blockchain is a dumb idea because people don't want to trade that. Like being on blockchain doesn't make it liquid. For liquidity, you need ubiquity and homogeneity and market making. And what we've been able to do in the credit class is we've been able to create liquid marketplaces for private credit that have never existed before. So we have the same type of liquidity that Fannie Mae and Freddie Mack offer, mortgage originators for um mortgages and HELOCs and other credit assets that create a huge competitive moat for us in terms of what we're doing and why we have 170 third parties that use our ecosystem to originate assets because they have access to that liquidity. But the the biggest value prop to blockchain is what the market calls DeFi, decentralized finance. And decentralized finance at its core is just directly connecting sources and uses of capital. And the idea that I lend directly to you. And I've been looking at some platforms out there like Ave, for example, which is a platform I have a huge lot of respect for, where people are on Aave borrowing against their crypto at 6.5%. And if I go to Canner or you know, another institutional back leverage provider, it would cost me 9.5%, 10% for that loan. And the question is, well, geez, why is it so much cheaper in this DeFi structure? And it comes down to this what we would call Pareto efficiency of directly connecting the source and use of capital, the lenders getting something better than they were ever getting before, which was zero, right? The borrower's not paying the overhead of the bank as a capital allocator, and you're creating a structure where both sides are coming out of that transaction better than they would through the bank as an intermediary. And that to me is is the huge value of what we're ultimately trying to do and bringing DeFi to the market. And we'll we'll talk about why I think now is the right time for that. But you know, at its core, that's what we're ultimately trying to land on is a true decentralized finance structure, a true self-custody structure, like everything consistent with the ethos of blockchain.

SPEAKER_04 12:22

There's so many directions to take this. And I think the commentary is super interesting. I'm seeing kind of a clear tie between your early days as a hedge fund founder and manager and what you've gone on to found seeing uh mispriced assets in the market. It reminds me a lot of the early days of Capital One and information-based systems where you had two homeowners who were neighbors, but you integrate them completely differently for a credit card. And the market just didn't realize that. Similarly, SoFi, you know, you have a really low-risk, high-value asset in business school students, and yet they're being priced entirely the same on the market. And there was no risk-based pricing. And SoFi was the first to actually introduce that. And now I'm starting to see that story with Figure as well, except in addition to better risk-adjusted pricing, and we're going to get into this with democratized prime, but you have this entirely new form factor for everything from like cross-asset collateralization to introducing new participants to the market to better data for risk-adjusted pricing to private market investors and the conventional credit hedge funds who've been playing in the space for a while. I think anybody who's gone through a home buying process and had to deal with mortgage and title understands the value here of being able to centralize all information in one place. And so HELOCs are a really, really salient first product for this. But the potential for the technology, I think, you know, far outstrips that.

SPEAKER_03 14:50

Yeah, and and even before we go to the Genius Act, I want to double-click on a point you made about um, you know, the wallpaper on the wall and the importance of being a marketplace operator, because that's really the evolution of what figures got into today. You know, if you looked at our business two years ago, we had a lot of third parties that use our technology to originate assets, but we sat in between them and the capital markets, right? So we would buy their loans and then we would package them up and securitize them and do whatever we would do in terms of the downstream liquidity. And what we started a little over a year ago was a marketplace that allowed our partners to sell those loans directly to the capital markets without any intermediation from us. But it happened in our marketplace, right? And so we earned the take rate on that market as opposed to getting the gain on sale by sitting between the originator and the and the ultimate takeout. So that model I just mentioned was sort of FinTech 2.0 and Web 3.0 is the marketplace operator model. And what we've been able to do, if you look at our economic performance, you know, we went from 0% of our business in the marketplace June of last year to, you know, the beginning of that at the end of last year. So we're running a 31% EBITDA margin last year with with without really a marketplace. First quarter of this year, 18% of our volume went through the marketplace. Second quarter, 40% of our volume went through the marketplace. And that EBITDA margin went from 31 to 37 to 47%. And that is demonstrative of when you're not using your balance sheet, you're not using your equity capital, you're not using your operations and incurring your variable cost. It is a much more profitable business to be running the marketplace. And that's where we're ultimately trying to get to. And so the logical next extension of that is the financing marketplace. So we we now have the liquidity marketplace, which we've stood up. And you know, I would expect that 80% of our volume runs through that marketplace as we get into the the tail half of this year and into early next year. And you're gonna see a corresponding increase in Ebata margin that that looks like a true market exchange. But the financing side is even more interesting because you know, that in in theory at its margin is 100% contribution margin business. And so, you know, we're very focused in building that out. But the Genius Act is is done something to catalyze the adoption here. And notably, you know, with the Genius Act, we now have legal stable coins. And the biggest limitation that we've had with stable coins has been application to payments. You know, in the US, you still don't go to Starbucks and buy coffee with stablecoin. You're you're buying, you know, with fiat through a whole bunch of mediums that you have. My view was that the US interchange system, so when we swipe a debit card, there's five parties that sit in between the buyer and seller, right? There's an issuing bank, issuing processor, the Visa MasterCard Network, merchant bank, merchant acquire. And there's such a monopoly in that ecosystem, especially at that initial point of sale, the physical hardware, that it's very hard to disrupt that. So if you look at China or Brazil as corollaries, I always use the China example. You know, I was in Beijing and I went, I bought coffee with my American Express card, you know, using my phone and on point of sale. I went back a year later and everything was QR code, Alipay, we pay, right? You you could not use your Visa or MasterCard anymore or Amex card. And because they didn't have that physical hardware at point of sale. And so it was very easy for them to introduce QR code, as it has been in Brazil and other regions, but in the US, that's been very challenging. And my view was until the banks can lean in and actually affect change to payment rail, nothing's gonna change. So the Genius Act is effectively providing a mechanism where you are gonna see JP Morgan with JP Coin through Chase. Chase is the biggest issuing bank in the world. They are going to lean in and build a rail. And that rail is not gonna include an issuing processor, it will not include a Visa MasterCard network, it will not include Merchant Acquirer, you know, it will still have issuing bank because that's them. They still want their share of the economic. But you're gonna get cheaper, more efficient rails that are gonna be introduced by the major players now that they can legally participate in this ecosystem. So what does that mean? Well, now I have a structure where I can self-custy my cash in stablecoin. It will probably pay me rewards, if not explicit interest, right? The way they're get around the interest payment is when you have it at Coinbase, Coinbase will pay you interest on USDC because they they don't pay you directly. But there's all kinds of you know, clever tricks that people manage in terms of payment of rewards and interest. But I'll be able to custody my my self-custody my cash, it'll pay me something. And I can go to Starbucks and buy coffee online to buy Bitcoin or Tesla stock, and I can pay my bills all with one medium. And in that capacity, the question is, well, why do I have a bank account? And you know, this is actually pretty interesting for the chimes of the world to start thinking about, well, their back end should actually just be stablecoin and not be bank ledger and the bank, you know, bank as a service partnerships that they have. So there's a huge amount of innovation that's going to come out of this, both in terms of you know, not just payment infrastructure, but the way that uh challenger banking works, for example. But the key is that it is cannibalistic to a bank account. And the Treasury's put out these studies and they've said, hey, look, we think $2 trillion goes into stablecoin in the first year. I I don't know if it's that's true or not, but I do think you know ultimately trillions of dollars are going to move into stable coin. They have a study that says over the next several years, 6.6 trillion move in. And you know what people don't realize is you know, the Treasury touts this about how great this is because there's only six and a half trillion dollars of treasury bills. So 6.6 trillion moves into stablecoin and it has to buy treasury bills. It's a bonanza for the treasury. They can sell all the debt in the world that they want, but they don't talk about where the money comes from, and it comes from bank liabilities. And we had a little bit of a precursor to this in late 22 and early 23. So when the Fed started to tighten, we saw a trillion dollars leave the bank liability system. We went from 18.2 trillion to 17.2 trillion in bank liabilities. And it was disaster. I mean, if you weren't in the capital markets, you might not gotten a first, you know, front row seat to this, but the capital markets completely shut down. The banks were all buyer-selling assets. Ultimately, Silicon Valley Bank failed, First Republic failed, signature failed, you know, the the Fed and the FTIC, primarily the FTIC and the Treasury had to step in with extraordinary measures to keep the market solvent and liquid, um, because we were right at the cusp of everything just seizing and falling over. And and this was a trillion dollars of outflow. So if $2 trillion or $3 trillion or $6.6 trillion come out of the bank system, something has to step in and provide financing to that credit. Because you know, the banks are the buyer of private credit. And, you know, factually non-agency mortgage, for example, all credit is going to bank balance sheet or ultimately landing on bank balance sheet or insurance company balance sheet. I don't want to diminish that. But my view is that DeFi has an opportunity to step in and provide the solution for a couple of very interesting ways. Certainly, we at Figure can demonstrate to the banks what the value is to originate blockchain native. We can show them the transactional efficiency, right? The 150 basis points that we save. They can accrue that benefit. We can show them the liquidity, the ability to trade those assets and have liquidity for those assets to the extent they want that. And liquidity means tighter spreads and higher value of those assets. So they accrue that. But most importantly, we want to show them the financing side, the ability to actually finance these assets in a decentralized finance structure. Now, the irony here is it's the same money that's financing those assets that was on their balance sheet, right? Because you and I are taking our deposits out of the bank in the form of coin, but then we're going to these DeFi applications and lending that out and now getting six, seven, eight, nine percent on our deposits instead of zero that we used to get at the bank. And so it's a reallocation of the capital. And if you're a regional or a super regional bank, let's say I'm I'm fifth third, I don't mean to pick on them, but I'm not gonna be able to compete with JP Coin, right? Like no matter what I'm gonna be able to do, fifth third coin will never have the market presence and power as JP coin will have. What I need to be thinking about is my liabilities are gonna be under attack. You know, first order I need to think about, well, how do I bolster the balance sheet? Well, DeFi is a way to do that. And second order is, well, how do I defend or provide a competing product? I think, you know, yielding stable coin, like our yields product, for example, is a way for the bank to have a defensive position. Now, they don't get the benefit of the liability there, but they're gonna lose a liability anyway. And so why not maintain the customer relationship and have some take on the economic as opposed to give that up entirely? And so there's these two dynamics that come out of the Genius Act. And the the most important second order effect is it does perpetuate narrow banking, right? The idea that you're separating out deposit gathering and lending from the financial institution. And, you know, I've I've talked to some bank CEOs about this, and I'd say there's sort of, you know, a couple of different camps. There's there's one camp which is the government will never let this happen. They're never going to let our deposits leap because we play too integral a role in terms of credit creation and everything else. Well, the reality is a lot of those deposits just get migrated into the megabanks and the JP Morgan and others. So there's still a capital mechanism or a credit mechanism for distribution. And I also think these banks don't understand that the current administration has a very strong libertarian bent to it and actually doesn't see neurobanking as a bad thing. And so, you know, there's another group of CEOs that feel that way and say there's absolutely nothing the government's gonna do to stem this. And, you know, we have a problem. It's just when is it going to happen? Can I ignore it for another two years? And I think it's gonna be a very slow and all at once dynamic. You know, and then there's the the execs that are leaning in saying, look, I want to figure out what to do right now, and and how do I build a defensive model off of this? And I think those are the institutions that are gonna come out of the other end of this and still thrive as a franchise. The banks have a bunch of comparative advantages. They have physical branch, they have the customer relationship, they have brand. And so, you know, they're not in a position where it's preordained that they lose. But I think if I'm a bank CEO, especially a regional or super regional bank CEO, I need to massively rethink my strategy because the idea that I'm gonna have the same persistent liabilities I've had for a hundred plus years, I think that goes out the window in the back of the genius act. And I think that's the seismic shift that people are are struggling with right now. And, you know, when we were on our roadshow for the IPO, one of the bankers said, Hey, I'm talking to um a bank board about this, a relatively large bank. And, you know, would you be willing to have a conversation with them? And I said, Yeah, sure. You know, I'm happy to go do that because I'm I'm doing that anyway. And he he came back the next day, he said, Well, they said that you were too scary. Um that was what I expected was probably gonna happen. Well, you know, Tanne Boom and I penned a piece in the American banker called, you know, Genius Act creates a trillion dollar stable coin opportunity. Our our original title for that was You're All Doomed. And you know, it it's like the the level of change that's coming in, I think people just don't fully grasp what's going to happen. And it is seismic.

SPEAKER_00 26:17

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SPEAKER_04 27:26

I wish we had more, I wish we had, you know, another two hours for this conversation because there are so many interesting threads to pull on here. A couple of quick reflections on my end. I just got back from Mexico last night where I was down there for Fino Summit and I was talking to the group about stable coins, and a lot of these themes seem to be coming up in every conversation. But two interesting questions I got were, you know, why are we seeing so much innovation here in the US? And, you know, what it what impact is this going to have on banks? And I couldn't agree more with a lot of what you just said. You know, in the US, we've done this almost overnight 180 from, you know, arguably one of the more hostile environments towards uh blockchain and financial markets to one of the most permissive. And so you're seeing this really interesting catch-up right now where all of a sudden everywhere from institutions to startups, people are saying, okay, well, how do we think about this? And how do we think about the state of play and how this affects capital markets and credit formation? It's interesting that it's happening at the same time as this explosion in private credit, where you know, people who've been in credit markets for a while know that it, you know, it's like a balloon where you squeeze risk out of one corner of the market, that risk is gonna pop up elsewhere. It's just different participants are gonna be able to serve it. So following the 2007-2008 financial crisis, you have capital requirements constraints that are placed on banks, stress test requirements that they have to fulfill. And so they couldn't play a lot of the role in credit markets that they were beforehand. It doesn't mean that those credit markets aren't gonna get served. It's just that it's popping up other places. We have a lot of new private credit issuers, scale private credit issuers. Like you mentioned, it's not just banks buying that paper either. It's insurance companies and pensions and others. Now they're trying to get retail investment in private credit, 401k investment in private credit. You have other providers of liquidity to that market that are stepping in now. And I think if you're seeing at a you know one of the prudential federal financial regulators, you're looking at this and you're saying, well, it's contingent on who's actually in the driver's seat in this administration, but you're looking at this and you're saying, you know, we had great line of sight into the role that banks were playing in this ecosystem. You know, with the rise of quote unquote shadow banking, you know, how do we think about where risk is aggregating in the system and what our visibility into that looks like and what our abilities to you know actually effectively create monetary policy look like? And so that brings me, I think, to you know, one of the most interesting things that you just said, which is that you are removing the role that you know, demand deposit accounts and savings accounts and checking accounts play in the ecosystem. And this is kind of the second thing that I thought was a really good question on the stablecoin panel in Mexico, is you know, what role are checking accounts going to play? What role are banking accounts gonna play? And it's kind of weird to think that in the consumer financial ecosystem today, you basically have this hub and spoke model where your checking account acts as the hub for any kind of transaction that you're making, but you kind of have to round-trip all the money through a bank account. There's so many interesting downstream effects here. But like you're saying, if you have six trillion of capital that's leaving this ecosystem because now it's sitting in wallets, now it's sitting in direct peer-to-peer transactions instead of all being intermediated through checking and savings accounts, that's one of the most radical shifts in financial services since the introduction of consumer bank accounts. And I think, you know, from the monetary policy perspective, from the credit market participant perspective, from the regulatory perspective, everybody has to think about how this is going to affect uh liquidity, capital formation, consumer savings, and kind of the role that different ecosystem participants are playing in the credit markets. And what's really interesting about Figure is you have technologies that more efficiently allocate slices of the pie. And I think we've talked a little bit about how Figure plays that role. But you also have technologies that increase the size of the pie. And what we haven't talked about as much is that figure is also playing that role. And you have new participants who can come into these credit markets through DeFi and actually play meaningful roles. And so it's not just getting cheaper and more efficient for participants, but you're also increasing overall liquidity in the ecosystem in a way that is, like you said, it's going to be really disruptive to banks. Somebody commented recently on Twitter and they said, you know, stable coins are going to replace banks. And you know, my pushback was it's not that stable coins necessarily are going to replace banks, it's that there's a segment of banks that are being really thoughtful about how to use blockchain in capital markets. And those, you know, franchises have a lot of the benefits that you described. They have brand value, they have branches, they have distribution. Some of them will be really effective at doing things like JPM coin and being able to go on-chain. Some of them are going to be really resistant too. And in this paradigm shift that we're going through, that's going to be really painful. But as you said, this administration doesn't necessarily think that there's like a right to win for banks. There's no reason that de facto banks are the right form factor for uh continuing to play this matchmaker role in in the provision of liquidity and the credit ecosystem. And so that brings us to figure and brings us to democratized prime specifically. So I want to go back to that an early comment that you made, you know, on Twitter. This isn't a blockchain HELOC story. This is a story about the introduction of blockchain to financial markets. And HELOCs are the first product, but this goes far beyond that. Um I'd love to hear in your words, and I know Michael Tandenbaum talked about this with Julia a couple weeks back. You know, what is democratized prime and what does the long-term vision here actually look like?

SPEAKER_03 32:32

Let me hit on a couple other points that you raised uh before I go into the demo prime construct. And you know, I I always go back and in 2023, I was working with a handful of regional banks on a tokenized yielding deposit product and uh way ahead of its time. And and the regulators came in, the OCC uh and the FDIC came in and said, We're not gonna let you do this because blockchain isn't consistent with safety and soundness, and they killed that project. And that's why I ended up um doing an S1 for yields, which was our security version of stablecoin that pays interest and and you know made it through that process and went effective with that this year. Uh but it was a shame that that the regulators were taking that position because the banks, a group of them were very eager and early adopters. And we had a we had a pretty broad set of constituents in that group. And I think as it relates to policy, I think that this administration doesn't view Fed funds and the control of deposits as necessarily the right policy tool versus open market operations, which affect the longer end of the curve. And you know, I think that the challenge that they have right now is, and you saw this, that the Fed cut the Fed funds rate and the tenure rate went up. And you know, what they ultimately want is a lower tenure rate because that's driving mortgage rates. And and you know, you get that through open market operations. So I don't I don't know that what they're losing in terms of the transmission mechanism of liabilities in the banking system is necessarily front and center to them as a concern to the current administration, the current Fed. I think that that ebbs and flows, obviously. But as it relates to democratized prime, you know, as I talked about earlier, and sort of as the name implies, it's just reallocating who is doing the lending, right? Because today, when you and I have deposits at the bank, the bank takes that, it lends. Now it earns a massive skin between what we get on our deposits, which is generally nothing, and what it charges on the loan rates, right, which, you know, eight, nine, 10%, whatever the rates are. And it needs that because it's incurring all of the cost and overhead of the bank. And you know, I would I would say in general, banks are relatively inefficient. The reason why they trade on a book multiple, you know, one is they have to constantly raise equity capital to commensurate with their business because they don't have business that can that can scale outside of equity capital. But the other is, you know, for for whatever reasons, and it could be regulatory, it could be operational, they're they just tend not to be the most efficient users of capital, right? The ROEs aren't aren't super high on the banking side. So with demo prime, you know, as the name implies, what what we're doing is trying to take the bank out or the prime broker out as a capital allocator. And you know, some of this came on a trip I did out to Singapore, and I was sitting down with with Tomasek, and they've been a longtime investor of mine, both directly and indirectly, and and we were having this conversation about capital markets and about prime brokerage. And they were saying, yeah, you know, the problem we have is um we can't cross-collateralize our assets. And and if we could, we could deploy twice as much capital with no incremental risk, but but we just get no benefit. Everything lives in a silo. And I said, but even if that didn't happen, we still couldn't actually borrow any more money because we're name full on every prime broker, right? And and I said, okay, well, this seems like a great application of blockchain because your assets are on blockchain, you can use them on a cross-collateralization basis, you can borrow directly against those assets. And the the interesting thing about decentralized finance, DeFi, is when you take the bank out as a capital allocator and you and I become capital allocators, you and I aren't in a position to underwrite credit, you know, every single credit or every single loan that we make. And so what DeFi has done is it said, look, what we're going to do is set up collateral that's liquid, that you can see the market for that collateral, the depth and liquidity of that collateral, the volatility of that collateral, the overcollateralization of that borrow, and make your decision off of that as opposed to the fundamental of underwriting the borrower itself. And you know, this is very easily applied to crypto. And I always use the analogy, I've lent against people's homes for a long time. And generally we make a lot of money, but sometimes we lose money on one of those loans, right? Something goes bad and things go sideways and we misjudge the value of the home, what have you. You know, I've lent against Bitcoin since 2020. I've never lost a dollar lending against Bitcoin because I know that at 2 a.m. in the morning when you broach an LTV threshold, I can liquidate it, right? And that's what I care about because I'm not I'm not looking at what is the fundamental value of Bitcoin. You know, when I was talking to the institutions about back leverage for Bitcoin financing, and I'm like, hey, I need a warehouse line for this. Every one of them first question is, well, what if Bitcoin goes to zero? And I said, it's not if Bitcoin goes to zero. It's if Bitcoin goes to zero within three seconds that it takes me to liquidate a Bitcoin position, right? That's that's what you care about. You don't care about, like, I'm not underwriting the fundamental long-term value of Bitcoin. I'm underwriting what is the volatility and how fast can I exit a position and how much overcollateralization do I have to protect myself? And so with demo prime, what we did is we were looking at Ave and other platforms, and I said, well, let's, and I was bugging my capital markets team. I'm like, why can't I borrow at 6%? Why am I borrowing at Silver Plus 250, which at the time would have been, you know, 7% from Goldman when I can get 6% from DeFi? And they're like, we don't know. People aren't pricing this right, blah, blah, blah. I'm like, well, why do you know they're not pricing it right? Like, what are the loss rates here? They're zero, right? Because it's sufficiently collateralized. And so I said, well, we'll just stand up our own DeFi marketplace. So we stood up Demo Prime, and uh we did this initially. We run a small crypto exchange and we do that for a lot of RD purposes, although it is very important to us. And we said, let's let's finance our margin loans on demo prime. And it worked the way we thought. The community would finance the loans at 6%. We said, great, that's awesome. Let's bring loans over and see what happens. And so we brought $10 million of loans over into demo prime and boom, immediately filled at a rate lower than we'd finance out of Goldman, right? Brought another $10 million over, boom, did it again. And this was, you know, literally like a month ago or a month and a half ago that we started doing this. And so we kind of opened up the door and said, all right, well, there is a process here. We need to solve some of the mechanics around the liquidity because loans, whole loans in themselves, you know, we trade them once a week in a B Wick auction, a bid one in a competition auction. We need to have higher frequency of trading and so forth there so that people can make these lending assessments. But, you know, there is a path there. And the next step is for us to bring $100 million of assets over, but do it for our partners, the 170 third parties that use our platform to be their warehouse. And where we're gonna say, look, don't do a warehouse with Goldman or Jeffries, do it on this DeFi platform and you can finance it cheaper and more efficiently. And, you know, when I when I started talking to the banks about doing this, you know, they're like, oh Mike, you know, you're really gonna regret that when the cost to borrow goes up to 15 or 20 or whatever percent, when the market's going sideways because you're gonna want that sofa plus 250 warehouse. And I remind them that whenever the market has gone sideways and rates go up to that level, my warehouse providers all call me and say, don't send us any loans because you won't be getting any money. You know, so it's I'm not actually losing out on anything. If anything, I'm I'm creating persistent liquidity where I can be upside down on the carry sometimes, but I have the liquidity and it's a better solution. And so, you know, I was I was at a Goldman event over the summer, and you know, they invited some companies to go out and talk to a handful of investors, and and you know, I talked about what we were doing with democratized prime. And I got to tell you, virtually nobody understood what the hell I was talking about because you know, I'm I'm like, we're doing this thing on blockchain, we have these blockchain assets, we're trying to connect these source use of capital, and everyone's like, oh my God, you know, there was like a paper packaging company that presented before me. Everyone got that really well. And and you know, and I I'm talking about this stuff, and at one point, David Solomon, you know, leads over to to David Lovelig, who runs capital every capital markets, is like, hey, I think he's talking about getting rid of our prime brokerage business. Like, isn't this really bad for us? And Lovelig's like, yeah, you know, Mike's a visionary. This is a who knows if this is ever going to happen. But here's where it's super interesting, which is this value prop of transactional efficiency, liquidity, and financing is extensible to lots of asset classes, not just credit, right? I think we've we've fully demonstrated this in credit. And to your point, like we're now going into first lien mortgage, which is the biggest credit market in the world, is 2 trillion plus origination a year. And we think we're gonna absolutely kill it in that space. You know, we think we have a very competitive product of Fannie Mae and Freddie Mac, especially for sub $500,000 mortgages. And that's a big strategic focus for us where our partners are doing that. So we're effectively stepping into the Fannie Mae Freddie Mac role for all these origination partners to lever into that. But one of the things that that I'm doing, and you know, I hope to get done, is a second QCIP for figure equity, where we would do stock that's native on blockchain. It is not a DTCC security. It doesn't trade on the NASDAQ or the NICE. It's going to trade on our alternative trading system, on Provenance, on blockchain. And the question is, well, well, why would we do this? And it's like, okay, there's certainly some transactional efficiencies that you can get off of this. Like the transfer agent cost is much cheaper because you're just watching the blockchain and watching, you know, as a security transfers. There's some liquidity benefit that I think people put too much value in. Like, yeah, you can trade the stock 24-7. The reality is, like, I was, I was trying to buy FTX out of bankruptcy and FTX out of 24-7 US equity perp market. And if there was that much value in trading stock 24-7, that would have blown up and it didn't. It was going sideways. So, you know, I don't know that the 24-7 thing is actually what the real value is. To me, the real value is DeFi. And on a first order, it's, hey, I can use that equity to buy Bitcoin, I can use that Bitcoin to buy equity, and I can do that seamlessly. Well, that's super powerful because right now it's a very clunky process to try to do that. Like you can't cross margin in these brokerage accounts that you have out there. But the the more interesting thing is you can control your own stock loan. And so if you think about what's one of the primary functions the Prime Broker does and what's one of the primary revenue drivers for them, it's managing stock loan, it's sourcing stock for you to borrow to short. And sometimes that stock goes on special. So sometimes it costs you 40 or 50 or 100% to borrow that stock. Well, that prime broker skims almost all of that, right? You get very little as the person who's lending that stock out. So I'm still getting Fed funds, they're getting 40%, right? Well, now I control my stock and I control the borrow and I lend it out at whatever rate I want to lend it out at, and it accrues directly to me. There's no intermediation with the prime broker anymore. There's an open marketplace, a DeFi marketplace where you go and bid to borrow and I offer to lend. And this is hugely powerful. And so when we were on the roadshow, and I think we did 150 investor meetings as part of the IPO roadshow, and I was pitching this to everybody. And universally, every one of those buy site accounts was like, I would much rather trade that if you can ensure it's going to track to the NMS security. Which I think we figured out how to do, and how to have liquidity over there that matches the NMS liquidity. And, you know, what I would hope out of this is these buy-side accounts, if this works, would go to all their other companies that are invested in and say, hey, you should have a second QSIP, right? Because I want to be able to control that loan. I want cross-collateralization. I want this benefit. And so what gets really interesting on this is that stock is trading on a decentralized exchange. So even though we have an alternative trading system that's registered with the SEC, it's a bilateral system. You and I face off directly to settle. There's no intermediation through the broker. It's a DEX, decentralized exchange.

SPEAKER_04 44:39

No DTCC?

SPEAKER_03 44:40

No DTC. Well, so if you think about it, at the very top of the stack, no DTCC, right? So the blockchain is the registry for the security. No NASDAQ or NYC, because it's a decentralized exchange that you just attach your wallet to your MetaMask wallet, your Phantom wallet, your figure wallet, doesn't matter. You attach your wallet to it, you trade. No introducing broker, no Robinhood, no Schwab, no TD, right? And in terms of where do you get your margin or where do you get your stock loan? DeFi. And so you're talking about a wholesale displacement of the stack. And so what I what I love about what we've done with credit, that was greenfield, right? Like we built that origination infrastructure, the the market liquidity, and now the financing where it never existed before. In equities, it's not greenfield, it's just disruption, right? Which is it's just taking out the entire vertical stack. And that that's what we're trying to do.

SPEAKER_04 45:38

It makes sense. You know, you remember the I personally think misplaced, but uh there is some consumer panic about payment for order flow that aggregated around Robin Hood four or five years ago. And my perspective was, you know, one, people don't really have a sophisticated understanding of capital markets, and two, like, this is great. I would love to pay for order flow instead of paying, you know, a $5 per transaction brokerage fee every time I want to trade a stock. I'd much rather give up a little bit on the spread there. But, you know, like you said, removing the introducing broker just makes the spread so much tighter and actually ends up lowering costs for every market participant in the ecosystem. Let's forecast a decade in the future here, because this is something that I'm really interested in hearing your perspective on as a longtime student of capital markets. You mentioned the first Republic SVB microcrisis, let's say, that we had a couple years ago over the weekend. What's really interesting is, you know, there the fundamental problem was, you know, an effect of maturity mismatch. It's not that this underlying, you know, book of assets and obligations was mispriced necessarily. It's just at a point where they needed to sell, they weren't able to find a buyer that could support the asset valuations at the moment. And so they needed somebody to step in. And the United States government has always kind of played this lender of last resort role in the ecosystem. You can make an argument that FTX was in a similar position. Um, you know, there was just a maturity mismatch, but you know, the estate's actually been able to recoup more from the underlying assets than where they were marked. It's just, you know, that there was uh liquidity crisis at the moment when they needed to be able to raise capital against those assets. Looking to years in the future, you know, let's say Figure is wildly successful and we have multiple different capital markets that become more efficient by going on-chain. And there are other figures that see this opportunity and they spring up. And maybe there's the you know, the JP Morgan and the Morgan Stanley version of Figure that springs up as well as you know, net new businesses. When you have stress events globally and you have these moments of quick liquidity contraction in the market, you know, one of the benefits that you talked about of Figure's model is uh if you breach an LTB trigger, you can kind of immediately liquidate. And so you're really not taking a directional bet on the underlying value of the asset, you're just providing liquidity through a loan to the ecosystem, and then you're you can kind of recoup it immediately if if there's a markdown in the asset value. And this is all available on-chain in microseconds, whereas you know, you're marking bank assets to book on a longer timeline, or you know, a house may not reprice for years or decades. If you have kind of this cascading effect where there's a stress event and assets are getting marked down and loans are liquidating automatically, um, you know, how do you think about the role of a buyer of last resort changing? How do you think about um the parties that need to step in to provide liquidity in the ecosystem and support underlying asset valuations to prevent there from being kind of a death spiral?

SPEAKER_03 48:34

Yeah, it it's a it's a great point. So let me let me go back to a couple of things that you said and then you know dive into this one. You know, first I I I'd be remiss if I didn't let it pass it that FTX did get more back than was lost, but that's because uh it indexed the price of Bitcoin at you know under $20,000. So it benefited from the accretion. The the creditors there lost a lot um in terms of what their actual opportunity cost was of losing their crypto. You know, and I and I think in the SVB situation, it was certainly a very poor treasury management risk management construct where they bought a bunch of tenure agency securities and they didn't swap them back to short dated liability, you know, to match the liabilities. But the reason those agency securities fell in price was because of people dumping assets, right? And and so it was caused by the Fed tightening and you know the banks hemorrhaging those assets. And and then, you know, what happened with SVB, and I I remember this specifically, one of my investors, a massive global fund, called me and said, I think these guys are insolvent. And I said, That's impossible. And we went through the 10K, and he's like, Okay, explain to me why that's impossible. And I said, Well, you're missing the swap book, because clearly they didn't hold $90 billion of agencies without swapping them back to floating. And so there's a huge gain on the swap book. He's like, Well, where's the swap book? And we went through and I'm like, there isn't one. And and you know, which a little bit of a non-sector because I'm gonna get to your question, which blew me away because when I was at Wells, I did a lot of the balance sheet management. And, you know, it was a $200 billion balance sheet when I was there, which is exactly the size of SVB. And I had to manage against rates going up and down. I had like a $50 billion for position, I had $100 billion of swaps, I had $50 billion of futures, like I had a huge position to manage that risk exposure. They had nothing. So that was just absolutely mind-blowing. And and these guys put a short on, they made a ton of money, you know, because I'm like, you're right, this is completely insolvent. And this was well before we actually had the run. But I digress a little bit in terms of, I mean, look, where I think this lands is and and where I think there's sort of an interesting battle right now, and and you're gonna see this in the Clarity Act. So the Genius Act, you know, I think went through without a lot of opposition in part because there was just momentum around crypto and people wanted to get something pushed through. I think with Clarity, which is the market structure bill, um, it's much more contentious. And and part of why it's contentious is the thing about blockchain is it's so disruptive. It's not like reinventing your business. It's like blowing your business up and starting over in a brand new company, right? And and this is what's so scary to people about like if I'm DTCC, how do I even think about blockchain? Because blockchain just gets rid of me, right? If I'm Visa, you know, my whole business is predicated on chargeback management, right? And you know, when you can transact bilaterally with as in cash, there is no chargeback anymore, right? And so, like, I have no value in the ecosystem. Like when I see these companies being like, oh, we're doing blockchain initiatives, I'm like, this is ridiculous because if blockchain actually exists, you don't. And this is this is part of why it's so hard to disrupt with blockchain, because normally you get disruption through first order disruption of existing incumbents changing their model slightly, right? And introducing something new and building into that or or opting not to do that. And in this case, it's just wholesale disruption. And I think what what's happening right now is there's there's sort of a fight where TradFi is trying to lean into blockchain but use it in a centralized way, right? Like ICE and NASDAQ want to have a centralized crypto exchange. And and you know, which by the way, Coinbase has a centralized crypto exchange, right? And and to me, the crazy thing is like the whole point of blockchain is decentralization. Decentralization is predicated through cryptocurrency. And we can go into why. Like a lot of people don't understand that correlation, but but that's the fact.

SPEAKER_04 52:32

It's a little bit like passing legislation that cars have to have horses pulling them.

SPEAKER_03 52:36

It's exactly, and and you're you're just scratching your head, like, and after FTX in particular, like why does anyone trade on a centralized exchange? That's a horrible idea. And so what Tradfi's trying to do is basically just reinvent to blockchain with the same thing. FIS is a great example of this with their FIS coin, right? Like, what is that? It's it's uh it's you're not changing anything. It's the exact same. It's like I call it lipstick on the interchange pit, right? You know, there's there's no innovation or disruption that's happening there. True disruption is there is no FIS, right? You and I just bilaterally move coin and wallet to wallet. And and so, you know, I I think we're gonna end it in in one of two verticals, which is we're either gonna end in this really didn't change anything, meaning, you know, TradFi won and we're just using blockchain as a glorified data infrastructure, which is not a great use of it. Or we actually really realize the value and promise of this and we get to decentralization. And decentralization, you know, I gave you the example on the stock market. I can give you that example on every market that exists, right? Like it is a wholesale transformation of whatever was there isn't there anymore. And a lot of it is greenfield, like on the lending side, right? You know, and what we've done in credit. But, you know, it it is such a different world that you're talking about trillions of dollars, trillions and trillions of dollars of public market capitalization that just either gets reallocated or goes away. And the idea that we're transacting through self-custy, biometric-driven wallets on our phones versus what we do today with all the intermediation that happens between any two parties, I just think it's it's a seismic proportion. Like people, as I said, people just don't get how much change is actually going to come if it comes to fruition. And and there's, you know, there's a group of us that are very, very focused on that. There's a group of us within the crypto industry that are not focused on that, right? That still want that centralization. There's a group of us in the crypto industry that have actually benefited from the regulatory morass of the last four years and you know have been able to build businesses because of the moat that that provided. And so, like I'm I'm spending time in Washington lobbying now. I I avoided Washington like the plague for the last four years, right? Because there was no reason to ever be there. And now, you know, we have to be there. But I can say that the crypto industry, the blockchain industry is not aligned in its objectives right now. The issue is, you know, DeFi is probably the least organized of that ecosystem to create a cohesive lobbying effort. But, you know, that's the camp that we're in.

SPEAKER_04 55:11

Well, Mike, I would be remiss if I didn't put in a plug here, but uh we are bringing stablecon to DC as our full-time home next year and uh you know next September. I hope we can get you on stage because you know, policy is going to play so much of a bigger role in this ecosystem and its growth. And uh, you know, I think making sure that we have the right voices in the room is incredibly important, not just to stable coins, which I view as kind of act one of broader tokenization of assets, where we're just talking about fiat assets, but you know, what you said exactly, RWA is so much bigger than that, and and we're just seeing the early innings. But, you know, to your point, we kind of have banks who are fighting a little bit of a rear guard action here where in theory you're retreating from a disruptive technology, but you're kind of lobbying in protective measures if you can to defend your core business from being disrupted in the meantime. And if the US continues as it has been for the last 250 years as a free market where there's no right to win, you like really have to provide the best product, then I think you know this ends up being one of the most important financial services and capital markets conversations of the next, not just the next decade, just you know, the future in the US. Um, you are talking about a wholesale shift that collapses a lot of distinctions in the market and is incompatible with inefficient existing business models. And so I am incredibly excited to see where this goes. People who are excited about figure, who want to join, who want to follow along, where can they find you all? And do you have any uh closing thoughts that you can leave us with?

SPEAKER_03 56:40

Yeah, look, um, figure and figure markets, the the two haven't fully consolidated yet. So figure.com for everything we're doing on the HELOC side, figuremarkets uh.com for everything we're doing in the blockchain and crypto and stablecoin side. And then we're on Twitter and Telegram and and Discord and all the other normal places you'd expect to see us. Look, I I think first off, I really appreciate you having me on uh and I've enjoyed the conversation. I think my uh last comment would be buckle up because you know, if you look at how much we were able to do in the last four years in the in the most difficult regulatory environment I could ever imagine, um, you know, what we're doing now and what others will do, not just us, but our peers, you know, in a more favorable regulatory backdrop, the cuffs are off, right? We're gonna lean in and we're gonna drive real, real disruptive innovation. And you know, just it's an exciting time.

SPEAKER_04 57:29

Well, I'm really excited to follow along with this story. We are going through a huge sea change here, and you are you know one of the people spearheading it. So I appreciate all the perspective today. Mike, thanks so much for joining us.

SPEAKER_03 57:39

Nick, thanks for having me.