Welcome to Rebank, your front row seat to the future of finance. Mike Cagney, welcome back to Rebank.
Well, it's great to connect with you again. We had a conversation together with our mutual friend Lex probably four years ago now. You were still, I guess, relatively earlier in the Figure and Provenance journey, and man, how things have changed. You're a public company now for one. How was that?
It was a big step. It was something we felt was important to do, something that was very hard to do under the prior SEC and a little bit easier under this one. You know, I had tried to go public starting back in '23 and, you know, given some of the headwinds that we had about how blockchain and crypto-heavy the business was, I split the company in two. And so I had Figure and Figure Markets, and I went to be the CEO of Figure Markets, and I brought Mike Tannenbaum in to be the CEO of Figure. And Mike I'd worked with for a long time. He was the chief business officer, revenue officer at SoFi, and he was at Bear Stearns as the COO, and I've been trying to hire him out of there for a couple of years. You know, when I had a chance to bring him in as CEO, it was something appealing enough he made the jump. And then as we were going through the process, it was clear that we still had a lot of headwinds because, you know, even by splitting the business, they were both still very blockchain-intensive. And when Chairman Atkins came into the SEC, we realized we had a slightly different market construct and a different public market appetite as well, and we recombined the business. And when we did that, I asked Mike to stay on as CEO, and I moved into the Executive Chairman role where I basically do the same thing I've always done before, which is I drive product strategy and direction, and just, you know, I don't have 500 people reporting to me. Mike is much better at that than I am, and so it's a good separation of responsibilities.
Amazing. Well, congratulations on that milestone. But I also know that it's just the beginning. So, one of the things that I've heard you say recently is that equities belong on blockchain. I wonder if you want to unpack that a little bit for us.
Yeah. And I think it's a very particular approach and a little bit different than a lot of my peers in that, you know, a lot of people are talking about equities being on blockchain, basically taking DTCC securities that trade on the NASDAQ or the NYSE and tokenizing them, putting them on blockchain, and the idea that 24/7 trading is the value prop there. And 24/7 trading is not in itself that valuable. Market makers generally aren't comfortable making market on public equity off-market hours, off New York hours. There is value in 24/7 if you create more of a democratized access to the equity so that you have a global reach versus a regional reach in what you're doing. But to me, I go back to when we started putting credit on chain, loans on chain, there were really three things that we were trying to accomplish. We were trying to get transactional efficiencies, we were trying to get better liquidity, and we were trying to be able to leverage DeFi from a financing standpoint. And I felt that we certainly have demonstrated that on the credit side. So if you look at what we've done with loans, we've cut upwards of 150 basis points of cost out of origination, aggregation, and securitization. We've created what I would consider the only liquid private credit marketplace outside of Ginnie Mae mortgages. And that's because of how we use blockchain. And then we're leveraging DeFi now and basically using it in lieu of traditional warehouse financing and being able to finance assets cheaper than we can through wholesale financing. And I think that's going to continue, but I've always felt those value props were extensible into equities. And I had tried way back when we started Figure with an alternative trading system from the SEC, which basically allows us to run a blockchain marketplace for securities, and it's self-custody, self-settle, works just like a decentralized exchange. It's a little bit interesting in terms of how it was structured, but it's unique in that way. And I felt that we could be able to take equities on chain and get the same value prop, the same transactional, liquidity, and financing benefits.
Initially, as I mentioned earlier, I wanted Figure to go public and go on chain, and at the time that wasn't viable. I had tried to buy Celsius out of bankruptcy because they had this weird Chapter 11 construct where if you emerge out of Chapter 11, you can become a public company without a national registration, and so I didn't need the SEC to sign off on it. And that's why I was very aggressive trying to get Celsius and also then why I tried to get FTX. FTX eventually didn't lift out. I always felt that there was this value prop, and the transactional benefits are relatively straightforward. You can reduce the cost of the transfer agent, for example. You can, as a company, reduce your proxy expenses because you can use wallet as a voting quorum as opposed to sending out snail mail. I used to talk about NASDAQ cues in my personal account that went through a voting process a couple months back, and I must have gotten 90 pieces of physical mail encouraging me to vote, including about 15 FedEx letters. It would have been a lot easier if they just pushed an NFT to my wallet and said vote here. And so, there's some benefits that occur on the transactional side. As I mentioned, there's liquidity benefits in that you can run 24/7. And again, the real merit of that is if you're providing democratized access, and that's what we're doing with the ATS, and that you don't need an introducing broker. You can actually show up with a wallet, you show up with stablecoin, you show up with the security itself, and you go to the ATS and you trade. And that changes a lot of things in terms of access, and it really opens up and democratizes access. But the key benefit of putting equity on chain is DeFi. And it's really around this idea of being able to take my stock, use it as collateral, cross-collateralize it with things like Bitcoin where I can't do that today, and create better collateral pools, but also to control stock loan. And one of the biggest economic drivers for prime brokers is the fact that stock loans are a completely obfuscated process. You want to borrow stock to short it, they run a locate process. You don't know what they're paying the person with the stock. You know what you're paying them, and they run a relatively large spread between those two rates. The idea of being able to use DeFi is you can just run a straight lit limit order book for stock loans. So, you and I can put our stock out for loan. I want to earn 10%, I get to earn 10%. Everyone can see that. And that I think is a huge deal and drives an enormous amount of economic back into the buy-side pocket. But for this to work, you can't do a wrapped version of a DTCC security for a couple of reasons. One is the SEC has come out and said, look, if you tokenize a security that trades on the NASDAQ or the NYSE, it's still the security that trades on the NASDAQ or the NYSE, meaning that it has to adhere to Reg NMS for best execution. And what Reg NMS says is when I lift an offer, hit a bid, there isn't an atomic settlement. I'm not hitting any particular bid or lifting any particular offer. I have to go to eight different pools of liquidity, do what's called sweep the table where I have to take the best bid or the best offer across those pools. Obviously, in a blockchain construct, a DeFi construct where it's bilateral, I'm facing off to you and when I lift the offer, I'm lifting your literal offer. That won't work in a Reg construct. And so, you can't wrap that security. What you have to do is create a new security, a distinct security that lives on blockchain that doesn't live on DTCC, isn't part of the national market exchange. The other reason you have to do that is in terms of collateral, there's a very limited market that will lend against a wrapper versus a very deep market that'll lend against the actual security. And if you actually want to unlock DeFi, you need to have the security on chain. So what we did the end of last year is we filed an S-1 with the SEC, effectively a second IPO, where we said we're going to issue Figure equity. We're going to do it native on the blockchain. It is a separate and distinct security from the NASDAQ security. It will trade on our alternative trading system, and you will be able to take it over to Democratized Prime, which is our DeFi protocol, and you'll be able to borrow against it, lend it out, etc. And so it's really an innovative transaction, one that I hope happens in the next week or so, as we're trying to push this to get it done by mid-February. But it's important on a bunch of different dimensions, but most importantly, it won't be the only stock there. So there are other companies behind us that are going to do the same issuance. We'll start building a marketplace. And this is really the first what I would consider a real challenge to the public equity ecosystem. If you think about what we're doing versus the way that it's been done historically. So, first, there is no DTCC registry. It's registered on the blockchain. There is no NASDAQ or NYSE. It's trading on effectively the ATS, which is really a DEX. There is no introducing broker, no Robinhood, no Schwab, no TD. You just bring your wallet, attach, and trade. There is no prime brokerage or broker margining. You go to DeFi to get your leverage and DeFi to lend your stock out. So there's almost nothing from the existing stack other than the transfer agent that exists in the new stack. And the transfer agent's important because when we were doing the roadshow for the initial IPO, I was telling all the buy-side accounts, look, you really want to own the blockchain version of the security for the reasons I just walked through. And they said, well, that's great, but what if no one shows up? What if there's no liquidity? What if it trades at a 50% discount? What am I going to do? How am I going to get out of the trade? So, we worked through a pretty novel way to basically allow you to swap one security for the other. So, I can take my blockchain security, I can turn it into the NASDAQ security, I can take the NASDAQ security, I can turn it into blockchain security. And in doing so, we've effectively created the same liquidity across both pools. So, Jump is providing liquidity on the NASDAQ side. They're providing the same level of liquidity over on the blockchain side, and therefore you have assurances that those two are going to trade in sync because there's an arbitrage if they don't, it'll be picked off. So, we're pretty excited about this, and I think this is really the beginning of what I think is a true challenge to the traditional equity ecosystem. And what's interesting is it's global. It's not specific to the US. We're already talking to companies in other parts of the world that are looking to do the same type of listing and have the same type of global market access and the same type of blockchain benefits. So, obviously you have regional issues that you have to deal with in terms of the domicile those companies are in. But I think this is a foundation really to, first and foremost, introduce this decentralized construct to the equity market, but more importantly, introduce DeFi. And I've been a strong proponent of decentralized finance. To me, it is the most powerful thing about blockchain and why blockchain really matters. And going all the way back to when I started SoFi, my motivation there was directly connecting sources and uses of capital. And that's what I see its core principle, DeFi is. And so, being able to bring public equity into the DeFi ecosystem to me is a transformative play.
Amazing. A few follow-up questions. So firstly on the transfer agent side, is that you or you're working with a third-party transfer agent?
Yeah, we have Figure Equity Solutions, which is a registered TA. And so that's providing the transfer agent services on the blockchain side. We still work with a traditional transfer agent on the public side, although our intent is to swap that out to Figure Equity Solutions as well. And effectively through the TA, we can do a ledger transaction to move the stock across those two networks. And you still have the fact DTC is in real time, so we can move it as fast as we can move it as it shows up on the register there, but you have that transferability.
Yeah. So during market hours, you think it'll be a relatively quick conversion between the two, and outside of market hours, you're waiting.
Well, I think you'll be able to lock the conversion in immediately. It's just the delivery into DTCC is limited to as fast as they can take the registry update, which is generally business day, but you'll lock the swap, effectively the shares, immediately.
Do you think there's any chance of like regs relief or rule change to facilitate on-chain markets?
I think that this is what some people are trying to push for in the Clarity Act. And I think it's a really, really tough road. Reg NMS is a law. If it was an SEC edict that was subject to their interpretation, it could be easier, but it's not. It's a law. It's a law that had best intentions. I don't think necessarily has resulted in the outcome that the lawmakers intended it to have, was really a result of, I don't know if you read the book Flash Boys and the whole issue of front-running security transactions and so forth. And so the intent was to protect the investor. It really hasn't done that in my view, but it is a law, and I don't think there's a lot of appetite to overturn that. And I don't think the SEC is in a position to provide exemptive relief to law as such. I'm not optimistic that you're going to get any wholesale revision or changes on the Reg NMS side. And I think the right way to do it, and anyone who's saying, well, it's the only way it can happen, that's not true. Just look at what we're doing. You can do what we're doing. We don't have monopoly on a company issuing a second public equity. We do have an ATS that's uniquely situated to support it. My expectation is that people will start leaning in this direction in terms of what to do on the public equity side.
And moving away from the idea of just tokenizing existing stock. You have such a strong background in kind of traditional institutional markets and connectivity into them today. I wonder how you think about ultimately how this transition is likely to play out. So on the one hand, it's kind of inherent in the innovation phase of the market right now. You have DTCC taking one approach where they're basically looking to defend their entrenched position when many could argue that in a disintermediated world the requirement for an entity like that is less relevant. You have Kraken, you have Robinhood, you have Ondo, you have Superstate, all taking what seem to be kind of different flavors of, more or less, the same approach. On the one hand, you have kind of wrapper versions. And on the other hand, you have the sort of transfer agent level issuance, creation of tokenized securities. How do you think about how this shakeout is going to happen? How this transition is going to play out? Like how do we get from where we are today to a sort of unified model in the future.
Yeah. So I think you raised a couple really interesting points. I mean, one, you've seen the announcements from DTCC, from the NASDAQ, from the NYSE. I think some of those announcements were the result of our announcements and their desire to stay relevant and part of the dialogue. I think that the irony or the paradox of that is, to the point you made, you don't actually need them in a blockchain construct. And I bring this point up all the time about lots of different industries. I pick on Visa a lot. I probably shouldn't pick on them so much, but they're always talking about doing blockchain initiatives, and I'm like, well, blockchain really works. If stablecoin payments really work, the true bilateral transactions biometrically signed, you don't need the chargeback and reversal services that Visa provides, which is really the value of that network, or at least the value of that is significantly diminished versus what it is today. And it's the same thing, like what role does DTCC play in bringing stocks on the blockchain but still custoding them at DTCC? If I'm just wrapping a stock, that's not the stock itself, then as I mentioned earlier, you have very limited collateral value. You have no governance capability. You have a trust element. But also, you're extremely vulnerable to the prediction markets because why don't you just trade on the prediction markets or trade on the perp markets? Why do you need the wrapped version of the stock to trade at all? Because it doesn't mean anything. It's no better than trading on a perp or just writing a prediction market. Hey, I think Figure will be over 80 bucks by this date, where I get massive leverage in terms of what I can do. And so I just don't think that those are viable sustainable strategies. I think that the prediction markets will ultimately make the wrapping construct irrelevant.
And so you're going to bifurcate into two models, which is, that prediction and maybe perp marketplace where you're not actually trading the underlying security. You're making a bet on a reference point to that security, or where you're actually issuing a security native on-chain, you actually have the asset. You can use it as collateral value. You have the governance that it affords you, and for certain, you have the stock. And the key for that is that security has to be able to trade, and the limit that you have right now is you can't tokenize a NASDAQ security and put it up into a limit order book because you're violating regs. And what you need to do is actually create that security native to the blockchain ecosystem and then you can support a marketplace for it. So, I see the rush to tokenize will dissipate into two somewhat diametrically opposed camps, which is I don't actually have the stock. I'm betting on the price and I can do that through prediction or perpetual, or I do have the stock but it's native on blockchain and it affords all the benefits that I get from it.
