Well, ladies and gentlemen, thanks so much for tuning in to the Crypto Tape. I'm your host, Frank Chaparo, head of content and special projects at trading firm GSR. And I'm very excited to have on the other side of the mic, Michael Cagney of Figure, the CEO. Thanks so much for taking the time. We were kind of chopping up before the recording devices started working about your sort of come to Jesus moment, so to speak, with crypto and blockchain. You paid lip service to it for a while until you really bought into the promise, the liquidity promise we could call it.
Well, first I want to clarify I'm the chairman of Figure now, not the CEO, but when I recombined the business, I stepped into the chair role, but I'm still full-time on Figure, so I'm still doing all the same stuff. But yeah, I mean, I remember distinctly when I had the realization of what blockchain really was and why it was its whole ability to create a native digital asset where you know for certain the ownership and the composition and the history and really what you could do with that not just in how it trades because obviously you can trade it bilaterally without any intermediation but also how you finance it. You know, to me the DeFi opportunity within blockchain is really the big opportunity, although it's not really taken off yet and we could talk about that. I think some people would say, oh, you know, there's like on a Hasstra protocol there's over 500 million on Kamino now, it's clearly taking off. The reality is 500 million is a tiny, tiny amount of dollars in the grand scheme of financial services and so there's a lot of work we've got to do to bring those TradFi dollars over and get it to scale. But the framework, the technology and the premise is all there.
Maybe we can zero in on sort of the impact that it has on the main business in which you operate, which is the HELOC. I mean, the cost savings, I'm sure a lot of listeners have seen, is astronomical and the time savings, right? Anyone who's borrowed against their house or has borrowed to purchase a property knows closing costs are a huge chunk of the commitment and can take a month or more. What's behind, walk us through the way in which it simplifies and streamlines the process.
Yeah. So we see three value props of blockchain as it relates to traditional financial services. One is the operational efficiency that we can reduce a lot of our audit and quality control third party review expenses. We can pledge faster into our warehouses. There's a bunch of blocking and tackling stuff that actually adds up to well over 100 basis points of cost savings from origination through to deal execution. There's certainly a liquidity benefit and I think one of the problems or challenges we have in blockchain is people think when you put assets on blockchain they become liquid. Obviously that's not what happens. For liquidity you need homogeneity and ubiquity and ideally market making. But you have a framework where you can create that liquidity. So what we've been able to do in the lending ecosystem is actually stand up a liquid capital market, the only credit liquid capital market that exists, at least from my perspective, outside of agency mortgage, Fannie Mae and Freddie Mac mortgages. And we're able to do that because the assets are homogeneous. You know for certain what they are on blockchain, the remittance, the principal and interest payments in real time into the blockchain, so you know for certain the performance of the assets and the combination of those things has allowed us to stand up a liquid capital market. And so there's obviously a liquidity benefit that we get out of that, but the biggest benefit is really DeFi, the financing side. And we had a thesis about a year ago, a little less than a year ago, and we said, well, we can bring loans over to DeFi. Can we finance them cheaper than we can through Goldman Sachs warehouse? And we brought $10 million of loans over and we financed them cheaper. And we brought another $10 million of loans over and we financed them cheaper. And then 100, then 300. Now we're on our way to a billion. But one of the things that was necessitated out of that and that a lot of people especially in the real world asset domain of blockchain don't spend enough time thinking about is DeFi is just asset-based lending, right? So the key from a DeFi standpoint is I'm not underwriting Figure's collateral. What I'm underwriting is how liquid is it? How volatile is it? And what's the advance rate? How much over-collateralization is there to protect me to the extent that I have to liquidate that collateral out. And the challenge you have with loans is, let's say I've got a $50,000 HELOC. You're part of a lending pool. You got $5,000 in there and the loan to value threshold breaks where you foreclose on the asset. Well, how do you foreclose on $5,000 worth of a $50,000 HELOC? And even if you could take possession of it, what would you do with it, right? There isn't a HELOC market that's just sitting there that you can move into. And so that's why we launched Forge. And really the whole point of Forge is to create that abstraction from the actual assets to fungible, homogeneous tokens where those tokens can trade on an LOB or an AMM and they can act as collateral and you do have the ability to perfect them and liquidate them. And so you can kind of live to the ethos of true DeFi asset-based lending. And that's what most of the market really misses right now when they're talking about bringing assets on chain. I get hit up for, you can imagine, all kinds of crazy assets and all kinds of crazy loans. And part of the problem is a lot of times these are assets that don't have a home in the traditional capital markets and the idea is well there's cheap money or dumb money in blockchain and I can bring it over. And we really dissuade people of that. We're like, 'Look, if you don't do this the right way, it's not true.'
Or the idea is that they're having a hard time, whether it's like a private credit fund that they can't push to the street, they'll find a layer one to get behind it, invest 10 million, slap blockchain on it, and hopefully attract a capital base.
Right. And the reality is no one's been successful doing that. There's some dollars that have flowed into funds and other whole assets, but generally, trying to do this in an illiquid form doesn't work. And what we're very focused on is, again, staying in the spirit of DeFi, making sure the collateral is liquid.
So, walk us through where the street stands on DeFi. Do they buy into this vision? Do they realize the value proposition? Give us a sneak peek into some of the conversations that you're having with the street.
Yeah, and I'm having a bunch of different conversations. And let's start with capital. And so, one of the things that we're trying to do is figure out how do we bring the multiple billion dollars that's in asset-backed financing, for example. How do we bring that over onto DeFi? And we're talking to fund managers and I'm explaining to them it's just asset-based lending, right? It's no different than a lot of what you already do and I think what they want to see is a variety of different credit types. HELOC is a little bit scary to folks because it's long duration. So, we just did a deal with AOR to bring auto on. We're working on a couple of receivable financing deals where the duration is very, very short. And I expect you're going to see a broad swath of credit asset classes that we're bringing into the DeFi protocols and we'll start dragging in some of the traditional allocators, some of the funds that would invest in a commercial paper market or an asset-backed market or a prime money market, mutual fund market. And I think we'll make some headway on that front. The street from a financing standpoint themselves has gotten very interested in blockchain because of what happened with ReColor and what happened with First Brands and the double pledging of assets, though not a lot of people understand that when I have a Goldman warehouse the way it works historically is I send them a spreadsheet with a bunch of loans on it and they send me a bunch of money and then they spend five days figuring out if I lied to them or not. And as long as I don't lie to them I get to send them another spreadsheet and it's the most ridiculous antiquated process. And of course, I could send the spreadsheet to two different, three different banks at the same time. Sorry about that. My dog's a little excited about it, too. And so our view is this double pledging of collateral is kind of a disaster waiting to happen. And with it happening, what we do with Goldman is we use the blockchain and the loans are on the blockchain and they have this utility called Dart which registers an encumbrance on the blockchain. And you can't double pledge the assets. You can't misrepresent what you're moving over. I can't send bad assets to them. And in the beginning, they really pushed back on using the technology and they're like, 'Ah, you know, we don't trust the blockchain and you might just steal our loans and all this ridiculous stuff that wasn't really relevant.' And then, once they started using it, it took them about a day to figure out, okay, well, we can reduce our risk. We can get money to you faster, meaning we get paid faster. We don't pay someone for 5 days of diligence every time the loan pool comes over. Like, this is great. We love it. And what I think you're starting to see, especially with some of the regulatory error cover and legislation like Genius and more importantly clarity, is the traditional finance folks, especially the sell side, the Goldman of the world, they're moving much faster than the traditional crypto community is into blockchain, right? And in particular into the real world asset construct. And so, it's in some ways a little unfortunate because you'd like to see some of the original blockchain and crypto entities kind of paving the way for this. But, the thing about the street is when they figure out they can make money, they lean in hard. And that's what's happening right now. And so I think you're going to see more development and innovation come out of the big sell-side banks over the next 12 to 24 months than you are out of what has been the crypto ecosystem.
Yeah. And I mean there is an element that's unfortunate that I think over the course of the next year you'll see a contraction on the crypto-native side in terms of headcount, funding, wallets, a lot of these bulge bracket banks start to expand. And basically what's happening is the chessboard is being reconfigured. I'm curious though, I guess one of the impediments or one of the things that these banks have to get in place is the ability to do proper credit risk assessment on these platforms. And I think that has historically been an impediment, understanding through the way they interpret risk and analyze risk what counterparty risk is in DeFi. But it sounds like based on what you said they have gotten to that point.
Yeah. I think that you're not going to see the street invest heavily in an algorithmic yielding stablecoin like Athena, but you are going to see them go heavily into assets where they can get a UCC security perfection to the asset. It's bankruptcy remote. They have control. There's some modicum of a transfer agent involved so that it's not a bearer asset. So, they lose their keys or the keys are stolen, they can still replace the asset, mint and burn. And so, as it relates to situations where they have visibility of legal perfection, they're very comfortable leaning in. I think what's kind of plagued DeFi, and we saw this with one of the hacks that just happened a couple days ago, when there's a bunch of yield farming beneath the layer that you don't actually see, and it turns out that yield farming is actually not a riskless activity, that's unfortunate. And I've had multiple DeFi platforms reach out about cash infusions off of the hack that's happened. It just fundamentally demonstrates some of the problems that we've got. But I think we are getting to a point of maturity within DeFi. I certainly think what Figure does with democratized prime and what Hasstra is doing on Solana now on Ethereum mainnet, those are what I would consider best-in-class infrastructure and I think the street will lean in and leverage that and obviously the street's been working with Figure on Provenance for a couple years now. We've done well over 25 billion of asset origination, we warehouse our assets on chain, we're moving to do securitizations on chain and in the beginning there was a lot of kicking and screaming with the street to get there but now they're pretty willing to lean in.
Is there still some kicking and screaming on the securitization side?
Yeah. There's definitely nothing's easy bringing the street onto blockchain. And so it's kind of slow and then all at once you hit an inflection point and they lean in pretty aggressively. And what a lot of people don't understand is you go all the way back to when we started, we were originating loans on blockchain. We were selling those loans to hedge funds and the hedge funds came to us and said, 'We will pay you more money if we don't have to deal with this blockchain crap.' We, you want to sell a loan to us for 103, we'll pay you 103 and a half, but no blockchain. And we said no, because the whole point of why we were doing loans was to get them to lean in and start using the blockchain. And I had at one point a massive insurance company come to us and say I will pay you more if you underwrite my loans to my box. I don't want to use the general box. I want to use my specific underwriting guides. And we said no because we then we lose the homogeneity of the asset and we end up in this bespoke morass that we've been in for all of time. And so we had to leave money on the table to get to a point where we are now. And at one point, literally probably two years ago, it flipped and all of a sudden blockchain became an asset, not a liability to us. We're able to demonstrate real cost efficiency. We're able to demonstrate real liquidity, like all these things. But we had to stay dogged in that mission and it's not easy for a startup to leave money on the table. But we had to do that because we were thinking about the endgame, not how much revenue we made that year.
You don't want to cannibalize the main offer.
So, walk us through maybe just the state of credit in crypto right now. We kind of talked about it at the onset, the lack of borrow. It just seems like they're the scarcest resource right now.
Yeah. I mean, it's interesting if you look at a platform like Aave for example, the borrow rates there are relatively low. You can borrow against your Ethereum in the low single digits, and that's cheaper than you're going to be able to borrow in the wholesale capital market for sure. It's just there isn't a lot there. And at last I looked total aggregate stablecoin count was less than $9 billion and it hovers right around there. And $9 billion in historical crypto land was a lot of money, but as you know, we talked about earlier, it's really not. It's kind of a tiny amount of dollars that you need to support a broader ecosystem.
So, what's keeping someone right from parking some collateral in a to go make a car purchase?
I think that's actually a relatively good idea other than you've got to manage your margin. And if, but the reality is you could put your coin over there. You could buy a put option on it to effectively cover that margining and still have cheaper financing than you would getting a traditional car loan. But again, there's not unlimited money over there. Money is going to run out as more and more important people lean in. And so we've seen periods where that liquidity has gotten really tight and the interest rate's gone very high. And so what I think we need to do is kind of a bifurcated approach which is we need to bring institutional dollars over, we need to bring the money market funds that are investing in asset-backed securities and commercial paper, they should be investing in DeFi, especially where they have true perfection to the asset and visibility is what the collateral is and it's a yielding asset. I also think that we need to bring the fintech users over to blockchain and right now everyone gets very myopic on cryptogs and building solutions for them and the reality is that the ecosystem is not very big right now and part of why you pointed out that there's going to be consolidation and so forth is because so many blockchain businesses are subscale because the ecosystem isn't big enough.
Attention being drawn elsewhere that's being drawn to commodities and oils and stocks.
We had a guest on earlier today who made the joke that it almost seems like crypto exchanges don't want to list more tokens. They want to list stocks.
Right. Well, and you have to ask the question, what's the point? Right. At that stage and that's a definite rabbit hole worth going down. But the reality is we've got to bring the SoFi user or the typical Robinhood user onto blockchain. And the biggest impediment we've had for that is the wallet experience because the wallet experience is built for a native crypto user not for a SoFi customer. And so, we think that there's a tremendous opportunity to build a wallet that is self-custody but is decentralized MPC backend where you're not memorizing a 24-word keyphrase, where it's just a normal experience you would expect to have. And I always use my dad as a litmus test. Like if my dad downloaded MetaMask and tried to go on to a he'd get fleeced in about 2 minutes, right? My guess isn't it crazy how unimaginable you know not to be too cruel and derogatory to the wallet providers out there but every iteration of it every wallet just looks like the same thing and it's kind of like makes you think what's the definition of insanity is trying the same thing over and over again expecting a different result. I mean every Solana wallet looks like what the Ethereum wallets look like and onward and onward and it's like don't these people realize that this is a terrible experience.
Well, and it's one of the biggest opportunities that we have in blockchain because if you look at a SoFi or a Robinhood or even a Coinbase, they're trying to build a super app.
They want an app that sits on your phone that you borrow, you lend, you invest, you trade, everything happens through that one app. They control your data, they control your identity. And what blockchain affords us to do with the wallet is effectively self-custody, custody our assets, custody our liabilities and go to distributed applications to decide where we want to trade, where we want to finance, where we want to lend and pick best of breed across that with a consistent experience through the wallet in terms of what your balance sheet looks like, your assets and liabilities and so forth. And so, I believe this is the future. I believe the wallet-centric approach is going to beat out the super app. The super app was a fintech 2.0 technology and the wallet is 3.0. But we got to build a better wallet and if we don't, we're just going to be languishing.
So, what do you think about obviously everybody's talking about the rise of perpetuals and how that product fits into the broader market structure.
They keep seeing them in the Wall Street Journal. So I have a slightly orthogonal view to where the market is on perps. So I think obviously with perps 70-75% of crypto trading is done in perps not in spot because the reality is people don't want to hold the coin to stake or governance or what have you. They're just taking a directional bet and that's the best way to describe it. And there's nothing wrong with that either. It's just that that's what it is. And perps are great because you get a lot of leverage. You have liquidity but there's a downside. The downside is margin calls. Certainly the fall that we've had, from Bitcoin up at 130,000 bucks to Bitcoin today a little over 70,000. That wiped a lot of people out on the way down.
That's the flip side of the coin. Bitcoin.
It is. And it raises an interesting question right about the extent to which does the US market or is the US retail trader who's far more accustomed to options than futures, is this a product that's for them right and will the FCMs even get on board with it?
So it's great points and you hit the salient point which is options and I think the prediction markets are much better positioned to take advantage of those directional plays and the perpetual market is the prediction market. I'm buying a binary option.
