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Unchained
Lessons From A Successful Tokenization Project & What Market Structure Reveals About Trump-Linked WLFI’s False Promises: Bits + Bips - Ep. 986
01:03:55
A double-header episode examining what actually works onchain, and how new rules could force crypto to prove its decentralization claims.
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- [00:00]
Mike Cagney
There isn't this fantasy of money on blockchain that you can't get to anywhere else. Money is really smart. It can get to whatever it wants to. It doesn't need the blockchain to do that. And so in the beginning you're introducing something different that introduces friction. And so, you know, in the beginning it isn't that it's cheaper for me to finance XYZ on blockchain or trade PDQ on blockchain or whatever it might be. It's actually, you know, in a lot of circumstances going to be more difficult to do it. But in the long run it will make sense.
- [00:32]
Steve Ehrlich
Hi everyone, welcome back. My name is Steve Ehrlich. I'm the executive editor at Unchained and in this particular segment is going to be the bits and the interview.
- [00:42]
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- [01:01]
Steve Ehrlich
I'm here with Mike Cagney, founder and CEO of Figure, and we're here to talk about Figure's I think really terrific year, successful IPO and they've really found product market fit with regards to putting HELOC loans on their own blockchain called Provenance. I wanted to speak with Mike to kind of get a sense of what the year has been like for him. Now the tokenization has become a very hot topic again, sort of what helped him succeed when frankly a lot of tokenization products or projects that have been around over the last 10 years have failed and kind of what the future of tokenization means for his business. So welcome Mike, thanks for joining us.
- [01:45]
Mike Cagney
Oh, thanks for having me. Great to speak with you again.
- [01:48]
Steve Ehrlich
So yeah, let's just. It's funny sometimes when I talk to people about Figure, most people in crypto probably don't own homes yet they don't know what a HELOC is. And when I use that term they look at me like I'm speaking gibberish. So can you just briefly explain what a HELOC is and why it's a product that's very well suited to be tokenized?
- [02:12]
Jason Brett
Sure.
- [02:12]
Mike Cagney
So HELOC stands for home equity line of credit and it's effectively an open end mortgage. So generally when we think about mortgages, we think about getting a 30 year fixed rate mortgage and you're paying Principal and interest every month. And at the end of 30 years you pay the loan off. A HELOC is also a mortgage, it's secured by your home, but it's open ended. So I might have $100,000 HELOC, I might pay $50,000 down and then I can borrow the $50,000 back up again. And a lot of people think of HELOC as a second lien product. So there's a mortgage and then behind that there's a heloc. But one of the fastest areas of growth that we found is HELOC in the first lien position. So using it instead of a mortgage, and one of the things we've been able to do over time is get the rate on that HELOC in first lien position to be comparable to Fannie and Freddie rates for conventional mortgages. And, and this has been a huge advantage for us in mortgages under say $300,000 because the way the industry's evolved to do a Fannie Mae or a Freddie Mac eligible mortgage costs about $13,000. And so if it's a $200,000 mortgage, $13,000 is six and a half points. There isn't a market you can sell the loan in for six and a half points because of the efficiencies we captured through blockchain. And the capital markets that we built out through blockchain costs us less than $1,000 to reduce that mortgage. And so, you know, we have over 250 partners now that use our technology to originate loans, including 10 of the top 20 mortgage companies. And the fastest area of growth is HELOC and first lien position for these sub $300,000 balances. And we think that's an area that has huge opportunity. You know, it's almost greenfield because no one was doing those loans before because you couldn't do them profitably. So even though it's in the mortgage space, which we think is relatively saturated and competitive, that's actually a greenfield domain that we've been able to lean in on and grow.
- [04:14]
Steve Ehrlich
Gotcha. Maybe, forgive me, maybe you could just explain that a little bit more. I'm familiar with HELOCs. I have one on my home, but it's really kind of taken out as maybe just an emergency fund in case I need something or, or if I know people take them out if they want to perhaps do an addition on their home or some type of renovation and, but it's always again like a backup plan or a secondary source of funds. Can you just explain really what it means for it to be almost like an actual mortgage replacement, because I frankly hadn't heard that before.
- [04:51]
Mike Cagney
Yeah. And that was why when we started figure, we, we, we wanted to bring a tangible solution to market and, and we chose credit. We said we could, we could originate aggregate securitized assets on blockchain, save 85 basis points of cost, and we needed a credit vehicle we could originate that. You know, I knew that it would be a herculean task to convince the buy side to start using blockchain, the sell side to start using blockchain. And so I didn't want to fight it out with SOFI on personal loans or rocket on first lien mortgages. And the area to me that I thought was, was relatively untapped was home equity line of credit. Because historically it's been used for exactly the reason why you have yours. Right. It's, it's the rainy day line of credit. And I, I can tell you in, in the lending world, you don't like lending to people when it's raining out. You're like lending it to it when it's sunny out. So what, what always stuck with me when I was at SoFi, we, we would sell huge pools of unsecure consumer loans. And our borrowers tended to be prime, they tended to own homes, they tended to have a decent amount of equity in the home. And the question we always got from the capital markets was why aren't they taking a heloc? Why aren't they taking a second? Like, why are they taking this unsecured loan? The rate's much higher. The reality is they're doing that because the process was so much easier. We could underwrite an unsecured loan in a couple of minutes and fund literally that day versus the HELOC process, which was the same as the mortgage process, which was 45 days of misery. Right. You know, you're producing income statements and tax returns and all this stuff. And so we felt that if we could bring the personal loan efficiency into the HELOC marketplace, we could actually get people who wanted to take the loan out for immediate purpose. And so what, what's unique about this HELOC is when you take $100,000 HELOC from us, we're dispersing $100,000 to you. Now you can pay that down and pay it back up. It's an open line, but it's a fully dispersed loan at origination. And so it's really oriented more towards an immediate use case. Right. Not, you know, I'll Draw it when I need it. And, and again, what, what's interesting is, is the, the first lien product. So using the HELOC and first lien that's actually prevalent in other countries like Australia, that is what an Australian mortgage is. Right? It isn't a 30 year fixed product. It's an open line that you draw against your home because it's cheaper to do that than on an unsecured basis. And so, you know, we, we felt that we would have a lot of appetite for it. We also felt it had some, some virtuous credit signaling because if you had a borrower who could take an unsecured loan or you know, put their home up as collateral and get a lower rate, whether they're going to pay the loan or not, you know, which one they choose tells you a lot of that. And so, so, you know, it ended up being a great asset class for us to start with because nobody was doing it the way that we do it. And, and it really provided a lot of incentive for the buy side to lean in and start, start taking that loan down.
- [07:57]
Steve Ehrlich
Okay, so let's just again, because I want to make sure everyone watching and listening stays with us for the whole conversation. Can you just briefly walk me through like the life cycle from I guess origination to disbursement to I guess the loan being sold through your blockchain to your capital market partners so that everyone kind of has a visual visualization in their mind of how this works?
- [08:21]
Mike Cagney
Yeah, I'll do that and then I'll talk about some of the challenges that we had early on because of blockchain. And I think this is illustrative of why a lot of these RWA projects haven't taken off because of some of these challenges. And I can talk through how we navigated that. But basically what we do is, is we ingest the data from the loan so credit title, property income directly into the blockchain. And by the way, one, one correction, you know, we use a blockchain called Provenance, which we built, but we don't own. It's a public chain, so it's, it's public blockchain. And the importance of that is the blockchain's immutable. And so what happened in 2008 was, was a bunch of lenders got in trouble because they would go in and modify loan documents, modify income numbers, modify loan to value numbers, and it created a lot of uncertainty. And the rating agencies coming out of that said, you know what, going forward to get a AAA rating on A mortgage deal, we have to audit every loan. And it's $500 a loan. That's the scope of the audit. Well, because of the way we ingest data into blockchain and the immutability of that, the rating agencies have lowered our requirements down to 20 to 30% of the loans and about $100 alone. And so this manifests to a couple million dollars of savings per securitization transaction per AAA rated deal, which is about 50 basis points in terms of the cost of the life cycle. But effectively, we originate the asset native on chain, so the loan is on the blockchain. We pledge that asset into a warehouse provider like a Goldman, for example. Although this is changing because we're starting to use Defi. We could talk about that as well, but we pledged into a warehouse provider. And one of the things that I'd been pushing Goldman on for years was, look, you should take the loans on chain. You should use Dart, which is a registry service that we have to encumber those loans. Because the way we've historically done warehouse pledging is I send a spreadsheet to the bank full of loans, they send me a bunch of money and then they spend five days figuring out if I lied to them or not. And sometimes they can't figure that out. And the Tricolor was a great example of this where there was a massive amount of fraud. Well, you can't have that fraud on blockchain. And when Goldman finally started using it and realized, hey, we don't just spend five days, we know immediately whether you gave us the loans or not. We've de risked this transaction, meaning not only can we get you the money faster, we could actually give you more money, meaning we make more money. And we don't have a staff that has to do all this reconciliation. They really leaned in and embraced it. And our warehouse providers and partners all leverage that now. But we aggregate these loans up and then ultimately they're sold into either portfolio buyers like insurance companies, or they're securitized, where they're aggregated and turned into debt. The servicing, subsequent cash flows all happen on chain. And the importance of this is we think about why do we use blockchain. There's three reasons why we use it. One is we get some transactional efficiencies at the top, like the AAA rating cost or the warehouse pledging cost. And we've been able to capture over 100 basis points of efficiency out of that. We get liquidity. But liquidity doesn't come on its own. There's a misrepresentation of blockchain that if I put something on blockchain it becomes liquid. And obviously that's not what happens for liquidity you need ubiquity and homogeneity and market making and all these other things.
- [12:04]
Steve Ehrlich
I know, I was going to say, I know when we spoke in the past that was the issue that plagued many other tokenization projects. You can do the initial issuance but then you don't have this liquid secondary markets.
- [12:15]
Mike Cagney
Yeah, 100%. And this is why there's a lot of projects that are, that are well intended. You know, putting private companies stock on blockchain. Well of course you could do that, but there isn't a reason that it's going to trade persistently. Right. Or putting an office building on blockchain. Well sure you can do that, but who's going to trade it? And you know this, I think I've joked with you before is why I don't get invited to RWA conferences because I always say these are stupid ideas. But, but the, the, the construct is we've created a liquid market because all the remittance data, the principal and interest payments come into the blockchain. And so I have a pool of loans that are all like have a common agreement in terms of buying and selling and that I see real time whether they're performing or not. And, and that's created liquidity. So you know, if you go to Coingecko for example, I think we're the 11th largest crypto asset by market by TBL. So I think we're behind Dogecoin and ahead of Cardano last I looked at somewhere in that neighborhood. And but you see our volume every day and it's you know, hundred hundreds of millions of dollars of loans to trade because of this efficiency that we create in this liquid marketplace. But the real value prop to me is Defi and it's you know, connecting sources and uses of capital directly. And what we started doing last year is we started saying well look, what if we bring some loans over to defi? Because Defi historically has been crypto, right? Because for, for, for DEFI lending to work, the asset has to be liquid. This is another limitation that folks have and don't fully understand because you're doing an asset based loan. So you're not underwriting the asset, you're actually underwriting how liquid it is, how volatile it is and what the advance rate is. And so, so we, we brought $10 million of loans over and financed them cheaper than we could in our Warehouse and we brought another 10 million over and did it again and brought $100 million over. Doing it now. Now we're going to bring a billion dollars over and we're going to start migrating more and more of the capital structure to decentralized finance. And go ahead.
- [14:15]
Steve Ehrlich
When you say defi, I'm curious if you could just be a little more specific on which platforms. I mean, is it just like open Defi or I know groups like AAVE Compound, I mean they have institutional walled garden versions of defi.
- [14:31]
Mike Cagney
Right. So we, we have a defi platform called Democratized prime, which is open, although KYC'd. But we recently launched on Solana a platform called Hastra. And Hastra is, is effectively an open protocol that people buy wrapped yields on Hastra, which is our, our yielding security but wrapped in Solana, pledge it into Hastra. Hastra applies capital into our DEFI protocol to generate yield and then that staking token can be looped on Kamino or traded on radium. So it is actually in the broad DEFI ecosystem. It's not in a walled garden. And what's interesting about that is that activity lowers mortgage rates for US Consumers. So you think about in Camino they prevent US users from participating. So we have a bunch of non US Capital that is participating in actually lowering the cost of mortgages to US Consumers coming through this defi construct. Which is why defi is so important to me. And I think one of the things I've been doing recently is advocating for the market structure bill around protections for defi and what I can bring to the table that's a little unique from some of my peers is tangible use cases to senators, how this helps their constituents. So like Warnock, you know, from, from Georgia, on the Democrats side, we funded over a billion dollars of loans in Georgia and, and his, his constituents saved money because of defi. Right. And so, so we've been advocating very hard on, on that front. And, but, but effectively what, what I think ultimately happens is I think you're going to get a migration out of bank deposits on the Genius act because of the stablecoin legislation. I think that money gets reapplied into Defi and I think what you're going to see is assets and liabilities move from the bank balance sheet onto a defi protocol. And that's what I'm most excited about.
- [16:40]
Steve Ehrlich
I am too. And we're going to talk about that in a lot more detail. But first we just have to take a quick break to hear from some of our sponsors.
- [16:47]
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- [17:45]
Steve Ehrlich
Okay Mike, so before we left off, you started getting into what's happening in D.C. and, and sort of how it's important to get legislation right in order to kind of clear the pathway for products like yours that have product market fit. But first I just want to ask one other quick question about the mechanics of how this works before we get into that. Stablecoins, when people, when, when investors, you issue the money in, in fiat dollars, I guess to the HELOC participants. When, when people buy the, the tokenized security, the tokenized securities, when you securitize the loans, are those done in fiat or are they done in stable coins? And I know that you recently launched your own yield bearing stablecoin, you actually registered it with the sec. But when, when I checked, I saw uptake is still small. It's early. I think it was like $3.4 million market cap. It's.
- [18:36]
Jason Brett
So I think it's, I think we're.
- [18:38]
Mike Cagney
At a couple hundred million in market cap right now. So you might have been looking at some stale data. So it's, it's growing, it's, it's starting to take off. And you know what, what we're doing is if you think about our ecosystem, there's, there's loan funding which we're still funding in dollar fiat. And unless users elect to be funded in stable, there's the pledging to the warehouse where we're now migrating that to using stablecoin. So rather than when I pledge the loans, Goldman sends me a wire for dollars. I'm I to pledge the loans and gold and sending the yields, which is our stable coin, our yielding coin, there's loan sales which were also migrating to stablecoin settlement. So you know, I sell Apollo $200 million of loans, they're sending me $200 million of stablecoin. Again, yields. And the securitization is kind of the last leg where what we'll start doing in 26 is issuing those securitization bonds native on chain. Because today we don't today, other than some limited exceptions where we have done some on chain issuance, generally we've been issuing those securities in traditional form as DTCC registered securities. What you'll start seeing in 26 is blockchain native issuance. And that will then allow for stablecoin settlement. So there's no asynchronous process of a wire versus the security settlement. So reducing the post trade audit and reconciliation expense.
- [20:05]
Steve Ehrlich
And which stablecoin is that your stablecoin or is it usdc?
- [20:10]
Mike Cagney
So we use yields within our ecosystem, although yields is convertible in the USDC 24 7. And so, you know, that marketplace is always open, but we tend to use yields because it affords us some benefits that traditional stables don't afford, including the interest that it pays.
- [20:30]
Steve Ehrlich
Gotcha. And I am curious too. I mean, given how much you work with Wall street banks. I mean, what kind of conversations are you having with them about their own stable coins now that we're in kind of a post genius world, even though the law hasn't been fully enacted yet. And tokenized deposits, which from my perspective, I know all the benefits of stablecoins, but for regulated financial institutions, tokenized deposits seem to be a much more capital efficient tool. Maybe there's additional savings there that could be passed over to your customers.
- [21:01]
Mike Cagney
Yeah, I'm not, I'm not sure how valuable the tokenized deposits are and only in the sense of the way I look at the stablecoin ecosystem is, you know, stablecoin is not proliferated the way that we expected it to because it doesn't really have utility.
- [21:17]
Steve Ehrlich
Right.
- [21:18]
Mike Cagney
I can't go to Starbucks and buy coffee with stablecoin. And so that limitation, you know, both limits its use cases and also limits its, its disruptive capability and, and value creation capability. The Genius Act's going to change that. And, and what we're seeing is JP Morgan leaning in pretty heavily around the idea of building a new payment rail or payment infrastructure. You know, they just moved JP Coin off of their proprietary blockchain, which was a fourth version of Ethereum onto base, which is obviously an L2 EVM, but they're going to move it into broader Ethereum mainnet, I'm sure. And you're going to see what I think is JP Chase versus the rest of the world. JP Chase looks at Interchange and says, look, we've got an issuing processor, an issuing Bank, Visa, MasterCard, Merchant Acquirer, Merchant bank. Why do we need the issuing processor, Visa and the merchant acquirer? Like why, why don't we just have an issuing bank us and a merchant bank us and we trade on our rail? And I think they're going to lean in and do this and I think it's going to bring utility at least into that version of coin. And I think if I'm a regional or super regional bank, this should be an absolutely terrifying idea to me because they're going to come after my liabilities and they're going to get it because they're going to be able to offer stablecoin value that I can't do. And, and a tokenized deposit isn't a defensive mechanism to that because I'm not going to be able to use it as utility, right? I'm not going to be able to go buy Starbucks coffee with a tokenized deposit. So, you know, I, I think that the, the rest of the banks have to think about, you know, do we build around a common coin that's a little bit like hurting cats, trying to get, you know, every other bank to lean in to do that? We think yields is an actually interesting opportunity for the banks to lean in and support because yields is defensive against JP Coin because it pays interest and yields, we can hold Treasuries or bank deposits so we can keep the liabilities of the bank from their customers on their balance sheet. And so there's a value prop off of that. So I think it'll be really interesting to see how this evolves. But what I can tell you is the sell side, in particular the big banks, the Goldmans and the Morgan Stanleys and certainly the JPs, they are moving into blockchain and doing in my mind much more innovative and disruptive work right now than the coinbases of the world are. And this has been interesting to me to see and I saw this firsthand because, you know, we, we haven't asked one about issuing figure stock native on blockchain. We put it out a couple weeks ago and we're hoping that we do this. I call it a second ipo. Although it's all secondary, it's not primary, but doing it in January and you know, the, the, the speed at which the large institutions, if you look at the S1. JP and Morgan Stanley are on the COVID They're underwriting the deal. Right. I was sort of golden Morgan and a brain cramp. They're saying JP Goldman and Morgan Stanley are on the COVID and they're underwriting the deal. And they understand the potential disruption of this. And eliminating DTCC, eliminating NASDAQ, replacing Prime Brokerage with DeFi. This is a wholesale replacement of an equity capital market piece. But the traditional blockchain players or crypto players I don't think understand or have been as aggressive leaning into this opportunity set. And that's been a little bit surprising to me. But maybe not because I think again, with the legalization of blockchain and crypto, I kind of view it. When I started SoFi, I went to the very first LendIt and it was like the bar scene out of Star Wars. Right. It was the weirdest group of people that you'd ever see and it was just insane. And two years later it was just all suits. And so I think we're at the all suits inflection point that's about to happen in blockchain. There's been a lot of people lamenting about this on, on crypto Twitter, but I think, I think it's actually, we're at that point, it's going to happen.
- [25:41]
Steve Ehrlich
I guess that's good, but for me that's bad. I don't think I've worn a suit.
- [25:44]
Mike Cagney
In years since I. I don't even think I can fit in any of mine anymore. I hope, I hope no one gets married or dies because those are the only two reasons I break it out.
- [25:53]
Steve Ehrlich
Yeah. And yeah, most of the time, even when I wear a jacket underneath, it's probably like Philadelphia Eagle shorts or something like that. All right, so let's go back to the regulation because I know you started talking about that you've been going to D.C. a lot and sort of like, it seems like really making the case to help ensure that the Senate in particular gets market structure right, particularly when it comes to defi, which is a very, very thorny issue. So maybe you could expand a little bit more on what you've seen and heard there.
- [26:26]
Mike Cagney
Yeah, I mean, in our situation, there's three things that we're advocating for when one is around the ability to settle non currency or non security transactions with yields of security off a regulated framework. So not having to use an ATS or national market exchange. One is the modernization of the transfer agent rules where, you know, historically transfer agents have been forced to do best effort to get in an address, we think wallet address is sufficient because it's really just a way to, to drive quorum. But more relevant is the protection of defi as a peer to peer transaction, not a security offering. And you know, I think that what, what I've heard, there's a lot of frustration on the Hill around people coming and saying, oh, this is defi. This is defi. When it in in fact is not defi, there's a centralized actor or player and they're really just trying to avoid security registration and uses a shortcut for that. I don't certainly the stuff we're advocating for, that's not what we're trying to do. We truly do run a peer to peer lending transaction marketplace. When I say run it, it's a smart contract that sits out, that's effectively governed by everyone.
- [27:40]
Steve Ehrlich
It was a, I don't know, Freudian slips, right. Where we say you run up peer to peer. It's. You create it, I guess. A peer to peer.
- [27:46]
Mike Cagney
Yeah. And that's that. Yeah. And so we do that at the behest of hash holders, which are, you know, that's the utility token of provenance. And they can vote us out of not having anything to do with that protocol to the extent they want to do that. It's, you know, we don't own it per se. And the SEC has taken the position that that is, you know, effectively a protected transaction. It doesn't fall under a securities regulation. But that's the position. Right. That's not the law. And so what we need to do is get legislation codified for that protection such that we don't lose it in the case that Chairman Atkins leaves and someone else comes in with a differing view.
- [28:27]
Steve Ehrlich
What do you see as kind of the litmus test or the lines of delineation between a true peer to peer defi protocol and another project or that engages in defi theater or stage dressing.
- [28:43]
Mike Cagney
Yeah, I think it's all around intermediation. So if at any point you are touching the transaction between party A and party B, that's not a decentralized transaction. Right. So, you know, a true bilateral transaction doesn't require intermediation and you know, to a second degree, it's the governance of the mechanism that connects those parties. Where if you have exclusivity to that governance, that's also not decentralized because you can change how it works and so forth. So it really needs to be the community that votes for and controls and administers those smart contracts. And that doesn't mean you can't earn economic off it. Smart contract can say I'm getting 2% of every transaction. And again, the community could vote to modify that or change that. But those are, to me, the core litmus tests. And again, I think the challenge in D.C. is you're having to bring a lot of folks up the curve on the education side because they haven't had to think about this in the prior four years and now they're immersed in it. And also, as I said, one of the things I'm really advocating for is giving tangible use cases to a lot of the senators in terms of how defi is benefiting their constituents, how it's reducing their loan rates and the extensibility of that way beyond the mortgages that we do into almost every type of credit.
- [30:00]
Jason Brett
Credit.
- [30:00]
Steve Ehrlich
Yeah, I don't want to belabor this point, but this is a very hot issue right now, as you all know. What about voting power? I'm curious, like how much hash or voting power figure has on provenance and if you do anything like some projects do, to maybe restrict the amount of governance that you're allowed or the amount of voting power you're allowed to deploy on a particular proposal. And I actually just forgot what my second question was. Oh yes, some people might be confused how a defi protocol that does AML KYC users can also be decentralized. So maybe talk through those two items, please.
- [30:37]
Mike Cagney
Yeah, and the second one's a great question, but let me talk to the first one. So as you we built provenance and at one point we had the majority of the token. But in that case it wasn't decentralized. We effectively distributed back to the foundation or burned such that we now have 20% of the token. And my expectation is that we will do a series of actions that burn another 25 to 50% of that. So we're already a minority holder of utility tokens to the protocol, so we can't influence quorum. But our goal would be to get down at the 10% level or even slightly below that, not through sales, but through some burning function as it relates to activity that we do within the ecosystem. The second point that you raised, I think people confuse decentralization and anonymity, and I don't view those things as the same. Right. So decentralization is there isn't a single point that is intermediating transactions or driving the structure in terms of the transactions. It's a community quorum that effectively does that. So I could build the smart contract, but the subsequent Management and adjustment of that smart contract's done through quorum. That smart contract could require that you have a KYC certificate in your wallet to participate in that ecosystem. And there's nothing orthogonal to DEFI and doing that. And the community could vote to not require that. Again, it's different functions but, but I don't think that decentralization and anonymity are the same thing. And too often they get conflated in blockchain and in crypto and some people feel will die on that hill. And I just don't think that's the hill to die on.
- [32:33]
Steve Ehrlich
Okay. No, I appreciate that. Interesting. So let's look a little bit ahead. What's life been like now as a public company? How are you deploying all those funds that were raised? And I'd like to just get a sense from you on kind of what you see as the Tam for HELOCs. But your background as, I mean as the founder of SoFi is in broader consumer lending. I have to imagine you have a lot of plans and thoughts on ways to leverage the playbook that you've built here into other forms of credit provisioning.
- [33:07]
Mike Cagney
Yeah, and a couple interesting points. One is I think it's great being a polar company and you have to deal with the fact that the market votes on whether they like you or not every day. And, and so I just, I just don't look at the stock and I just think about things are very long term time horizon. So you know, that's, I've been relatively robust in dealing with that.
- [33:28]
Steve Ehrlich
That's good advice to crypto investors as a general rule of thumb anywhere.
- [33:32]
Mike Cagney
Yeah. And Jeff? Well, you know, I look, you know figures at the very beginning of a long journey and if you own figure, you're looking at this as a long term opportunity, not as a near term flip. And, and so you know, it really doesn't matter what happens to the stock price day over day. It matters, you know, what happens in 5, 10 terms of our ability to execute into things that are accretive and transformative. And I think we're doing that and I think that certainly within the mortgage sector, and especially now that we're competing in first lien mortgage, that's a $3 trillion a year industry and so largest credit segment in the world. And that one I feel very confident in our ability, especially that sub $300,000 vertical, to continue to make inroads against Fannie and Freddie. And I think it's pretty crazy to think about a blockchain native mortgage company out Executing Fannie Mae and Freddie Mac in the first lie mortgage space. But we've been able to do that and again I think we'll continue to do that, but philosophically, and I'm glad you brought up SoFi because when we built SoFi, we thought a lot about the super app construct and the whole value was cool cross sell. We get this customer in and they're super high value and we're going to be their lender, but we're also going to be their banker and their broker and their wealth manager and all these other things. And I, you know, that's certainly the extension that, that Robinhood has taken in their ambitions to, to be super app. And I think, you know, Coinbase announcing stock trading yesterday, albeit, you know, in the old antiquated way, not the new cool way, you know, everyone wants to, or a lot of folks want to migrate towards that super app. I've taken a different philosophical approach that you know, we'll talk more about as we get into 26, which is I, I believe that rather than the centralized construct, I, I think it's SEL wallets and distributed applications. And I think, you know, you and I will carry all the relevant information we need, you know, whether it's our assets or liabilities, our identity or kyc what have you in our wallet. And we will choose what venue we trade equity on what venue, we trade crypto on what venue we borrow against assets, what venue we lend against assets as distributed apps. And so what you really want to do is build some combination of the best wallet experience plus the best DApp experience and compete in that vertical, recognizing that you don't have this control of the customer anymore. Customer is going to have this, this ability to exercise democracy in terms of where they go. But to do that, you know, right now our wallet experiences in crypto are not great. And you know, they're, they can be very intimidating, they can be very non intuitive, they can be very cumbersome. And so, you know, I think there's some work that needs to be done around the wallet experience. But you know, the idea of, of taking my wallet, attaching to a dex, that's trading securities, you know, could be an alternative trading system and not requiring an introducing broker, right, not needing Robin Hood or, or Schwab to use that account to access the marketplace, but just access it directly with my wallet, that's a very powerful introduction and disruption into the market. And, and, and that's one of the things we're pushing hard on in terms of our equity offerings. Is allowing such market access. And we think that's a precedent that other companies are going to fall behind us on.
- [37:05]
Steve Ehrlich
Gotcha. All right, so as we get ready to wrap up here, I wanted to get your sense of, I mean, just broader tokenization landscape. I forget how big it is outside of just stable coins, but there's stable coins, there's money market funds, there's Treasuries, now there's stocks, as I'm sure you're well aware. There's a few different credit, like structured credit funds that have also been tokenized, I think from some of your own business partners. What do you make of all this? And I know you mentioned before you have some lessons learned from your own experiences and from what you've seen other tokenization projects do that didn't really get that escape velocity. What do you think needs to happen for all the hype to sort of really manifest itself properly this time?
- [37:56]
Mike Cagney
Yeah. So look, I think thus far I would argue, and of course I'm biased in saying this, that there really hasn't been a lot of successful tokenization of RWA other than what we've done in the consumer credit side. And the reason I'm saying that is, you know, you look at a biddle, for example, and okay, biddle has, I don't know, $3.5 billion of AUM in it right now, which as a money fund is insignificant. Right. You know, you don't make money in a money market fund until you have about $100 billion of assets. And so, you know, it's just not a material thing. And you know, like, like Apollo's acred. Well, there's a couple hundred million dollars in a cred on blockchain. Well, that doesn't even begin to move a needle for Apollo. Right. In terms of what that is. And, and I think what, what a lot of people don't realize and kind of going back to those three value props I talked about earlier for figure to get loans on chain, we had to leave a lot of money on the table along the way. So we had to have a long term perspective. So in the beginning, the hedge funds that came to us to start buying loans said, hey, I'll pay you more if I don't have to deal with blockchain. Literally, they would have paid me more money per loan if they didn't have to deal with the blockchain. And I'm like, the only reason I created a lender was to get you guys on the blockchain. So no. And you know, at one Point, you know, one of the big insurance companies came to us and said, I will pay you more if you underwrite to my underwriting box, not to the market underwriting box. And we said, well, that's going to get rid of the homogeneity of the asset. That'll impact liquidity. No, we're not going to do that. Right. We're going to get paid less and we're going to do what we're doing because we knew at some point we'd hit the inflection point where blockchain was actually an asset, not a liability. But the reality is, when you start off right now, it's a liability. There isn't this fantasy of money on blockchain that you can't get to anywhere else. Money is really smart. It can get to whatever it wants to. It doesn't need the blockchain to do that. And so in the beginning, you're introducing something different that introduces friction. And so in the beginning, it isn't that it's cheaper for me to finance XYZ on blockchain or trade PDQ on blockchain or whatever it might be. It's actually in a lot of circumstances, going to be more difficult to do it. But in the long run, it will make sense. Right. And, and for us, we hit that inflection point, you know, a year and a half, two years ago, and you know, our, our third quarter numbers, we did 160 million of revenue or somewhere in that neighborhood, but we did $90 million of net income. And you know that that net income margin was because of blockchain efficiencies that weren't there three years before. Right. And, and we only expect those efficiencies to get bigger over time. So, you know, that's, that's the challenge that you've got. And there aren't a lot of projects that can lean in and commit to leave those dollars on the table up front, you know, over the course of two, three, four years to get to that inflection point.
- [40:46]
Steve Ehrlich
Gotcha. Love to know the names of those firms that tried to pay you more to not use blockbane. But I'm guessing you will not disclose those names.
- [40:54]
Mike Cagney
I was very particular not to in.
- [40:56]
Jason Brett
That.
- [40:58]
Steve Ehrlich
Either for competitive reasons or to save them the embarrassment like. All right, so to wrap up, any final thoughts, big plans, expectations for 2026 that we haven't talked about yet?
- [41:13]
Mike Cagney
No, I mean, look, the big one is getting figure equity on chain, and I think we'll have some fast followers of other companies behind us. And true blockchain native securities, no DTCC trading on Dex Finance through Defi. Yeah, I think this is the future. And we're taking everything that we've been able to prove on the credit vertical, and now we're extending that into the equity vertical, and that'll be one of the big focus points for 26.
- [41:41]
Steve Ehrlich
Gotcha. All right, well, Mike, thanks for joining me on BITS and the interview. We'll have to have you back sometime next year. And thanks to everybody for watching and listening. And Mike, thanks again for joining us.
- [41:53]
Mike Cagney
Thanks for having me.
- [41:57]
Steve Ehrlich
Welcome, everyone. My name is Steve Ehrlich and I'm executive editor at Unchained. I am here now with contributing writer Jason Brett. Welcome, Jason.
- [42:07]
Jason Brett
Hi, Stephen. Nice to be here.
- [42:09]
Uniswap Labs Announcer
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- [42:30]
Steve Ehrlich
So you wrote a really interesting article yesterday, sort of talking about, frankly, I think, a big hairy question that many people in crypto want to pretend does not exist. And that is what's going to happen when Donald Trump's World Liberty Financial runs head first into the market structure bill? There's been a lot of discussion, a lot of controversy around the bill, particularly with how it is going to treat defi protocols and more specifically, how it's going to define defi protocols. And your story lays out in considerable detail why World Liberty Financial, although it claims to be defi, decentralized finance, is pretty much anything but. So why don't, why don't you tell us about your story?
- [43:23]
Jason Brett
Absolutely. And you know what's so interesting to me, this was probably the most interesting story I got to do this year because going into the Trump administration, you heard a lot about with the Biden administration about sort of the gray areas of the market structure Bill, and just the whole ecosystem. And people wanted rules of the road to go by. And so it put a lot of people in jeopardy. A lot of people were in jeopardy legally. A lot of things had to be figured out in the courts because there wasn't really any laws that apply to this ecosystem. So now going in with this story, everyone's very focused on the ethics, the ethics concerns of how the president of the United States is focused on building a business. And unlike hotels and resorts, where the business is already under laws, we don't really have laws yet for our sector. So in a sense, the President's operating or his business is being operated in a gray area. And the result is, well, what happens if the market structure lets pass? And interestingly enough, Chairman French Hill of the House Financial Services Committee made a comment as a retort to sort of the Democrats saying this is unethical, we need ethics in the bill and saying, look, the ethics will be by actually having rules of the road that everyone can play by. So what we did in this bill was take that a step further and say, okay, here's the Clarity act that Hill and other Republicans worked on and got passed out in a very bipartisan way and is now being worked on in the Senate that has indeed one particular bright line rule. It makes it pretty evident that if you just look at the facts, including what's on the website of World Liberty Financial and apply it to market structure, it probably wouldn't be necessarily classified. And what we should say is not as a defi platform, but what that means in terms of market structure is that the tokens would be regulated by the sec. As a securities token, it could graduate at some point to the cftc, right. And become a decentralized platform. And there might be other people in the crypto system, other companies that have the same dilemma as the Trumps do. Which made it really interesting as a litmus test really for the Trumps, but also for the whole industry, is how do you prepare for market structure? We want these rules of the road, but then once we have a law that says, Stephen, this is what decentralization is and this is what it isn't, you either have to restructure your business or just follow the rules of the road.
- [45:51]
Steve Ehrlich
Your framing of that conversation of that sort of. The introduction to the article was really interesting, but let's. And I think I want you to go through next and sort of talk about all the different ways that World Liberty Financial is actually centralized. But I think maybe the biggest one to start off is just that it doesn't really operate yet. I mean, it's building out a tech stack, I guess licensed, if that's the right word. The sort of like the lending contracts, the smart contracts from AAVE, the biggest DeFi lender that there is. But at this point, I think their only product is USD1, the stablecoin. It's not actually offering any trading or lending, et cetera. So it's very much in its embryonic stages, which would make sense that it's centralized, but you go through a number of different ways. Why it is entirely controlled by the Trump family. And a Few key insiders. So maybe talk about that.
- [46:51]
Jason Brett
Yeah. So when you look at what the Clarity act lays out, the first main concept is how much percentage do insiders have control over? So when you look at the way the tokens are structured in recent reports reporting, and it's even disclosed in the website of World Liberty Fi, it says that Trump and his family still own 22.5 billion tokens, and Trump, the president personally holds approximately 15.75 billion tokens. I haven't even, didn't even explore this down the article, Stephen, but something that's just fascinated me for a while is our president actually voting on a governance, any of these governance provisions proposals in World Liberty, you know, while being president, or does he have to give that right to somebody else? Because he does have all these tokens that can vote with the World Liberty 5 Governance token. And that's primarily what this, this governance token is supposed to do, is there's certain ideas that can come up with the tokens, like to go on the Abiy Protocol and then there's voting the, the issue and, and there is claims, and Zach Witkoff talked about it, you know, on a token 2049 with Donald Trump Jr. That look, you know, this is, gives the people, you know, to sort of weigh in on a particular protocol. It really is just how the protocol might work. But when you look deeper at the way that the company structured and what's clear in the fine print is if there's a vote that, let's just say it's decided that they don't like the insiders don't like the outcome, they have a right to overrule the vote. So it's sort of like, you know, voting of a President United States and tampering with voting. And I'm not trying to put like a political spin on it, but I'm saying the whole premise of Defi is we all have this vote. If you had a few tokens, Stephen, and you vote a certain way and what you voted on wins, but then some people, you know, behind the curtain can just change that vote. That's not really in the spirit of Defi. And I think that's what bothers a lot of people about this particular project in the space. And you talked about it earlier, and it's a very hard and delicate thing because it may bother them, but he's the President of the United States and the White House has a seat at the negotiating table, at least giving feedback on whatever the House and Senate is doing. So a lot of these crypto Associations can't really necessarily scream at the mountaintops. Hey, this isn't DeFi. I think the point is that if you simply look at what market structure is proposing, the bright line test of the 20%, the idea that you can overrule a governance vote, it isn't just necessarily. It's not with the principles that people in the space and DeFi have been fighting for. It's that those two elements alone make it pretty clear that it's a controlled organization.
- [49:38]
Steve Ehrlich
And I think perhaps maybe the most concrete example of all this is the millions of dollars of WLF tokens that they froze that belong to Justin Sun. It's kind of an interesting story because, I mean, Justin sun is, as we all know, is a somewhat controversial figure in the crypto industry and he also has very close ties with Trump and the Trump family. I mean, back when WLF was launched in what was it, September or October? October last year, they fell. They were very close or in, in danger of not reaching, I think what at the time was like a $30 million minimum investment round, which seems ludicrous now, but back then it, I think that was the number and they weren't going to make it. And Justin sun, who is a. A billionaire several times over, essentially helped get them over that finish line. And the rest is history. But I guess fast forward to about a year later and the WLF tokens which were initially not transferable, became liquid. And correct me if I'm wrong, but it seems like Justin, as the story goes, was moving some tokens between wallets or maybe he was rumored to be moving something to an exchange and they were frozen by the company. And actually I spoke with Justin over the weekend and I mean, confirmed for me that they are still frozen and he cannot get them back. I know that. Yeah, to me that screams centralization if one body can kind of unilaterally just decide to revoke someone's access to their tokens. I'm curious what you think.
- [51:26]
Jason Brett
Yeah, I've thought about this too. And by the way, I've heard Both Donald Trump Jr. And Zach Witkoff on stage, Steve, they're very particular about the, the way you pronounce their token, it's Wl Fi. So it's the WL Fi token. And when we look at this token, you know, Justin sun had moved quite a bit because the way the token unlock structure worked is some of the quote unquote insiders or early investors like Justin sun, they had an unlocked period. The Trump family's actually under stricter rules. Their Tokens aren't unlocked for quite some longer time. So when Justin's tokens became unlocked, he moved some of them to an exchange, used to be the Huobi exchange. And then he was going to potentially sell them or the question was, was he going to sell them? Was he going to manipulate the price of the token?
- [52:13]
Steve Ehrlich
It seemed like he was going to dump.
- [52:15]
Jason Brett
He was afraid he was going to dump. And so again I chuckle only because crypto, the whole spirit of this is supposed to be this free market without these controls in place. And if he had this right to maybe sell the tokens, he could have done that. But that was stopped and then he was blacklisted. And that brought a lot of ire from the crypto industry like Zach cbt who sort of mentioned if we're going to start just freezing wallets in the middle of a defi system, that's a worse problem than anything when it comes to decentralization. Now, they had blacklisted wallets before. I'm sensitive to this point for the Trump family and the administration to the degree whether you think they should be running a crypto business while he's president or not is I think in a way they had to do kyc Steven because if you're president United States, you have to make sure that the wrong people aren't part of your program or if someone really bad actors are trying to influence it. I know there's a lot of talking points and Democrats make noise all the time. Is the president being bribed or whatever.
- [53:17]
Steve Ehrlich
But it was coming to that famous dinner how much vetting when.
- [53:22]
Jason Brett
Right, right. And there was, I mean you had to like give. You had to do kyc. So there's this idea of we can all be anonymous. But let's just say this. You know, Satoshi Nakamoto couldn't really be President of the United States. And so with his obligations as president, I think he's. They've had to do these KYC controls. But it, but that, but that again calls into the question of you're trying to run a business that other people have been working on in the industry who run it sort of as true defi. This is sort of a mixed version and end has grown in billions of dollars of value in a very short time. You talked about how they rolled out the USD1 stablecoin. The values for the Trumps right now is somewhere average around 3.7 to $4 billion. It's doubled his wealth. So you have somebody very new to our ecosystem but very well known. And Kudos to the President. He's used his name and he's made a lot of money in an industry, which is a lot of the way he's made money in hotels and resorts is through that Trump name. But of course, if you're just building and you happen not to have that name, it feels like a little bit of an unfair fight that market structure could equalize. And again, that's why this became so interesting. Because right now, the White House in the middle of negotiations on a bill that could apply laws that could specifically handcuff his business, or they'd have to reorganize that business. And it's not a small amount of money. It'd be impacting them in the billions of dollars.
- [54:50]
Steve Ehrlich
And we're going to explore that in much more detail in a second. But first we need to take a brief pause to hear from some of our show's sponsors.
- [54:59]
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- [55:52]
Steve Ehrlich
All right, Jason, so we're back. I really just want to hit on two quick points before we wrap up. One, I'm curious if you're aware of any feedback from the White House about how to handle this DEFI issue when it comes to market structure. You've reported in the past, and we've seen from plenty of other sources how the White House has really pushed back on any sort of ethical constraints that would limit the way that the President and his family, close advisors, could profit from this industry. But have they done anything? Or even Patrick Witt, I guess I forget the exact title, but basically, David Sacks is underlinked to handle crypto.
- [56:32]
Jason Brett
Executive Director of the President's Council on Digital Assets.
- [56:35]
Steve Ehrlich
Yeah, thank you. That's a better title than underlink. Can you talk about, have they given any signals on how to handle defi or how they'd like to see defi handled? When it comes to market structure.
- [56:50]
Jason Brett
You know, I haven't heard specifically how any of that feedback came in as far as through official White House channels and Patrick Witt, who of course has a number of stakeholders. Right. But DEFI itself has already been at the center of controversy around market structure, mainly because the DEFI contingent in our industry has been looking to make sure they're protected in the market structure bill and not unnecessarily swept under centralized rules. And there's been hard pushback from some Democrats who want to see validators and minors and other people be part of that market structure. So it's already a sore point. I think there's general concerns from Senate Democrats that come up about the ethics and what Trump is doing as president. What I would say for right now with Trump is that this is about, to me, it's less about ethics and it's more about the aspect of when this bill is formed and goes to the White House to sign. How is it going to actually impact the financials of Ward Liberty Fight? And then there's going to be a ramp up period. I guess I say that, Steven, because what's important for people to understand about this story and why people in crypto need to think about it is if it takes a while to get market structure done, when we finally implement it by 2028, you might have a new president. And if you have a new president that's a Democrat and you don't have a market structure in place, then you're in a gray area again. And then it's all about going to the courts. And it's like we've recycled everything we had to go through with Gensler. I'm sure that's the last thing Trump wants. So to me, there's an incentive, I would think, on the White House's part, or at least on Trump's part, to want to get this bill done not just for the rest of the industry, but also. So there's protections under those laws.
- [58:49]
Steve Ehrlich
Yeah, I guess so. I mean, that certainly makes sense. But I do want to push you a little bit because when push comes to shove, I guess it remains to be seen what will happen. And we probably should have said this a little bit earlier, but you reached out to both the World Liberty Financial team and the White House for comment and neither one, the White House did not respond at all. And the World Liberty Financial team did not respond before publication and we haven't heard from them after publication either. But when push comes to shove, if Donald Trump and his family claim the World Liberty Financial is decentralized but the rules of market structure suggest that they are centralized. Like, what do you think that might mean for the credibility of the bill in general? And like, I mean, this, I don't know if this is too forward of a conversation, but like, could you imagine a world where the SEC perhaps investigates World Liberty Financial for not fraud, but just like circumvention of securities laws?
- [59:58]
Jason Brett
Yeah, I mean, those are, you're right to push on that, Stephen. I think, you know, the White House should answer these questions. So should World Liberty Fi. But the White House, because Trump is at least, maybe a silent owner, at least through or controls this particular network. I think, you know, getting an understanding of what that means and what it means, if you're saying something is decentralized, you're putting that out there as a platform. Maybe it's not an SEC concept about the securities. If you analyze it, maybe that would be the result. But at the same time, you're going to have like, maybe it's an FTC thing. Right. You know, federal about your, you know, fair marketing of what you're doing. And these are hard questions to ask, but it makes it even harder your question because the old SEC, with a Democratic appointee as Gary Gensler probably would go after these questions and want to understand it better and possibly even file a Wells notice. But crypto was beat up so much as an industry and Trump kind of won because of the crypto industry. And then he appointed Paul Atkins, who's a pro crypto guy who's heading the sec. And I'm sure it does a fair and judicious job, but it's very difficult. Right. Because he's been appointed by Trump. The SEC is supposed to be, at the end of the day, an independent regulator. And I think about that a lot as far as making these decisions, what's best for the economy, what's best for the market. And so the question is how much independence does the SEC have to go after them? So like so many things, right. That Trump has done where maybe you could say, say there's justifiable reason for an agency to go after him in reality, Steven, is that really going to happen? So, yes, I think the SEC under the last administration probably would send an inquiry by now and do an investigation to understand is this really decentralized or is the World Liberty Financial a token. But in the new world that we live in right now, you're just not going to see that from a practical point of view, I don't think.
- [62:00]
Steve Ehrlich
Yeah, I guess we'll have to wait and see what happens with the development of World Liberty Financial lfi, the token and most importantly, market structure.
- [62:12]
Jason Brett
And I guess if I could before Stephen, I think the important thing is just how new this all is that we're totally uncharted territories because we've never really had a president that's done active business before. So not only do we have a. A president that's in the commercial sector, this is a new commercial sector with developing laws where his White House is involved in making the law and at the same time he's running a business in it. So there's just so many. We've just never had this as a country.
- [62:41]
Steve Ehrlich
Yeah. Yeah. It reminds me of a conversation I had with Tim Massad, one of the former CFTC chairman, I guess, last year, and he said something to the effect of when Jimmy Carter was running a peanut farm, he wasn't working on peanut legislation.
- [62:58]
Jason Brett
Yeah.
- [63:00]
Steve Ehrlich
Anyway, Jason, terrific story for I would highly recommend everybody read it on Unchained Calm. There's a lot more detail than what we're able to cover in this interview. And please tune back next time for more conversations from Unchained on air. Have a good day.