Figure CEO Mike Cagney Wants To Sell Bitcoin And Coinbase Shares On One Platform
Figure CEO Mike Cagney
Figure
Mike Cagney is a cofounder and the CEO of Figure, a firm applying blockchain technology to markets such as lending, payments and exchanges. Cagney is also the cofounder of the Provenance Blockchain, a public, open source blockchain built for financial services. Previously, he was CEO, chairman and cofounder of SoFi, a leading marketplace lender providing student loan refinancing, mortgages and personal loans, as well as a range of banking and wealth management services.
In this interview Cagney discusses a wide range of topics from how his early days at SoFi impacted his decision to go into crypto, what investors should be looking out for in 2024 and whether there will soon be a world where investors can buy crypto and equities on the same platform.
FORBES: How did you first get into crypto and why did you decide to start your next venture in the blockchain world?
Cagney: When I was running SoFi I used to give a lot of lip service to Bitcoin, but I never really understood it or a blockchain. When I left, I spent a lot of time looking at different technologies and had sort of an aha moment with blockchain where I realized you can use the technology to truly displace trust with truth. You can start creating markets where users are completely agnostic to their counterparts. When you sell stock you have a buyer and seller, but also seven or eight other parties that sit in between that transaction. The idea that blockchain can distill these things down into bilateral transactions frees up trillions of dollars of intermediation. That’s what was super interesting to me.
FORBES: What experiences from SoFi have informed your decisions at Figure?
Cagney: We started SoFi with a pretty ambitious goal of transforming banking. Along the way we realized that we probably weren’t going to be successful. As we were thinking about what we wanted to do at Figure, it was along the same lines of wanting to transform markets. I think we’ve stayed more steadfast to that. For example, we had to create a lending business to drive adoption into the marketplace. That lending business has been very successful and you could have made the argument “why not just pivot, double down on the lending business?” But we did not want to lose the forest for the trees. The focus is really around building a transformative market play. We played the long game and chose not to participate in a lot of the things that happened in blockchain like the initial coin offering craze, non-fungible tokens and the unregulated exchange industry. We took a different approach, with a focus on compliance, and I think that long game has been paying off more recently as we’re leading and doing some pretty transformative stuff on blockchain.
FORBES: Can you give us a brief overview of Figure’s lines of business?
Cagney: The business is effectively two different operating companies. There’s one that’s very active in the lending space. We were the first to originate consumer loans on chain back in 2018. And then we were the first to warehouse and securitize them in 2020. This year we’re the first to do AAA rated securitizations of blockchain assets. And more recently we did a transaction where the bonds themselves are on blockchain, so they’re not on DTC. This business is what you see when you go to Figure.com, but it’s also a big B2B2C supplier. So roughly half of the top 20 mortgage companies use our technology to originate assets on the blockchain. That business ultimately is trying to build out a private capital market ecosystem.
The markets side of the business includes our broker dealer, alternative trading system and money transmission licenses. We created a platform called Figure Equity Solutions where we onboarded 600 companies to run their cap table up on blockchain with the expectation that they would want to trade the private stock. Now it turns out they didn’t want to trade their private stock and what we discovered was that the market just doesn’t have enough capital to create liquid secondary markets. So that didn’t work the way we anticipated. People love using the blockchain as an administrator but not as a marketplace. We tried to do the same thing with closed-end funds and we got Apollo and others to put funds on chain with the expectation that they would create a secondary market for fund interest and that didn’t happen.
What we ended up doing was taking a step back and looking at market structure. What’s astonishing to me is if you look at a Coinbase or a Binance, it’s entirely centralized, which can be very risky. We saw that risk manifest with FTX and with some of the other bankruptcies. It’s astonishing to me that we, as an industry, haven’t demanded that change and that we still have the same centralized structure in place for a technology that’s supposed to be decentralized. So what we felt we could do is use some of this recent MPC wallet technology to effectively take level one assets across Bitcoin, Ethereum, Provenance, doesn’t matter where they are, and be able to effectively shard their key to where I could look back and see that the bitcoin is in the address and I have a necessary but not sufficient shard of the key to release it. That effectively solves a ton of problems. What we’ve been doing more recently is leaning into that structure, combining it with cross collateralization netting, best in class lend/borrow, and starting to stand up a marketplace of everything. Not just of crypto, but of securities and anything else that one might trade digitally on blockchain. That’s really what the focus on the other side of the businesses is, to be the marketplace for everything.
FORBES: Can you describe Provenance and explain the role it plays in your business?
Cagney: Provenance is a public proof-of- stake blockchain. We built it but we don’t own or control it. It’s in the public domain and it has at this point a bunch of other entities that use it beyond Figure. It is very unique in that a typical proof-of-stake blockchain, if I put an asset on the chain, the asset goes out to all the validators, and they write it to the blockchain. The problem with that is if I put a loan on the blockchain, I don’t want that loan to go out to a hundred validators and give them access to that proprietary data. What Provenance does is when I put an asset on the chain, what actually goes to the validators is a 256 character hash of that data, and the data goes in an encrypted object store. The key to this is that if I trade that asset with you, you can reference the blockchain for the validity of the data that I gave you. The blockchain goes from being a golden dataset to a data validation agent. That effectively solves a ton of problems in financial services. We started originating assets on chain with HELOCs in 2018. We’ve now done a bunch of other asset classes there, but I think in aggregate we’ve done something like 27 billion transactions on chain, which is magnitudes more than anybody else in the space.
Forbes: Does Provenance use a token?
Cagney: It’s a public chain, so anyone can set up a validation node. There’s an underlying utility token called hash. Hash doesn’t trade on Binance or Coinbase, it trades on a decentralized exchange called Dlob.io. But as we start standing a marketplace up, hash will have an important role.
Forbes: Is there a way to operate a marketplace that can sell commodities and securities?
Cagney: We have an alternative trading system that allows for blockchain native assets and blockchain native securities to trade as bearer assets. So you and I can face off bilaterally. We see no reason why you can’t trade public equity on that platform and in the same construct be able to trade bitcoin and ether. Now, bitcoin and ether are not on our ATS because they’re not securities. But the idea should be that even though legally and structurally going from bitcoin to equity requires an intermediate step because you can’t run a bitcoin to equity cross, you should seamlessly be able to do that by going to cash and cash to equity on a common platform where you’re not having to de platform or re-log in or do anything else differently. One of the things that we saw with FTX before it went bankrupt is a lot of momentum into the idea that I can put bitcoin up as collateral to buy a stock, for example, or I can put the stock up as collateral by bitcoin. We believe that we have the right regulatory structure to do that as well. And we believe that there’s an enormous amount of liquidity demand from people who want to use one as leverage for another.
Forbes: How should investors think about equity and tokens in projects/companies that operate both types of platforms? For instance, hash does not offer equity in Figure in the same way that BNB does not offer equity in Binance. Would one dilute the value of another?
Cagney: It is a super rich question, and it probably has an evolving answer over time. Today Figure equity is very different from hash, and Figure equity is ownership of Figure and the operating business. Hash is the utility token on Provenance. The synergy or the alignment of these two things is creating more activity on Provenance that drives fees that accretes value to the token. So while they’re separate and independent, they’re aligned in the sense that activity of one propagates value of the other. But what’s key is if other people do things, it doesn’t necessarily accrue to Figure, but it does accrue to hash.
Forbes: Do you ever get questions from investors about whether value going to hash should be dilutive to Figure equity? How do you respond to that?
Cagney: Yeah, and the way we’ve dealt with it initially is we own a bunch of hash, and so that helps reduce that conflict. However, as we start rolling more products out and in particular regulated products that require SEC approval, that ownership creates complications because it creates potential affiliated transaction issues. So what’s going to happen is we’re going to have to divest that ownership back to our investor base where we aren’t the holder of that utility token. That way we have no conflict in the blockchains that we choose to use. I think, again, as the answer to one of the other questions you asked me has evolved, this one evolves, too. When you own Figure you own hash, but as the business matures and as we start doing more regulated listings Figure needs to divest that hash out into the broader ecosystem.
Forbes: I know this is not entirely your decision because Provenance is a public chain, but there’s a lot of news about projects flipping between blockchains. I’m curious if you’ve ever given thought to why some of these projects are switching chains and if there’s ever a world where you might decide the products you’re building are better suited for perhaps an Avalanche subnet or an Ethereum Layer 2?
Cagney: We think about that and as Figure evolves it becomes even more imperative that we look at blockchains on a level playing field basis as to what’s best for the business and for our equity holders. I think there’s a lot of switching because there’s a lot of incentives that platforms offer up to people to make that switch. No one’s really nailed down the real-world asset solution. I’d say Provenance is the closest because of the amount of transactions that we’ve done on it. But in terms of sustainable gas fees, you have Bitcoin, you have Ethereum, and then it drops off pretty fast. I think Provenance is probably like five or six in terms of gas fees, but a big chunk of that is just trading the underlying utility token itself of that network, and that’s ultimately not tenable. What you need are projects that generate real significant fees and that’s why I think a decentralized marketplace, for example, is one such project that potentially drives a huge amount of value accruing to the underlying level one.
Forbes: What do you make of the current bull run?
Cagney: I think that a lot of this is due to anticipation of ETF launches. One of the best things the industry does, or bitcoin has done for itself is that it has rallied into these ETFs because now there’s renewed interest after FTX happened and crypto collapsed. It was funny because a month or two before the bankruptcy, I was at a conference in Miami and it was full of institutional investors, pensions, endowments, sovereigns who were just looking at how we step into this. Then the FTX debacle happened, the price collapsed and nobody wanted to talk about it anymore. Now that bitcoin is back near $40,000, everyone’s like, “how do I lean into this again?”
It has also rekindled the loan market. Bitcoin secured lending, which kind of died after the bankruptcy collapses of Celsius and others, has restarted and people are leaning into that. So it’s very constructive for the space. But I think the best thing that’s going to come out of this is it’s rekindled the institutional investor interests, and ultimately that’s what I think you need for a healthy crypto ecosystem, and I think that will happen.
Forbes: Thank you.
