The Pomp Podcast - #1499 Micheal Cagney | Insane New Way To Get More Bitcoin

Starting point is 00:00:00 What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Are you looking for a simple way to earn Bitcoin rewards every single day? At Simple Mining, we help people mine Bitcoin, even if you're brand new.

Starting point is 00:01:01 We're a vertically integrated Bitcoin mining company based in Cedar Falls, Iowa, offering a premium white glove hosting service that helps you maximize your mining profitability. With over 500 clients worldwide, we manage over 15,000 machines across our sites. Our facilities are staffed seven days a week, and we fix most on-site issues in under 48 hours. In fact, we can repair more than 2,000 hash boards each month in our dedicated repair center, ensuring your miners run smoothly. Want to see it firsthand? tour our mining sites either in person or online anytime plus for your first year of mining we

Starting point is 00:01:31 cover all repairs no questions asked we bill you for the exact time your miners are running and you can pause whenever you want need to buy or sell our exclusive minor marketplace gives you the freedom to trade on your schedule you'll even have a custom dashboard to track your minor stats in real time and if you're thinking about running your operation like a business our tax team can guide you through the depreciation advantages ready to grow your bitcoin stack visit simple mining.io today's episode is brought to you by reed smith their practice of law has the power to drive progress to move businesses forward and support them in achieving their goals by seizing opportunities and overcoming obstacles reed smith is focused on outcomes i personally use

Starting point is 00:02:08 them as my law firm and i think that they are fantastic they know that your time is valuable and that your matters are important their deep industry knowledge long-standing relationships and collaborative structure make them the go-to partner for complex disputes transactions and regulatory matters. Reed Smith delivers purposeful, highly engaged client service that drives progress for your business. Go to reedsmith.com to learn more about the best lawyers in the game. reedsmith.com. Go check them out today. Today's episode is brought to you by Polkadot. Polkadot offers secure, scalable, and decentralized blockchain technology that perfectly aligns with the needs of innovative projects. It was developed by Gavin Wood, one of the

Starting point is 00:02:46 co-founders of Ethereum and the creator of Solidity. Polkadot aims to build an internet where users have full control over their data and their applications. Polkadot offers tons of unique features, a shared security model, along with a new auction model and significant implementations like ASIC banking. Given these characteristics, it's easy to understand why Polkadot is gaining more and more traction in the cryptocurrency world. Some people even are talking about it as the AWS of Web3. Now, companies such as Mythical Games, Astro Network, and over 50 other independent blockchains with hundreds of applications already leveraged Polkadot's technology to power their platforms.

Starting point is 00:03:22 If you're looking for a reliable, scalable, and cutting-edge solution, Polkadot seems to be the top choice for industry players. Go check them out today at polkadot.com. Hello, sir. I'd make sure I sat next to you, not too far away. Well, somebody tried to sit over there. Now I feel obligated to tell them to sit next to me. You are probably one of the most innovative people in finance and specifically fintech.

Starting point is 00:03:47 over the last decade, two decades. You got this idea for a Bitcoin HELOC. Let's start there. Explain how this works and what you think the advantages are for a Bitcoin HELOC. Sure. So one of the interesting things... We have a lending company and we were one of the first to do loans on blockchain back in 2018. We've actually done about $43 billion of on-chain transactions in the lending and security space. And one of the things we do is we do HELOCs. And what we found was that one of the primary reasons people were taking the HELOCs was to actually buy Bitcoin. And so we said, well, look, rather than us giving you $100,000 to buy Bitcoin, what if we could give you more but use the Bitcoin as collateral?

Starting point is 00:04:30 So the math is pretty simple. A typical home equity line of credit, you have a $500,000 home, you have a $300,000 first lien mortgage, we would lend you $100,000 and you'd be at 80 LTV, right? $400,000 total loans, $500,000 home value. Well, what if I lent you $200,000, but I held the Bitcoin as collateral? So now I have $500,000 in total loans, but $700,000 in collateral. I've actually reduced the loan-to-value ratio. So it's technically less risky, albeit with a higher volatility underlying asset. And so I've learned a lot about crypto Twitter over the last several years,

Starting point is 00:05:06 some of which I wish I could forget. But I put a tweet out on a Saturday and I said, hey, what if I do this? And I got 4,000 likes and about 500 DMs about I would like this product right away, including people that were in our funnel that were about to take their HELOC to buy Bitcoin and said, can I hold off and do this one instead? And so it was one of the most interesting product market fits that I've ever come across. And I was just thinking about, well, why not do this and see what happens? So in that product, keep going with your example, you've got $200,000 of Bitcoin, a $500,000 home, you've got the $500,000 loan.

Starting point is 00:05:43 Bitcoin's price goes up. If I'm the borrower, what do I get? What do you get? And then if Bitcoin's price goes down, what do I get? What do you get? Yeah. So you own the Bitcoin, right? We're just giving you a loan to buy that $200,000 worth of Bitcoin. You're just holding it back to collateral. So if it goes up, that's your Bitcoin. And if you're over collateralized, you can pull excess collateral out. The way that we structured it and the way that people were concerned about it is, well, if Bitcoin crashes, am I going to lose my home? And so what we did is we said, look, if the price of Bitcoin falls 50%, we will liquidate the position and apply it to the

Starting point is 00:06:14 loan balance. So if that happens, you're back into a situation where you have a $300,000 mortgage and $100,000 HELOC and a $500,000 home. And we underwrite you to afford and pay that loan. So it's... And we're doing some tweaking on the edges right now in terms of the structure. But we're getting a lot of resonance on it. We're funding loans right now. And the people who are coming to you... When I think of folks who want to do something like this, this is a pretty sophisticated... Hey, I know I've got equity in my home. I want Bitcoin. I'm starting to really think through like, how do I get more Bitcoin? Because I've probably exhausted the cash that I have buying Bitcoin.

Starting point is 00:06:52 Well, what you have is you've had home price appreciation that went on a tear and really tapered off the last couple of years. And so this is really, from my perspective, more of a diversification structure, which is I can take some of my home equity, I can maintain that HBA exposure, but now I can buy crypto as well. And the reality is this structure, we're going to ultimately extend to any asset. So you could buy Bitcoin, you could buy Ethereum, you could buy the S&P 500. The idea of using it as collateral instead of just treating it as the same as if someone bought a kitchen or paid debt down. That's what I think is novel. In the lending space, one of the things that people continue to hear and

Starting point is 00:07:31 multiple people have mentioned it this week is Bitcoin is pristine collateral. And I think they're talking about not only the properties of Bitcoin, but also this idea that it trades 24-7. It is very divisible. Talk a little bit as to what you can do as a lender using this as collateral that you may not otherwise be able to do. Well, I think Bitcoin really demonstrated the effectiveness of blockchain as a medium for collateral. And what's powerful about blockchain is the ability to get digital perfection of an underlying asset. And I always use the analogy... We've done billions and billions of dollars of loans. And one of my HELOCs, for example, there's a couple I've lost money on. I've misjudged the

Starting point is 00:08:11 property value. I wasn't able to foreclose, whatever the circumstance was. I've been lending against Bitcoin since 2020. I've never lost a dollar lending against Bitcoin. Now, what's going to change is right now, the capital markets haven't caught up to that. So my cost of capital to back lever my Bitcoin loans, for example, is actually higher than my cost of capital for my HELOC. So even though it's a shorter duration asset, even though it has a zero loss history, because we haven't really gotten the institutions in yet and the real capital in yet, the cost of capital is higher there. And you're thinking that that will switch and eventually be lower than the HELOC cost of capital? Yeah, I mean, look, we did an announcement yesterday that we stood up a guarantor on provenance blockchain to basically act like Fannie Mae and Freddie Mac. So it's effectively

Starting point is 00:08:57 providing a guarantee to loans that we originate native to blockchain. Sixth Street put $200 million into that guarantor to initially capitalize it as permanent equity capital, but we'll put in billions of dollars into this thing as we scale it out. And what that's doing is it's taking advantage of blockchain native digital perfection. And what you're going to see over the course... Next week, we'll drop another press release talking about some of the big sell-side banks that we've been trading with on blockchain, on public blockchain for over a year, that they weren't allowed to talk about it. And now they're allowed to talk about it. Now they all want to go to market and show everyone how smart and cool they are doing

Starting point is 00:09:31 stuff on blockchain. And so you'll see that next week. But the ability to get that digital perfection provides a foundation to do something that I call democratized prime lending, which is It allows anyone with capital to lend to anyone who needs capital without having to look through to the borrower. Before we move on to the other products, what do you need from people in terms of the Bitcoin HELOC? Do you need more people who want to lend money? Do you need people who want to take out the Bitcoin HELOC? What is helpful to you? Yeah. Look, what we're doing right now is we're going to the market. We're getting financing for it. And ultimately, we're going to work with the rating agencies. And the rating agencies are...

Starting point is 00:10:09 They're having an initial challenge around how do I rate Bitcoin? And what do I do? And how am I going to deal with this? But I think we have a path to bring them along. Okay. And then if somebody here wants to look at the Bitcoin HELOC product, where do we send them? FigureMarkets.com. FigureMarkets.com. All right. YLDS is a new type of stablecoin. Talk a little bit as to why did you guys think the market needs another stablecoin? And then how did you guys create this? Yeah. So the genesis of this was back in 23, I was working with a group of banks to do tokenized deposits. And the idea was that we could create a mechanism for cross settlement that would be better than ACH, that would offer programmability that FedNow didn't have. it. There were a bunch of features on it that we thought were pretty powerful. And the regulators

Starting point is 00:10:55 shut it down. They came out with the blockchain, public blockchain isn't consistent with safety and soundness and blah, blah, blah, blah, blah. And so I was getting very concerned at that point about fiat rails because it was getting harder and harder to get dollars on and off of blockchain. And one of the things that was very terrifying to me is there's a bank in Dallas that does all of the correspondent banking for Frick and Signum and all those offshore banks that provide dollar rails. And they got a cease and desist from the Fed that they said, you have to get out of the crypto business. Now, they didn't do that. And so, from my standpoint, the initial genesis with this was how do I build a future-proof fiat rail that I can get dollars on and off public chain?

Starting point is 00:11:37 And I said, I could do this as a security. And a security has a whole bunch of interesting dynamics in that I don't need a money transmission license. We can argue whether or not it's subject to BitLicense in New York and other aspects. But the issue is there have been some people that have done this with securities or tried to at least. So Benji and WisdomTree had done money market funds native to blockchain. But the problem with the money market fund is you can't move it peer to peer. So if I hold a money market fund and I want to give you $20 of it, I have to do it through an ATS or through a regulated national market exchange. And so we ended up researching arcane security types. And so there's a security from the 40 Act called

Starting point is 00:12:17 a face amount certificate that nobody does. And a face amount certificate is it's a really weird security has all kinds of weird characteristics, but it has a really cool feature, which is it's the only type of public security that's freely transferable peer to peer. So I can take 50 bucks of it from my wallet, move it right to your wallet. And that's a legitimate transaction. There's no exchange, there's no ATS. So the premise behind that is I can buy coffee with it, right? I can buy Bitcoin with it. And as a security, not crypto, the banks can actually hold it. So at a point in time where the banks could not hold crypto, this is a situation where they could hold this asset, albeit on public chain. And so we did the first S1 filing. It

Starting point is 00:12:59 was public in August of 23. We'd been working with the SEC for, I don't know, 6 months before that. And we went effective 2 weeks back. So it was a very long process. It was not a painless process. But what we now have and we're getting a huge amount of activity around it is a public fixing home security. So unlike Biddle, you don't need to be a qualified purchaser. Anybody in this audience can... I mean, many people might hear about RBQPs. But if you're not, anyone can go buy yields. You can send it to anybody. You can buy Bitcoin with it. And pretty soon, we hope we start integrating into payment rails where I can buy that coffee with it as well. A huge part of, I think, businesses that you've built, including Figure,

Starting point is 00:13:39 is it's not just about Bitcoin or crypto or a blockchain. You also have a bunch of what I'm going to consider just automation technologies that you're putting into this. And very early on at Figure, you went and said, Well, why do we have to have a 2 or 3 week approval process for these HELOCs? Shouldn't I be able to OAuth into your bank account? Shouldn't I be able to use all these new tools that got created? Talk a little bit about in an age where everyone is excited about artificial intelligence and all this new stuff happening. It just feels like these technologies are all merging together to provide a better financial experience for folks. And some of it will be with Bitcoin or crypto and blockchain. But also some of it is these

Starting point is 00:14:16 other technologies as well. Yeah. And some of this ties into the whole RWA thesis and the blockchain RWA thesis. And although I'm the largest RWA player in public blockchain, I don't get invited to RWA conferences because I'm generally not a proponent to the way people use it. To build liquidity and effectively take advantage of blockchain and the ability to bilaterally trade and settle, you want ubiquity and you want homogeneity, right? And so our automation was really driven out of the need to create homogenous assets. So we started as a lender in 2018. We're now a tiny lender. We have 140 third parties, including half of the top 20 mortgage companies that use our tech to originate assets native

Starting point is 00:14:59 on blockchain. All those assets are the same. And that homogeneity allows for us to run marketplaces where there's liquidity, where there's market making, where you have the things that you'd expect out of something like Bitcoin versus... When you put an office building in Topeka on blockchain, no one's going to trade it. And that's... So it's debatable about what value there is in having that on-chain. Talk about cross-collateralization. You talked a little bit about this idea of homes and Bitcoin. But it feels like as every asset becomes digital, you now get many, many more opportunities to start mashing these things together. You're talking a little bit of it here.

Starting point is 00:15:35 But as a lender, the more that you can get collateral, the better, obviously, you'll end up being. So where do you see areas of opportunity? What are you guys looking for there? Well, this is what I think is the massive transformation that we're going to see over the next five years and and maybe it takes longer maybe it happens faster but you know i i was when i was out in singapore at token 2049 i was i was sitting on with temasek and they were saying look if we could cross collateralize we could deploy twice as much capital without any incremental risk right through diversification and so forth and but it'd be irrelevant because even if we could cross collateralize we're name full with all the prime brokers we can't borrow any more money

Starting point is 00:16:15 And to me, what blockchain can solve is both of those problems. The first is through digital assets that you can have true perfection, the UCC Section 8 security perfection against, you can cross-collateralize in a way that we've not been able to do. So for example, you can go on figure markets, you can buy my REIT and earn an 18% return, and then you can borrow against that to buy Bitcoin and your margin rate's 10. And so you're now long Bitcoin plus 8%. It's a good trade. I do that myself. But the key is that we can cross-collateralize. We've got to be able to disrupt prime brokerage. And that's where we get to this construct I call democratized prime, which is anyone with money can lend to anyone who needs money. It's an Aave or a compound construct, but done in a limit order book fashion and done in a regulator framework. You talked to a lot of institutions, many of them work with you. They are providing liquidity,

Starting point is 00:17:08 they are on these public blockchains, they use the products that you've created. Walk me through maybe the last 5 years. What has been the evolution of their thought process here? And maybe even the recent political change and regulatory change is putting fuel on the fire. So they're getting aha moments. And as I said... And a lot of them got the aha moments a year or two years ago. And they just couldn't talk about it. The Fed wouldn't let them. But I was explaining to someone today that 3 years ago, I would send a spreadsheet to Goldman once every 5 days. It had a bunch of loans on it. Goldman would send me a bunch of money. And then they'd spend 5 days trying to figure out if I lied to them or not.

Starting point is 00:17:47 And that was how the process worked. Now that we do everything on-chain with digital perfection, they know immediately when I send those loans over to them, do I have them? Do I own them? Are they double pledged? Are they performing? And so rather than sending those once every five days, I can send them five times a day. That's great for me on a capital efficiency basis. It's great for them on a cost and administrative and risk basis. And those are the use cases that are coming to market that are really going to drive adoption into this. One of the things banks seem to be most excited about is actually getting custody of these assets. They historically have not been allowed to do

Starting point is 00:18:24 that. If you go talk to a private wealth team, they'll tell you, we have tons of crypto clients, but we can't touch any of that. If you look at all of these financial products that the challengers are building, banks would love to be able to offer everything from lending against Bitcoin to whatever other financial service. How do players like you start to work even closer with these large financial institutions once they're allowed to play more in the space? So I think this is going to be a really interesting year. I think the administration is trying to get stablecoin legislation and market structure legislation ahead of the August recess. And so we'll have some very good visibility as to what's going to come out of that.

Starting point is 00:19:02 But it's almost... The crypto industry has to be careful what it wishes for. Because there was a regulatory mode in the last 4 years that allowed certain crypto businesses to perform very well without competition because of that structure. And what's going to happen is you're going to get... The banks are going to come into the stablecoin space, the non yielding stablecoin space. The traditional custodians will come into the custody space. ICE and NASDAQ are both right now lobbying for a construct to have a national crypto exchange and not have these bespoke 2700 exchanges associated with all the individual crypto businesses. And so you're going to get real change. The issue is all of that change is still going to be predicated on centralization.

Starting point is 00:19:45 And to me, I'm very orthogonal to the construct of centralization. I get very frustrated that We don't remember FTX and we don't remember what happens when we have centralized custody. We almost had another centralized custody disaster last weekend, right? It got covered. But decentralized self-custody, decentralized MPC wallets, those are very important. And I think that's what's going to happen. You're going to get the TradFi coming in to compete on the centralized ecosystem. And the decentralized ecosystem, I think, is still very, very greenfield.

Starting point is 00:20:15 And that's really where the blockchain and crypto ecosystem needs to go. What are the KPIs or thresholds that you use to measure success here? Is it like a certain amount of Wall Street financial assets are on chain? There's a certain transaction volume. How do you think about what really started as 0.001% of Wall Street was doing this? To what point? And then all of a sudden, you're like, Hey, it's successful.

Starting point is 00:20:40 I think, I sincerely believe everything is going to move over. And I think that it will happen very quickly. I don't think it's going to be there's 5% of traded assets on chain than 10% than 15%. I think it's going to go 1%, 2%, 3%, 100%. And the reason it's going to happen is because it's a better structure. It's better for risk. It's better for cost. It's better for revenue.

Starting point is 00:21:04 So there's rationale why TradFi will move into it. The biggest issue and part of why you have such resistance to it is it is so disruptive. So when I hear DTC is running a blockchain experiment, I'm like, DTC is the last entity in the world that wants blockchain to come to fruition, right? Or when Visa has a blockchain initiative. I'm like, and apologies if anyone hears from DTC or Visa. But they don't want blockchain to come to fruition because it's going to disintermediate them. And so the people who would normally do at the margin disruption, it's really wholesale disruption. And they've not bought into the fact that they want to do that

Starting point is 00:21:37 yet. Does that mean that financial markets become 24-7, 365 and start to look much more like the crypto markets? Yes. What are the ramifications of that? Every time I tweet this and say that hours of operations is insane in 2025, somebody tweets back and say, humans need to sleep. Or some version of that. So how does financial markets change once we go to a persistent 24-7 type market? Well, I think in a lot of ways, you're de-risking it. Because right now, we're going to hit the bell close on Friday. And then what happens Saturday and Sunday? And, you know, how do you deal in that going into Monday? I think the biggest change, though, and just going back to my earlier point about democratized prime, the biggest change is going to be disintermediating allocators of capital, right? Allowing anyone with with capital to lend to anyone who needs capital on a direct bilateral basis. And that, I think, is seismic. And that's, you know, going all the way back to, you know, when I was at SoFi, I had this thesis, and I went out to the Middle East sovereign funds.

Starting point is 00:22:38 And I said, look, you all allocate to Apollo and Apollo buys my loans, just buy my loans. And no one ever did, but I tried. And so this is the same structure, which is... I think this disintermediation does happen. When we move to that 24-7, 365 world, all the assets have a common digital framework to them and the technology architecture. Do we just get the AI promise and all of a sudden, it's just a bunch of eugenic trading and everything is automated? Or do you think that there's still going to be human judgment, human intervention, human oversight over these systems? I think that it won't be any different than it is today. So the fact that you're training

Starting point is 00:23:20 24-7 versus you're training during regulated market hours, what you're doing with AI, what you're doing with high-frequency trading, all that's going to stay relatively consistent. I think market structure is the big thing that needs to modernize. And so I was out at ADGM and I was talking about standing up a blockchain native ATS. So we have an alternative trading system in the US that we can trade blockchain native securities and they sell, settle, self-clear. So it's the only ATS I know of that can do that. And I wanted to stand something analogous up in ADGM. And I sat down with the markets team and they said, all right, walk through your post-trade processing.

Starting point is 00:23:54 And so there wasn't any post-trade processing because both sides are encumbered with the asset. They face off bilaterally. The asset transfers, the trade's done. And they're like, well, we don't know how to do this. And it was, you know, when I got the ATS, I was sitting with FINRA and they said, well, explain to me what happens when a trade breaks. And I made the mistake of saying, well, a trade can't break. And the guy like nearly punched me in the face and said, you know, I've been doing this for 30 years and trades break, idiot. And so I was like, well, then you call the administrator.

Starting point is 00:24:23 And so I made this thing up called an administrator that you would call if the trade ever happened to break. We never had to call the administrator in five years. But it gave them peace of mind that there was an administrator. There was somebody there. Amazing. FigureMarkets.com is where people can go find out more about Bitcoin, HELOC, and also YLDS.

Starting point is 00:24:41 Yep. Amazing. Mike Cagney, everyone. We'll be right back.

The Pomp Podcast - #1499 Micheal Cagney | Insane New Way To Get More Bitcoin

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.