The Pomp Podcast - How Blockchain & Bitcoin Are Reshaping Wall Street | Mike Cagney

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Starting point is 00:01:00 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. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a

Starting point is 00:01:42 specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. So I love against bitcoin right and uh it's funny everyone who lends against it loves it for the pristine collateral that it provides a hundred percent uh so i've been lending against people's properties since 2018 and and generally we do a very good job at that but there are loans we've lost money on you know i've never lost money lending against bitcoin and what we're what we're trying to do right now is a structure that i believe we can bring to market where um if the borrower on a 12-month loan pays something like a 1.5% fee up front, at a 50 LTV, we will immunize them from

Starting point is 00:02:27 any liquidation, right? So we will never do a capital call on you. And how do you do that? What's going on, guys? Today, we got a great conversation with Mike Cagney. He's the founder and executive chairman of Figure. Figure just went public, and they've got a great business that is modernizing all of the infrastructure and finance. They've got everything from Helox to Bitcoin-backed loans and many other credit products. But the secret to this business is they've built it on top of brand new infrastructure that is leveraging blockchain and decentralization. Mike is somebody who's been innovating in financial markets for a very long time. He's got very unique views. And this business is something that I think a lot of

Starting point is 00:02:58 people are excited about. I've been an investor for a long time. And Mike's here to explain to us not only what's happening with all the digital infrastructure, but also things like stablecoin, Bitcoin-backed loans, and many other things. Here's my latest conversation with Mike Cagney. All right, Mike, I thought a great place to start the conversation. You just took figure public. That's obviously a big milestone for any company. You've been at this for a while now. You've built a number of great products inside this business. Talk a little bit about going public, what that experience was like, and why you think it's better for the business.

Starting point is 00:03:25 Sure. I mean, I think there were a couple of drivers for why we decided to go public. I think one, I fundamentally believe, just like we have this Mag 7 and Web 2.0, we're going to have that in Web 3.0. I think the opportunity set is so huge, not just from disrupting existing businesses. you know, certainly people talk about changing the way we trade stock. The reality is the NASDAQ works okay right now. It's, you know, that's, you know, there's opportunity there, but it's not enormous. But the greenfield opportunities are huge. And so, you know, we felt it was a great opportunity to be able to go to market and tell the narrative as to what it means to be a public

Starting point is 00:04:00 company on public blockchain and why it matters. So that was important. The second driver for it was, you know, back when I was at SoFi, I raised a billion dollars from SoftBank. It was the largest private capital raise anyone ever done and i always talk about the story about i didn't want the billion i wanted 200 million dollars in masa it was like if you don't take the billion i'll give it to your competitor and i was like all right i'll shucks i'll take the billion um it was a huge advantage for us from a competitive standpoint and and it was really the catalyst for for them starting the vision fund and it just allowed us to use our balance sheet in a way that was still prudent we were still running profitably but what we were doing was

Starting point is 00:04:39 you know effectively able to take risks that none of our competitors could and so i saw the same situation here the same dollars on the table and said look let's let's take those off the table and leverage them now when you went through the ipo process uh there is this allocation conversation that you have with the bankers uh depending on how much cachet you have depends on how much influence you get in that allocation uh conversation you have a lot of cachet and uh the company gave nearly 20 percent of the ipo uh allocations to retail investors talk a little about that decision? Yeah, there's a lot of conflict around that, you know, and a lot of different interests that folks have. You know, I was very adamant that we had broad retail

Starting point is 00:05:18 representation in what we were doing. And ultimately, you know, one of the most powerful things I see about blockchain is it's an incredible democratization force and leveling the playing field. I think DeFi, the ability for anyone with capital, anyone who needs capital, irrespective of whether you're a large lender, a small lender, large borrower, small borrower, you know, those really the underpinnings of why blockchain matters and i think why it is so transformative and so um having retail participation was very important to us and and you know we got a lot of pushback on that um a lot of concern about retail doesn't stay in you know et cetera et cetera i mean geez i can i can show you that's kind of a crazy argument against retail right yeah i can show

Starting point is 00:05:56 you the last couple of ipos where you know the big institutions the long-term capital holders flipped and and so you know for me it was around i wanted a shareholder base that was going to buy into the vision of what we're trying to do um you know what we do right now and and you know obviously trump tweeted out today he wants to change quarterly reportings to semi-annual reportings i'm not sure three months is changing your ability to be long-term perspective but but directionally it's right but one of the things i always point out to folks is i'm like look you know i'm very proud of our team and the profitability they've been able to generate and you know and the the business they've been able to build. But it's almost immaterial when you look at what the real

Starting point is 00:06:34 opportunity is. I mean, we're talking about a wholesale replacement of almost everything in the capital markets with this technology. And it's disintermediating trillions of dollars of market capitalization. And I want people to buy into that long-term vision to be part of it and grow there with us. Now, as you started to do this, you've both gone after the infrastructure of the financial system, but you've also built some of what I'll consider like more consumer facing products on top of that new infrastructure. Let's talk about what you're changing on the infrastructure side first, and then we can show kind of the applications. Like where did you see the opportunity to go and just essentially improve the way that finance worked? Yeah. So look, the

Starting point is 00:07:13 very first thing that we felt, we view three value props in blockchain. There's a transactional benefit, a liquidity benefit, and a financing benefit. And they're all rooted on this idea of true native digital securities or native digital assets right so not you know i i kind of bristle at taking a dtcc security and putting it on blockchain because that isn't the actual security and changes the paradigm of trading and borrowing and so forth but when you have a true native digital security you can really do some some incredible stuff and so you know when we started figure we went out and pitched a bunch of banks this idea of originating aggregating securitizing loans on blockchain saving 85 basis points of cost and and you know uniformly every

Starting point is 00:07:52 bank was like, this is great. We love it. We'd like to be the 10th bank to do this. And so there was no appetite to move early. So we stood up a direct-to-consumer lender. And it wasn't like coming out of SoFi, I wasn't, gee, I want to build another direct-to-consumer lender. It was just an artifact of something we needed to do to be first mover into the blockchain. Is it fair to say that you essentially said, hey, we built this thing. We need people to come and be the consumer of it. But nobody wants to be the first consumer. So we'll just be the first consumer to prove that works yeah and and that's been a a a process or a formula that we followed multiple times with figure and we i tend to follow that when when we do the stock issuance on blockchain

Starting point is 00:08:29 even when that happens which hopefully it will um and so what we're able to do is actually demonstrate not 85 basis points of value but but over 100 basis points of value through reduction of audit and qc and third-party review expenses more importantly what we started doing last year so we went on this evolution we started as a direct consumer originator so we would acquire customers we would use our balance sheet we would then securitize those loans then we became business to business to consumers we have over 170 third parties that use our platform including 10 of the top 20 mortgage companies but they would still use us to intermediate between them in the capital markets last year we started to disintermediate ourselves and allow them to access capital

Starting point is 00:09:08 directly in a blockchain marketplace and uh over 40 percent of our q2 volume went through that marketplace and and you know what we saw was last year's ebitda margin at 31 go to 37 and q1 and 47 and q2 as we were able to get more and more of that volume flowing directly through the marketplace which is ultimately what we are a marketplace operator so the infrastructure is very well in place right now and and i believe that value proposition between the transactional efficiencies and liquidity are extensible in other other asset classes what we're trying to show right now is the value of d5 sort of the third leg in the stool from my perspective which is the financing side and you know i i'd always been very jealous when i started to figure out i was looking at ave and

Starting point is 00:09:52 what stani did and i'm like i don't understand why you could borrow against your your ethereum at six and a half percent on ave and i'm paying goldman seven and a half percent right and and i would beat up my capital markets folks and like we don't understand i'm like all right well let's stand up a d5 platform and we stood up this thing called democratized prime and we initially seeded it out just using it on our exchange. We run a relatively small crypto exchange, but it's very strategic for us. And we were able to demonstrate that, in fact, I could borrow against my Bitcoin, buy it on margin, and pay less than I would if I was borrowing from Cantor. And so what we started to do is bring loans over and demonstrate that. And that has proven to be consistent with what

Starting point is 00:10:32 we thought it would be. And there's a huge opportunity in terms of building out that third leg of the stool, which is the DeFi side. And that's really the infrastructure to go to market on the consumer side. We started with HELOC. We do firstly mortgage now. We'll expand in almost every credit category, but we'll also be moving into things like equity and ultimately commodity and currencies as well, because I firmly believe that the value prop is extensible to any asset class. What's funny is you became the first consumer of the infrastructure change that you made. I think you built the third largest HELOC originator in the country or top five for sure. Certainly the largest non-bank originator. Yeah. One of the biggest by accident. Yeah. It wasn't it wasn't necessarily the model. And now it's becoming a very large first lien originator as well. But, you know, it's one of those things that just dropped out. Right. And it ended up like I believe that if you look at what we've done versus, you know, say intercontinental exchange, because I think they have aspirations to build the same kind of mortgage marketplace or a lot of the RWA platforms out there. Right.

Starting point is 00:11:32 what's different about us is we control production we control takeout right it's it's rare to get a combination of dna of someone that knows how to originate assets and knows the capital markets understands blockchain and decentralization and can intersect those two in a way that makes commercial sense and i think that's what we've done explain a little bit more when you say you control the production and you uh control the takeout what that means so so we can originate the assets ourselves so if you don't want to originate them we'll originate them right so in the beginning, that's what we were. We're now a very small part of the overall ecosystem of asset origination within our platform. And I expect we're going to get even smaller over time as more

Starting point is 00:12:09 and more third parties come in and leverage that technology. But when we do a new product, let's say we move into auto or unsecured consumer or student loan, we can be the first one to originate there, demonstrate it, and then have fast follow behind it. And hopefully the half-life of that fast follow shrinks on every asset. So that's the production side. The takeout is we can use a balance sheet aggregate and securitize we have our own shelf we have one of the best shelves i think in the in the programmatic abs space that's out there so you know obviously over time what we really wanted people to do is use that marketplace and sell directly to the capital markets but in the beginning we could be the takeout and we could provide that outlet and as you see this go through

Starting point is 00:12:48 you've started with credit you mentioned equity what do you guys plan to do there so you know there's a lot of discussion around tokenization of stock and and i i always kind of bristle the tokenization because to me it means taking something that doesn't live on blockchain and trying to represent it on blockchain and and you know i'm i've got a long history of of going against ibm's ridiculous we're using blockchain to track your strawberries because the blockchain doesn't have eyes and can't actually see your strawberries move it's not a great application for the technology and you know other people would argue with me and say this is what the role of oracles are you know to me in oracle you have to trust and i don't want to trust anything

Starting point is 00:13:21 And so, you know, in the structure of equities, if you create a native digital equity on blockchain, so not a DTCC security where it's an IOU, but the security itself is on blockchain, it affords all the superpowers you get from blockchain in terms of I can transact bilaterally with you and you know you've transacted to the asset. I can lend against it and I know how perfection of the asset. I know it's not double pledged. I know it's not sitting somewhere else. And so that introduces some pretty interesting efficiencies. So there's certainly, you know, I think about the three efficiencies of blockchain, there's some transactional benefit of that, it's cheaper for the transfer agent to track it, you know, when it's on chain, there could be some liquidity benefit in the 24 seven trading. You know, I mean, as you know, I was I was trying to bid to lift FTX out of bankruptcy. And I saw what the equity per market looked like it wasn't like it was on fire with people wanting to trade equities 24 seven. So you know, there's some benefit there, but it's not necessarily significant. But what's really powerful is bringing it on to DeFi, right? Where now I have that equity and I can use it to borrow to buy Bitcoin or vice versa. I use Bitcoin to buy the equity.

Starting point is 00:14:24 I do it seamless. I control my stock loan, right? So today, when you're an asset manager, you lend your stock out for borrow and it goes on special, meaning it goes from 5% to 40%. Your prime broker is taking almost all of that, right? Or taking a huge cut of that. And so if you control it, if you custody that stock and you control the loan, you get all the economic, right?

Starting point is 00:14:44 You decide what you want to lend it at and when you want to pull it back. That I think is super powerful. and and so what i'd like to be able to do is do a blockchain native public equity security so we already have the first i think public fixed income security needed to chain with yields which are stable coin but i like to the public equity i'd like to be able to have it convertible at the treasury to the national market exchange security so the two don't don't go out of whack and i think if i'm on the buy side why wouldn't i buy the blockchain version where i can control the borrow and use this collateral versus the nms security right and then obviously you don't have the

Starting point is 00:15:18 capital pledges to DTCC. I think DTCC sits on $50 billion of street capital on any given day. You can liberate all that out, right? So there's some real significant benefits that come out of this. Today's episode is brought to you by Zappo Bank, where eligible members can unlock the power of Bitcoin without selling it. Need cash fast? With Zappo Bank's Bitcoin-backed loans, you can access 40% of your Bitcoin's value, borrowing as much as $1 million for a full year with low interest rates, zero fees, and no early repayment fees either. Now, here's the best part. You keep your Bitcoin, meaning you get to watch your holdings grow as the price of Bitcoin increases. Whether you're looking to buy a house, fund your child's education, or seize an exciting

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Starting point is 00:16:34 edge security technology. Head to zapobank.com forward slash pomp to learn more. That's X-A-P-O-B-A-N-K dot com forward slash pomp. Go check them out at zapobank.com slash pomp today. So the idea would be, let's just call it the traditional stock share, the equity, and there would be a blockchain version, but it is not taking the traditional stock share and tokenizing it. Instead, it is its own different native thing that is issued by the company. and then therefore a holder of the blockchain based one could swap into the traditional one if they want to or vice versa so there's like this interchangeability between the two but it's really the company is saying look i don't want to give out my stock have you go like a lot of these

Starting point is 00:17:17 guys seem to be like putting it in spv or something and then tokenizing the shares in the spv so you don't really actually own the equity right it's kind of a little weird right well and that's the problem is is again you have to trust that the spv is there you have to trust the assets are in the SPV. How do you have transparency to that on blockchain? You don't. You're relying on someone's attestation. Those assets could be sold. They could be double pledged. There's all kinds of problems that you bring and introduce into that. And we lived through a lot of that through the FTX debacle and some of the other situations that we've had. And I think we came out of that smarter around really staying steadfast to the principles of blockchain. And that's around

Starting point is 00:17:51 decentralization, transparency, and perfection of asset. Forget kind of how we get to the point, but let's just say that in the future, I have an app on my phone or a wallet and I've got digital equity. I've got digital fixed income. I've got kind of these digital versions of all these assets that they currently exist. Do you see a world where I actually buy stuff with the equity rather than a currency? Yeah, of course. And so I have a very good friend that wrote a paper on this many years ago called nev money and uh nav money right that's a value money and um it introduces a medium where you know that flexibility of exchange and you know i think this is one of the the big things about the genius act is what we've not been able to do with stablecoin historically was use it for

Starting point is 00:18:39 purchases and and that's because u.s payment infrastructure has a massive monopoly and in my mind the only way that monopoly was going to get broken is if chase leaned in and said we're going to build our own rail and i think they will i think you know they'll use jp coin as a catalyst to do this um but when you have a mechanism then where i have a single wallet that i can hold my cash i can earn some rewards or return on it and it's debatable about how that return happens under genius but but i have some premise like that but i can buy coffee bitcoin tesla stock and pay bills all out of the same medium i don't know why i need a bank account in that situation Right. That also opens up the opportunity for the transfer of other medium, like using Bitcoin for transactional purposes.

Starting point is 00:19:22 Right. Things that you can do with relatively low friction. But I think that second order effect about why would I have a bank account? That's profound. And I don't think people are focused on that enough. You know, like when the Treasury is talking about two trillion dollars moving into stable coin on the back of the Genius Act. Well, where does the money come from? Right. It's not like it was just sitting there idle and not being used. It was at banks. It was in bank deposits. And, you know, in 22 and 23, when the Fed started to tighten, I know it's interesting because we're talking about the Fed loosening right now, but the Fed started to tighten in 22. And we went from $18.2 trillion to $17.2 trillion in bank deposits. The entire capital market shut down. The banks all had to fire sale assets. Silicon Valley Bank failed. First Republic failed. That was a trillion dollars of outflow, right?

Starting point is 00:20:07 So if the Treasury is right and $2 trillion come out or $6.6 trillion, they did a study that said that number, something has to step in and fill that void. And I think this is the golden moment for DeFi, right? And this is where, again, you're not sourcing new capital. You and I are taking our money out of the bank in the form of stablecoin, but then we have a medium to reapply that in a lending ecosystem where we can earn direct yield and disintermediate the bank as the allocator, right? We used to get zero as depositors or de minimis amounts as depositors, and the banks would charge normal market rates for that. Well, now we get a lot more lending directly. It does feel, at least generally, the banks are extractive, maybe a little bit too aggressive of a word, but they definitely profit off of inefficiencies in the market, right? You know, one of the things I invested in this company, Bridget, years ago, that they identified the top four banks made like $8 billion off overdraft fees.

Starting point is 00:21:00 Right. Like, basically make money on people who don't have money in the bank, right? you know lending is another one there's all these you know things that they do as this technology uh becomes more popular and kind of finds its way into consumers hands do you think that it is actually a headwind and these banks are in a lot of trouble or is it something where like the pie grows and the banks will be just fine but now you're just really expanding to you know offer more services to more people no i think the genius act is is really the beginning of of narrow banking especially for regional and super regional banks i think there's

Starting point is 00:21:31 reasons why the money centers are going to be fine in terms of providing deposit relief. But I think it's going to be very hard for the regional and super regionals. And their position has been the government will never let this happen. And I think they misunderstand. I don't think that the regulators would let a financial calamity happen, but I don't think they have any affinity to keeping the banks alive. And so disruption by innovation is different than lending contagion or something like that. Yeah. I mean, the idea that you and I can take our money out of the bank and directly lend it and earn a better return is actually pretty consistent with the you know the populist thesis of the current administration so you know it's not an orthogonal

Starting point is 00:22:08 you know a negative thing at all and so um you know i i think if i was the ceo of one of these banks i would be having an existential moment right now about what does my business look like because i have potentially a physical footprint right i have brand value i have franchise value have relationship value but if i don't have that balance sheet right how does that transform my model and that again is where i think the banks can lean in and start using d5 now they can use d5 right they couldn't four years ago or a year ago for the last four years so i i think we're at the press of some pretty significant change talk about stable coins you guys launched a stable coin that's pretty interesting but obviously that has started to get a lot of attention just as a

Starting point is 00:22:50 kind of a vertical within the industry yeah look i mean i i think that again the the biggest impediment that we've had is the ability to use it for payments and and i think with the legalization of coins through genius act um that will happen i i think the banks felt a little bit bamboozled about genius and that they were very adamant that it not pay interest it doesn't preclude someone like coinbase for example paying you on your usdc deposits in the context of marketing rewards and so forth um i don't think they fully understood that going into it and that might have changed their support for the bill explain this a little bit more because i don't think people quite understand like basically the banks did not want a stable coin that replicated

Starting point is 00:23:29 an interest-bearing account that's right this part right that's right they felt it was too competitive to their demand deposit account and they didn't want that so i think the first point is you know people see this genius act and they're like oh wow this got done it's like you know crypto friendly, whatever, there was a battle behind the scenes between a lot of different players that was all jockeying for what was going to be in this bill because it is a threat in some cases to these banks. That's right. That's right. And whatever that battle was, the battle that's happening right now in Clarity, which is the market act, is 10x, right? Because in Clarity, you've got a really interesting construct where even within crypto, the centralized and

Starting point is 00:24:07 decentralized actors don't have the same incentives, right? In terms of what they want for protection and legislation in addition you've got you know the tradfi entities like like the nice here are nasdaqs of the world that you know have their own views about how crypto should trade right and want to introduce that so i think clarity is going to be a harder process i'm optimistic that it goes through um but whatever whatever the knife fight was in the genius act clarity is like a knife fight in a phone booth so now we get okay there is this uh ability for the coinbase the world center they essentially found a workaround explain a little bit it's like what these companies are doing where they qualify under the genius act but it is something that maybe the banks didn't

Starting point is 00:24:46 quite understand yeah so you're you're buying stable coin and putting it on deposit of the broker and the broker is paying you effectively interest but but in the context of a reward right they would call it a marketing fee and say well we would pay to acquire this customer this is just a reward we're monetizing back to them directly um but it's de facto interest and and so i don't think that the banks understood coming into this that this even existed and i think they're now absolutely up in arms about it but i think it's highly unlikely they're going to be able to amend the legislation to prevent that is this um something you put in the category of like uh technologists being slick or is this something that uh the banks maybe just didn't do enough

Starting point is 00:25:26 diligence or a combination i think it was the latter it had been going on well before the genius act had happened so it wasn't that it was something that was slipped in and i think you know the reality is a lot of these banks should have had accounts of these crypto exchanges and understood how a lot of this worked and unfortunately most of them probably didn't now uh the stable coin you guys launched what is the differentiator like what what are you guys doing sure so we have a stable coin called yields and what's different is yields as a security so it is not part of the genius act it's actually regulated as a security and the issue is generally with securities uh you require some regulated entity to move it so if i want to move it to you

Starting point is 00:26:03 requires a broker dealer or a market exchange or an ats alternative trading system and yields is done as this relatively obscure security called a face amount certificate it's the only type of security that's really transferable peer-to-peer so i can move fifty dollars from me to you now this introduced a lot of consternation with the ft uh the sec around well is that a kyc transaction or not because finsen is very clear that if a non-regulated non-banking entity non-financial entity is moving it, it has no obligation for KYC. So you can imagine all the consternation that we've had with the SEC on that front. But effectively, what we have with yields is something we think you can do everything you can do with USDC, but it pays interest. Now,

Starting point is 00:26:45 right now, what we're focused on is using it for our own loan market ecosystem, using it to settle our transactions, using it to represent remittance and loans and so forth. We're starting to reach out and talk to exchanges about using it as collateral. So perpetual collateral where you earn interest on it there's some interesting treasury use cases there we will see how the payment infrastructure evolves so yields is backed by the same thing as stablecoin as it's treasury backed um so it has the same investment policy um so hopefully it won't be precluded from using the payment rails and that's something you know we're working with the industry on right now how much is the yield uh approximately that's i think right now it's so for minus 35 so around four percent

Starting point is 00:27:25 around four percent so i mean it's pretty competitive given um what people could do you know outside of the crypto world or anywhere else yeah yeah it is it's intended to be uh effectively a freely transferable money market fund got it um in those conversations you started having the conversation with a different administration you now have continued them with a new administration are there any surprising takeaways that you would say over the last two years or so with your kind of conversations with regulators do you think would be valuable for people to understand yeah look i i think the last four years um have been probably the most difficult you know prior to the change in the sec specifically the most difficult regulatory

Starting point is 00:28:04 environment we could have being a blockchain company um and you know i'm very proud of our team what they've been able to build over that period i mean they built a business that you know has originated 17 billion dollars of assets and over 50 billion dollars of on-chain transactions 339 million of revenue last year profitable um but it was the most difficult environment you you can imagine. And what we have now is the beginning of a better environment. And the first step in that was the SEC not using enforcement as a policy tool. That allows us to think about things in the construct of rules as opposed to interpretation. And that's helped a lot. And the crypto task force, I think, has been very good at being receptive to the industry,

Starting point is 00:28:44 being able to come down and talk through things. The Genius Act, obviously, is great to see that codification. What I'd really like to see in clarity is what Chairman Atkins is talking about in terms of protection for DeFi, and in particular, carving DeFi out from certain aspects of regulation. While that's his interpretation, and I appreciate that, I'd like to see it codified as law, because I would not like the next SEC commissioner to come in and not have that view. What is that process like? Is that just like a regular legislation? And do you think that's going to be the Clarity Act? And like I said, it's that is going to be a contentious bill. You know, we just got 180 pages of effectively a recast version of it out of the Republicans.

Starting point is 00:29:28 And then we got, you know, seven critical points that must be met out of some Democrats, you know, in terms of how this is going to come together. And there's there's still a pretty and this is just across the two parties. And then, as I said, even within our industry, I don't think we're all aligned in terms of what we want out of this. So it's funny because there's this framework I have where politicians historically, very abrasive, very fragmented, very few people supported crypto in general. And there was a lot of very loud detractors. The industry was very aligned, very kind of cohesive in saying like, hey, Bitcoin, crypto, blockchain is good. Right. Fast forward to today, it actually in a weird way has swapped a little bit.

Starting point is 00:30:09 Like politicians all understand we have to support this or like our constituents will vote us out. Right. but it's now like infighting in the industry that seems to be something that is much more abrasive than maybe it was in years past well i i think in part it's because some of that regulatory quagmire was a huge benefit to certain incumbents in the space and you know the the elimination of that changes the paradigm and introduces a competition that wasn't there before and so um you know everyone has their own interests in terms of what they're advocating uh you know i think there are some universal points that that we agree on as an industry

Starting point is 00:30:45 you know bitcoin's not a security for example um but i think the the it's actually the only thing that anyone agrees on that's why i said there's there's at least one north star that's that's that's it um but uh once you move off of that you know people have their own interests and and like i'm i'm a big proponent of decentralization and uh you know everything we do, we, you know, we use MPC for custody because we don't want to take possession or control of people's assets. Other people, that is their business model to take possession and control. You know, you've already heard me talk about, I don't, I'm not a fan of oracles and the representation of non-native digital assets on blockchain. Other people, that's their whole

Starting point is 00:31:25 business model, right, is to provide that medium of trust or representation. So, you know, and I'm not saying I'm right and they're wrong or vice versa. It's just, you know, we have particular views and and you know there are many in the industry that share our views and there's some that don't we are seeing a lot of collaboration now um obviously circle and coinbase maybe is one of the biggest ones we've now seen uh tether make a lot of investments in various uh organizations we've seen nasdaq invest in gemini it just seems to be kind of um it's like uh everyone's got to pick a friend right and then like there's going to be this big competition how do you think about the folks that you work with or partnerships or allies that you all have going into uh what seems

Starting point is 00:32:06 to be a very contentious battle for market share. Yeah, one of the biggest challenges is the space is notoriously subscale. So I think it was 2,700 crypto exchanges or something out there, of which 2,695 are probably subscale. And so there's a tremendous opportunity for consolidation in a subscale market space.

Starting point is 00:32:26 I think from our perspective, we've really adopted the idea of we are going to trust ourselves first. That's why we originally had the first loans on chain, even though now 170 third parties do that represent way more of the market you know i believe we will be the first native equity issuance on chain right there's there's a whole series of things i think we will be the first and and i like that because you don't have reliance on third parties and you know doing mergers and acquisitions and roll-ups there are people that are phenomenal

Starting point is 00:32:53 at that i've always struggled with it um not to say we wouldn't do it but it requires a lot of time a lot of energy and a lot of focus and that comes at the expense of all the other things that are out there. One of the biggest challenges that we all have is we're sort of the proverbial kids in the candy store, right? We went from a repressive regulatory regime to, hey, we want you to lean in and innovate and do what's potentially the biggest greenfield of innovation we've ever had. And so while I believe in the disruption construct, and I think blockchain will move more public market cap than any other technology ever has and any other technology ever will including the internet um the greenfield opportunities are even bigger right and so it's

Starting point is 00:33:35 not it's you can get myopic in terms of you know the the idea of competition between big you know blockchain native industries right now is kind of goofy because the opportunity set is so enormous that you know we shouldn't be worried about ourselves we should be leaning in and trying to actually create new opportunity where are those new opportunities well i think certainly in um um in defy uh and its ability to step in if this deposit flight occurs and create a new kind of lending paradigm you know that introduces a whole bunch of opportunity around you know how do we deal with collateralization how do we deal with liquidity how do we deal with cross-collateralization correlation of assets there's enormous things there i think as the payment monopoly gets broken

Starting point is 00:34:18 down um you know and in particular we move away from these physical point of sale transaction devices into qr code who are going to build those rails right and how are they going to work and and how does it extend into things like cross-border remit and treasury management and so forth huge opportunity there and i think you know when when you think about the the equity side and what i always find interesting when when i talk to people about this you know people always gravitate to dtcc they're like all right you're going to do a blockchain native public equity you don't need dtcc anymore no 50 billion dollars of street capital no game stop issue you know et cetera etc that's true but but go one level further to the exchange well nasdaq and ic or centralized

Starting point is 00:34:59 exchanges what about a decentralized exchange right what about one where we can all attach our wallet to and trade which means we don't need any introducing broker so you don't need robin hood or td or schwab you go and attach your wallet and trade but where are you going to get the the margin where you're going to get stock on defy right and so what you're ultimately talking about is a wholesale replacement of a capital system that's been in place for 100 years. And the value of that displacement is just enormous. Today's episode is brought to you by Bitcoin OS. They're the ultimate upgrade to Bitcoin. Bitcoiners can now experience the magic of the entire crypto world, including DeFi,

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Starting point is 00:36:38 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 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.

Starting point is 00:37:11 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 leverage Polkadot's technology to power their platforms. 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. When you start to look at a lot of what's playing out here, I also think there's a difference between the East and the West. in crypto we've seen uh asia was very much not subject to u.s regulations there was kind of a different culture uh lots of capital pouring in there the west i think has always said hey we have scale we have rules and we have what many people would look at as like the best financial institutions

Starting point is 00:37:59 etc you're trying to build something that actually i think the east is much more uh ready for but you're doing it in the west and competing against these you know uh kind of large institutions some may look at that as a downside i actually think in a weird way it's like the classic innovators dilemma where you're well positioned to disrupt some of these large players that aren't used to this yeah and look i think the fundamental driver is it just works better for everyone who participates in that market right and and that's you know at the end of the day that's why people lean in to use the technology it took me a true innovation that solves a problem yeah yeah i mean it took me years to convince goldman to start using dart which stands for digital asset

Starting point is 00:38:39 registry technologies the way we register assets on chain to use it for warehouse lending right so so the way you do warehouse lending is i send the the bank a spreadsheet 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 right and this is a very high profile case that just uh affected jp morgan and fifth third and a few other banks in terms of a warehouse borrower who double pledged the assets right sent the same spreadsheet to two different banks and borrowed twice as much money intentionally right the fraud of them and you can't do that on blockchain right and and this is what i was trying to convey to goldman and also i'm like you don't need to spend some the money does someone do the five days of

Starting point is 00:39:16 diligence but you can give me the money faster and you de-risk it so you can give me more money so it's lower risk cheaper and faster cheaper and faster so you can make more money and reduce your costs and when they finally got to and they're like oh public blockchain scary you're gonna steal our loans you know all this stuff and i'm like oh you know you can't do any of this stuff And there's an education like, what if we lose our keys? That's like the most classic boogeyman of all in public blockchains. What do you lose your keys? And, you know, why MPC is so valuable? But just tell David Solomon to hold them. But ultimately, we got him to do it. And they're like, this is great. Like, why don't you tell us to do this years ago? This is wonderful. And, you know, but this was this was in the prior regulatory regime. And I'm like, great, let's do a press release. They're like, absolutely not. we you may not tell anyone that we are doing this and and as soon as uh the sec changed and we were getting different fed leadership they they called up they're like hey you know we really want to do that press release now interesting and and you know because you

Starting point is 00:40:12 know we're really like at the forefront of blockchain and and it's just you know it went from being a risk to now it's cool to brag about being that's right they want to be seen and i think all financial institutions are going to now want to lean in and be seen as being progressive within digital assets is it fair to say that uh figure in general the big value proposition is you're essentially modernizing financial infrastructure is that like if you really boil it down to like what is the essence of this company yeah i think it's it's whether you call it modernization whether you call it disintermediation um but again not just disrupting what's there really building what isn't and i mean look we stood up the only liquid private

Starting point is 00:40:48 credit marketplace that i've ever seen outside of fannie mae and freddie mac and we couldn't have done that without blockchain um another area that you guys have pushed into is bitcoin back to loans um again kind of this like consumer lending you know type uh dna that you have described like why that product so i i love letting you guys bitcoin right and uh it's funny everyone who lends against it loves it for the pristine collateral that it provides a hundred percent uh so i've been lending against people's properties since 2018 and and generally we do a very good job at that but there are loans we've lost money on you know i've never lost money lending against bitcoin and what we're what we're trying to do right now is a structure that i

Starting point is 00:41:27 believe we can bring to market where um if the borrower on a 12-month loan pays you know something like a one and a half percent fee up front we and at a 50 ltv we will immunize them from any liquidation right so we will never do a capital call on you and how do you do that we buy puts right got it so basically somebody can come and they can borrow against their bitcoin if they do not pay this one time one and a half percent fee then there is liquidation risk but they don't pay the fee but if somebody pays a one and a half percent fee then you basically protect them from any sort of liquidation in the future that's right and it's a much quote-unquote safer my words not yours um way to borrow against your bitcoin but it costs something that's right yeah and why does

Starting point is 00:42:09 nobody else do this i don't know why people aren't doing this yeah so i mean it feels like this is the type of you know to me it's always like uh the market has said hey i want to borrow against my bitcoin right you can see this across multiple companies um the trade-off is the liquidation risk you're dealing with an 80 vol asset that you know tends to go down when you don't want it to no 100 and a lot of people have a misperception about why people are borrowing against their bitcoin they think it's tax it has nothing to do with tax that people just want to stay in the bitcoin right because of that 80 volatility it can double just as much as it can have right and so they want to maintain that exposure and so this gives them peace of mind and maintaining

Starting point is 00:42:46 that exposure yeah it's pretty interesting that you then use the financial mechanism to protect them from themselves essentially right yeah do you think you can get the one and a half percent down even more or is that just the cost of the puts cost of the puts because of all told you so high yeah and then um that brings the question of like all these derivatives obviously have been very popular offshore it does feel like maybe the u.s is trying to get to a place where we can start to bring some of this stuff onshore yeah i think one of the most interesting derivative innovations is going to be around the short-term lending index being able to swap that to longer rates. So if you look at a platform like Democratize Prime, where it's hourly, or Aave, where it's

Starting point is 00:43:21 continuous, generally, DeFi is not a term borrow structure. It's not a term borrow structure because once you introduce term, you don't have homogeneity to those loans. Today's loan isn't the same as tomorrow's. And so the problem is people do want term. They want to hedge that out from an asset liability standpoint. So I think there's an interesting opportunity to create a swap market. The issue is who is the logical other side of that swap? And that's one of the things I'm spending a lot of time thinking about right now in terms of trying to build that out and bring it to market. When you look at the future of the business, do you just go product by product on Wall Street and try to pick off the lowest hanging fruit and say, look, where are the

Starting point is 00:43:57 areas where there's really big spreads, there's a lot of inefficiency, and this new technology can solve that problem? Yeah. What we do is I've got a great synergistic relationship with Mike Tannenbaum, who I brought in a CEO to run. Last year, I split figure into two because I was trying to take figure public and the regulatory regime was just too difficult. And I took all the crypto and blockchain heavy stuff in markets that I went to run. And I bought Mike in, who I'd worked with for a long time ago at SoFi. I was a chief revenue officer there. And more recently, I was a CEO at Brax. I brought him in to be the CEO. And when the regulatory environment changed and the public market changed, it made sense to recombine the business. I asked him to stay on as CEO.

Starting point is 00:44:37 and part of why I did that is it gives me the ability and flexibility to really focus on all the zero to ones and so I've got you know five six seven eight different things that I'm looking at at any single point in time and when they come to fruition and hit that one I can push them up to him at the organizational level and he can scale it to a hundred right and and so that's kind of how we look at it so on any given point in time there's no shortage not just as I said of disruptive opportunities but greenfield opportunities the technology affords um and i'm fortunate to have a partner that can then take those ideas when they show merit and really turn them into businesses you've been uh innovating in financial markets for a very long time um you've

Starting point is 00:45:16 built now numerous multi-billion dollar companies do you have any advice for either people in the crypto world or people in the traditional world that are trying to also kind of blaze their own trail and innovate yeah my my two pieces of advice and and one we were talking about very recently The first one I always tell everybody is, you know, don't be you need to be obstinate enough that when people tell you you can't do something, you're not listening to them. Right. You can't be crazy in the sense of I'm going to turn lead to gold. You know, there's there's some things I used to say flying cars, but, you know, I don't know. I'm not sure that's that crazy anymore. So you have to kind of thread that needle.

Starting point is 00:45:52 But but but the first part is more important than the latter. But the second is when you're pitching your idea, do not use someone else's company. Do not be, I'm going to be the Uber of this, right? Or the SoFi of this or the figure of that, like be yourself in terms of how you're talking, describing what you're doing, like be category defining. Don't take someone else's category and try to fit into it. One thing that I've observed, I mean, we've worked together now for quite a while. I'm an investor in figure for a number of years.

Starting point is 00:46:19 You're a very good fundraiser. Very good. What do you think are some of the lessons you've learned there on that front as to, you can be a good fundraiser. and if you don't deliver returns then you become a very bad fundraiser because no one's giving you money anymore you've been able to obviously deliver returns but there is something about the fundraising process that you run that is effective yeah look it's you you you want to build on making people money and and the more money you make people the more likely they are

Starting point is 00:46:43 to be receptive to you coming back and talking about your next ideas and one of the things that was personally rewarding to me when i was out on this ipo road show um was i had more than one investors say, you know, Cagney, your ratio of say to do is the highest we've ever seen in an entrepreneur. And, uh, you know, that, that meant a lot to me, uh, just in terms of executing to what it is we're trying to do. And then lastly, um, for those that are looking at the business, trying to understand it, what, what's kind of your pitch as to what figure looks like moving forward and, and, uh, maybe even the type of shareholders that you're looking for, given as a public company, you know, there's plenty of people who want to trade in and out of these

Starting point is 00:47:20 things, but you want kind of alignment with those shareholders. Yeah. I mean, we really want people who are aligned with the idea of revolutionizing capital markets, right? And I think what figure is going to do is change market structure, both existing markets that we know of, you know, I give the stock market as an example, but also new markets that we didn't have, you know, your ability to lend against figure assets, for example, or other loans, non-figure loans. And so, you know, to me, this democratization, you know, which is really at the core of what defy is which you know there is no delineation between you and i or the biggest investment bank in the world and defy it's all the same dollars going against all the same assets you know that's

Starting point is 00:48:00 really what unlocks a huge amount of opportunity and so we like people that are aligned to that want to participate in that ecosystem um where can we send people to find you on the internet i know you don't create a lot of content on the internet but when you do it's very high quality so where should we send them uh well you know figure.com obviously is is our site and then i'm on i'm on twitter i'm cagney and i'm on telegram i'm cagney linkedin though i i am on linkedin i don't use it as much now you post on there every once in a while i do i do it's not it's not uh like you're supposed to say i got the best linkedin go follow me on linkedin i have a great linkedin uh please follow me on linkedin very important to do that i'm also m cagney there too see i'm i'm the first

Starting point is 00:48:41 on all these platforms which is why it's m cagney on everything i'm cagney at gmail yeah right but But, you know, LinkedIn still is great for lots of purposes. So I didn't mean to poo-poo it. No, but you do tweet often. And I think I've been doing a great job there as well. So I appreciate you taking the time to do this. We'll do it again in the future. All right.

Starting point is 00:48:58 Thank you.

The Pomp Podcast - How Blockchain & Bitcoin Are Reshaping Wall Street | Mike Cagney

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