Transcription:
Kirk: (
Well, good afternoon. Welcome to Austin, Texas, our hometown, where the temperature is the only thing as hot as inflation. It's great to see so many of you, friends and colleagues alike, back in person, it's nice to be in person together. It's been a crazy couple of years in banking and the services that we provide to our customers, to all the communities and businesses that rely on banking for their financial wellbeing. The services you provide is more important than ever, but the future of our industry is in question, who are the players? What are their roles? What shape will the industry take? So this week, this group of great leaders is here to discuss exactly that what's next in digital banking. On behalf of Q2 and American Banker, we hope that you have a wonderful show. To get us started, I want to introduce Penny Crossman, who is editor at large for American Banker prior to that role. She was editor in chief at bank, Technology News and technology editor at American Banker and several other senior editorial roles before that. So let's lend a warm welcome to Penny Crossman, everybody.
Penny Crossman: (
Thank you so much, Kirk. It is so great to see everybody live. We have tried to do this conference virtually, two times, and we're really happy to be back in person. I am not gonna blather on, we have a great first speaker and I would like to welcome him on we have Mike Cagney who is founder and CEO of Figure Technologies. Please welcome Mike.
Penny Crossman: (
So as David Letterman, say my next guest needs no introduction. I'm sure most people know who Mike Cagney is. He was the founder and CEO of SoFi, which is a sort of one of the first challenger banks in a way doing student loan refinancing. They later added personal loans and mortgages and they've actually become a full-fledged digital bank with all kinds of banking products. You may not all know that, Mike actually started his career at Wells Fargo as an analyst. In 2018, he started a new company called Figure Technologies, he was doing really interesting things with blockchain technology and with a version of a Stablecoin, which they sometimes call a digital marker or digitized deposit, the USDF token. So we're going to, pick Mike's brain about a wide range of topics and if somebody has a burning question you wanna ask and you wanna raise your hand, we'll try to get to you. I'm just gonna kick things off here. So, let's start with your experience at SoFi. When you think about all the things you did at SoFi, what are you most proud of and what would you do differently if you could start over again?
Mike Cagney: (
The motivation on what we were doing was, there had been some really interesting pioneer work around this whole concept of peer tope lending and Chris Larson in particular at prosper, really pioneered the concept of aggregating sources and uses of capital in marketplaces, where you could drive efficiency off of that and kind of dis-intermediate the traditional bank deposit liability funding ecosystem. So out view with SoFi was that we could tap into affinity, starting with student loans, where we would source capital from the Alma mater of the school, the borrower, and build on that affinity construct and build these marketplaces. What we discovered very quickly was there just wasn't sufficient capital to support that ecosystem. In particular, the irony that we had was we were always, kind of poking fun of the banks in the public forum, but on the back end, everything we were doing, we were either financing or selling into the banks, primarily.
Mike Cagney: (
So there was a very important synergistic ecosystem that came off of that. I think one of the biggest challenges that we had organizationally was, with SoFi, we kind of built it as a very focused solution around disintermediation disruption and financial services. We didn't think a lot about the culture construct and the type of organization that we wanted to build over the medium, long term to make it sustainable. We had a lot of people that were at conflict with one another within that organization, it created a lot of challenges, one of the things that we did with figure is we spent a lot of time before we launched the business around what is it that we're trying to do? Who are the people that we wanna be working with? What do we want the culture and norms of this business to be, to be able to execute in a way that would be sustainable and long term tenable.
Penny Crossman: (
That's super interesting, and this is a tangent, but so how would you hire differently now?
Mike Cagney: (
So we used to hire on ability experience and then cultural fit. Now we hire on cultural fit first. So if there isn't a structure or a circumstance where someone's gonna align to the entrepreneurial and collegial culture that we try to build out then it's a no go. So irrespective of the experience, the capability forth and it's hard to adhere to that because sometimes you have a pressing role you need to fill into, and you get someone with an incredible track record or incredible background. You almost wanna leap over that and just say, well, we'll figure out how to get it to work. The reality is that never works and it introduces a lot of friction and a lot of disorientation within the organization. So you want everyone rowing in the same direction and everyone aligned, so we just made a conscious effort to make that first.
Penny Crossman: (
When you think about all the challengers, you mentioned prosper, there's a lending club SoFi on deck cabbage. There were a whole bunch that started around the same time. Do you feel that they have changed the industry, changed the status quo, or are they kind of becoming banks? A lot of them are getting bank charters or have bank charters, work very much with banks, like you were saying, are they sort of becoming like more like the rest of the industry?
Mike Cagney: (
So I think what the industry did is it brought digital first and in particular digital direct to consumer, and more holistic view of the customer and the relationship aspect of the customer to the forefront, but the model itself is very difficult, over time, if you don't have that consistent source of liabilities. That's why there was such a synergistic relationship between the Fintech's and the banks back then, and why a lot of the Fintech's have done a natural evolution of becoming banks at this point and being able to have that liability that they can tap into. So I think the idea of being a balance sheet lender works until it doesn't work and the experience of. This is one of the things I always tell like the nonbank mortgage originators that are moving into personal loans or moving into helos or other verticals, they're used to a capital market where the agencies, the GSEs are always there and the bid is always there. The reality is when you move off of that agency, the bid isn't there all the time. So what do you do if you're doing a billion dollars of production a month and no, one's there on the other side to take it out. That's where, having a bank and having that balance sheet gives you a significant comparative advantage, but introduces a lot of restrictions and constraints as well through the bank whole co-construct
Penny Crossman: (
Everyone here can relate to that. I'm sure so let's talk about what you're doing now. You guys built a Providence blockchain, it was originally based on Hyper ledger, I believe. Then you went on to use the cosmos SDK. You kind of change the technology underpinnings, and now you have I believe a network of about 50 banks that you're working with in various ways. Tell us a little bit about what you're doing and what these banks are doing and what they're hoping to do on this blockchain.
Mike Cagney: (
I think there's a couple dimensions to the question you asked. So let me first, just philosophically go through why we think blockchain's relevant and then talk some of the practicalities of deploying it. If you think about what blockchain does, it does two things very well, which is it allows you to displace trust with truth through native digital assets. What I mean by that is I can create a loan on the blockchain where the composition, the provenance, the history of that loan are known for certain such that when you face off against me to transact, you don't have to rely on my weapon warranty. That the asset is what I'm representing it to be, whether it's the DTI or the CLTV or the FICO, or what have you. The second thing blockchain does, it allows two counterparties to face off and transact bilaterally without incurring each other's counterparty or settlement risk.
Mike Cagney: (
If I have 50 million loans that I wanna sell, you have $50 million of stable point in your wallet. We face off on a decentralized exchange and the loans get registered to you. The stable point gets registered to me and we've transacted real time. Some settle, no counterparty risk, no settlement risk. So when you intersect these two things where I don't have to rely on your representation of the asset, I can transact without your counterparty risk. You create marketplaces where you're agnostic to your counterparty and if you think about financial services, all financial services is intermediate marketplaces. So you have the way we trade public equity DTCC, sit in the middle, you have the NASDAQ or the IC as the exchange, you have your introducing clearing brokers, think about interchange, visa, MasterCard, and own the interchange rail. You have your issuing bank issuing process or merchant bank, merchant acquirer.
Mike Cagney: (
You can eliminate these BI party settlement ecosystems and make them bilateral using blockchain. So you're talking about trillions of dollars of market cap that can be disintermediate out through the technology. That's really what attracted us to come into it. Your point we started with Hyperledger because in the beginning, we went to a bunch of banks and the first thesis we had was securitization. I said, look, I think you can originate warehouse. Then securitize assets and generate 90 basis points of cost efficiency from point origination through the deal execution. The banks all said, well, that's great. Who do we call? If something goes wrong? We said, well, you call the administrator. We made up an administrator and, the reality is it, doesn't go wrong in blockchain cause you precum every transaction.
Mike Cagney: (
I had the same discussion with FINRA when I was going through my broker dealer application. After two years, when no one called the administrator, we were able to get rid of the administrator and move to a public open source, decentralized chain. So Provenance was built by figure, but we have no ownership or control of that network. So it's effectively a public open source blockchain. Anyone can use it. It is the only blockchain public blockchain that US banks have used. And it has some particular, compliance infrastructure around that to support that, but it's something that we feel is a foundation for a lot of traditional banking activity.
Penny Crossman: (
So to your point, what happens if someone makes a mistake or there's a dispute about a securitized asset?
Mike Cagney: (
Well, the key is that every transaction on blockchain's pre encumbered. So if I were to sell you $50 million of loans or 50 million of figure equity, whatever it's I might be doing, I would have to own that and encumber that, and then attach that onto a decentralized exchange. You would have to have stable point to be able to bid to that and cross that transaction. So you actually don't have trade breaks. This is the important element around blockchain, to the event that someone enters the wrong information or what you have, your normal legal course in terms of correction of that we have in the off chain world, but the key with blockchain is because you're pre encumbering transactions. There is no trade break and that's the substance of what most of the concern is around who do I call when something bad happens.
Penny Crossman: (
So I remember talking to Sheila Bear about this, the former FDSC chairman and she well was on your board. I think she still is and she said that, if we had had this during the mortgage crisis, we really would've helped with a lot of the issues that occurred, where it was hard to even figure out who the originator of the mortgage was or what the original terms were. It was very hard to have that proof of what the original contract was and what had happened to it in the meantime. I know there have been other attempts to do this too, that just haven't worked out partly because it's hard to get consensus among a lot of Bankers about all agreeing to one way of doing something. How many Bankers do you have buying and selling, loans on your, platform today.
Mike Cagney: (
Between credit unions, regional banks and money center banks, we probably have about 50 relationships that are active on the blockchain today. What Sheila said was if I had blockchain, it wouldn't have prevented the problem. I would've known where all the bodies were varied, my view is, it actually would've prevented a lot of the problem too, because you would've been able to see the amount of leverage that was coming into the system. This is one of the benefits of that native digital asset construct and the ability to lend and perfect directly to the digital asset. So we think about sort of the evolution of this, think about prime brokerage, for example, today you have prime brokerage relationships, and we've seen that those don't always work in the case of Archie goes, for example, the problems that came off of that in a blockchain construct, I'm not lending against you, the fund manager, I'm lending against the securities directly and I perfect direct interest on those, so those securities can't be re hypothecated out. I have certainty as to my perfection ability. So it actually introduces transparency and stability into the system that we don't have today.
Penny Crossman: (
So I know you also work with a few banks like New York community bank, who want to use the USDF Stablecoin to make payments like, international payments more quickly. Have you begun, is that in operation today?
Mike Cagney: (
Yeah, so we did a transaction last year that was seminal on two different fronts. So one of the businesses that we run figures in a blockchain holding company. We have a bunch of different businesses. We have figure lending, figure payments, figure marketplace, and we have a business called equity solutions, and we run about 500 company cap tables entirely on chain. So there is no digital, there's no paper certificate, it's a digital cert. Those companies have the ability to attach on this decentralized exchange to generate primary and secondary liquidity. So last year we did a transaction, where we had a bunch of figure investors and employees go and take their stock in their wallets, attach it to this decentralized exchange. We had a bunch of institutional investors come in and bid to that stock and for 24 hours a day for seven days, we just ran a straight up market.
Mike Cagney: (
So our stock floated, fortunately it floated up, but it traded real time, settled real time. The importance of that transaction, it's the first time anyone's run a marketplace for blockchain security. So we did this through our broker dealer. We have an ATS exemption, alternative trading system exemption, specifically allowing us to run these types of marketplaces. This was the first of this type of instance. The second reason why this was relevant is the institutional buyers in that marketplace bought Stablecoin directly from New York community bank and they use that stable point to ECU their wallet and go to that exchange and transact real time bilaterally. And what near community bank did that was prudent as they said, well, we're not gonna turn this into our stable point. So we're not gonna go the path that silver gate's trying to go with DM.
Mike Cagney: (
What we're gonna do is we're gonna make this a bank utility and USDF is going to be a functional Stablecoin for any bank that wants to use it. They established a set of operating rules with their founding members. So Synovis and First Bank and MBH and Sterling Webster, they now have over a dozen members and they've got about a hundred and Q to join into this. It's gaining a lot of traction, but the premise behind this is it does two things that are really powerful for our ecosystem, which is one, it provides unlimited stable point on the blockchain and it's bank backed and bank minted stable point. Obviously we've seen with UST and I think you're gonna see, further with some of the disruption we had last night with Celsius, a lot of pressure on the non-bank Stablecoin construct.
Mike Cagney: (
Bank Stablecoin, to us is a much more tenable solution for the broader decentralized ecosystem, but more relevant than being able to provide Stablecoin to support these decks transactions. Decks is just the acronym for decentralized exchange. It provides a payment mechanism for any two banks to face off on that network and move money between themselves 24 hours a day, seven days a week, 365 days a year with almost no friction. So you can think about this displacing ACH, displacing interchange, the use case you mentioned, displacing cross border, cross border remit, and swift. There's pretty significant applications of this as a payment disruptor. There's also sort of an existential reason why they need to do this, because if the banks don't get in front of this, the CBDC, the central bank digital currency, will get there and that's sort of an existential threat to the existence of a bank.
Mike Cagney: (
What's ironic about this is the money center banks are very focused on, JP Morgan's focused on JP coin as well as it's focused on their coin and those are closed loop systems that really don't require blockchain. They can function on a database blockchain, isn't the most efficient platform to use for movement of value and it really operates under a decentralized construct, but these regional banks are actually leaning in and adopting and developing technology that not only is giving them some significant first mover comparative advantage, but, creating some defense against what I see as an existent. They see as an existential threat of central bank digital currency.
Penny Crossman: (
So why do you see central bank digital currencies as an existential threat? I've heard several people say that recently, including we, did a bank think about this a few days ago. Why do you really think that the fed will set up accounts for every consumer and let them and bank with them directly?
Mike Cagney: (
Yeah, so it's basically a slippery slope that's created and there are plenty of current in Exped officials that have said this and have been public about it. But if you think about, how does government move cash out for disaster relief? They do it through prepaid debit and prepaid debit is a horrible medium to do distribution because it's wrapped with fraud. People go and they raid the mailboxes. There's no identity associated to that prepaid debit card. If you look at some of the stats on Katrina, for example, hurricane Katrina, the amount of prepaid debit that went to fraudulent purposes, it was through the roof. Why wouldn't the fed say, well, we're gonna use our central bank digital currency to just push that to your wallet. Right? Well, once they do that, they're in the business of banking and then the question is, well, if I'm providing a bank account for a certain portion of the population, why not provide a bank account for all the population and why not have economies a scale where, this becomes a medium of which we all transact.
Mike Cagney: (
You build in starting with, well intentioned foothold of let's displace, prepaid debit as a way to distribute cash out. Whether that's for disaster relief, whether it's for unemployment assistance, what have you into that traditionally underbanked community? Well, now you have a bank account structure there. Why wouldn't it scale into the broader application set? That's the issue. What the banking industry has to do is two things on that, which is they should be getting in front of that with their own central, own digital Stablecoin. That digital Stablecoin should allow them to extend product and service into a demographic, they haven't traditionally served into to address that need of displacing prepaid debit as a primary medium for disaster relief, for example.
Penny Crossman: (
That's interesting, coz I feel like and maybe I have a limited view, but I feel like the fed is not the federal reserve banks are not equipped to handle, 300 million people, in their day to day transactions. They just don't have, they just don't have the resources, the infrastructure to do that, but maybe I'm missing something.
Mike Cagney: (
So I think they're spending a lot of time and a lot of money thinking about it. We're still waiting for Fed Now. We don't wanna put the carpet head of the horse, and a lot of people talk about Stablecoin versus Fed Now and they say, well, "Mike, why do you care so much about this Simpson settlement infrastructure you have Fed Now?" My immediate response is, "I don't actually have Fed Now yet". The more relevant response is, Stablecoin is programmable and whereas Fed Now is not. So if you think about what you can build with programmable money and the kind of marketplaces that you can create, again huge amounts of disruption, so payable, receivable, supply chain, finance, all these things that require some intelligence in the Fiat that you're using to transact, you have that ability to program that in and you can do, significant market disruption.
Penny Crossman: (
So when you think about, the blockchain technology in our industry, about five years ago, we did a ton of stories on a number of very promising efforts. You had the enterprise Ethereum Alliance, you had the Hyper ledger project, it was a company called R3 that had a number of bank partners. There was another company called digital asset holdings that had some banks they were working with and they did create a blockchain for the Australian stock exchange. But for the most part, these groups kind of fell apart over time. What is different today, that is really making or going to make blockchain technology more viable, more useful in this community than it has been in the past.
Mike Cagney: (
Yeah, so I think there's a couple reasons why the early efforts were pioneering and they paved a lot of way for those of us that came in behind them. So we appreciate that but they weren't well suited to be successful. One of them was a use case application. A lot of it was around trade finance and you saw all these people running these processes in parallel and said, oh, well, we ran trade finance on blockchain turned out more expensive or whatever the case might be. It didn't deliver a value prop against it. I think the more fundamental limitation though, was lack of being able to represent Fiat currency in the blockchain. So if you go back to my philosophical construct on this, that ability to transact bilaterally is predicated with the ability to represent Fiat currency in your digital wallet and USDC, which is circle and USDT, which is tether, neither of those are tenable solutions for bank ecosystem.
Mike Cagney: (
The lack of being able to represent bank issued or bank minted Fiat on chain has been the biggest impediment that we've had. That's what we think USDF and whether it's USDF or it's DM, or what have you, there's a significant opportunity for first movers to lean in and provide that capability into the banks. It introduces a really interesting opportunity for the banks. So if you think about I'm a bank today, I have retail customers, I have small business customers or medium or large size business customers. Well, what happens today is I have a tiny little slice of that interchange ecosystem, what I call transactional tax. So, I've got the issuing bank, which, predominantly is chase, I've got the issuing processor, I've got visa MasterCard in the middle network, I've got merchant acquire, which is square Stripe, FIS or others. I've got the merchant bank, which is me, right. Of that a hundred basis points of debit or 300 basis points of credit tax. The bank and polling at most 20 bibs out as part of the transaction, is that merchant acquirer. Well, what Stablecoin does and what blockchain does and what USDF does, is it allows that bank to set up their underlying retail customer to operate on USDF rail and they do that through, Jack Henry, Banno through FIS, whatever the underlying backend infrastructure is and a lot of these bank and core providers are integrating into USDF. Then I go to my small business, medium size and large size business customers and say, look, I'll be your merchant acquirer. So I will set you up to take USDF.
Mike Cagney: (
Instead of paying the a hundred basis points of debit tax, or the 300 basis points of credit tax, I'll charge you 75. By the way, I'm gonna take 50 to 75 basis points of that, right? So I'm taking the lion share. What I'm doing is, I'm delivering a better value prop to my merchants, coz I'm cutting their interchange infrastructure cost. I'm giving them real time settlement, but I'm displacing the merchant acquirer and I'm actually making more economic for myself as a bank. So, on a first order, the bank cuts out, the issuing bank cuts out the issuing processor becomes merchant acquirer and competes directly with square and Stripe, and is still the merchant bank in that construct.
Mike Cagney: (
On a second order, they now have high frequency transactional data. So if they wanna compete with square cash, they now have the ability to lean in and do that as well. I think what you're gonna see is a massive leveling of the playing field of this technology, where it has direct and immediate ramification to bank profitability, which is what you ultimately need for banks to lean in. It can't be a proof of concept. It has to be like for you to take the effort and the I'm gonna call it brain damage to lean in on blockchain, coz it can seem like that sometimes, yougotta have a real motivated reason to do it and I think those are reasons to lean in and do it.
Penny Crossman: (
Just briefly why you said USDC is not tenable for banks. Like why do you say that?
Mike Cagney: (
Because it's a general obligation to circle it. It's just you lending money to circle and you could say, well, I look through the circle's balance sheet and I see they've got treasuries and commercial paper forth. That's fine, but you're still a general obligor to circle. Circle provides good transparency on that other Stablecoin operators don't. Some Stablecoin operators don't have true reserves against it and there's an algorithmic process trying to manage it. That's what we saw with UST. At the end of the day, we think that ultimately for a tenable solution it needs to be bank issue, bank backed and regulated the way that banks have been regulated.
Penny Crossman: (
We don't have much time. So lately the news has been kind of dismal in the crypto world. You've had the, Celsius and Binance both saying this morning, they've a temporary hold on Bitcoin withdrawals, you had Tara USD supposed to be worth a dollar dropping to 10 cents recently. How do you look at all that really? Is it safe?
Mike Cagney: (
I was doing a lot of Bitcoin mortgages up until about yesterday. So I think that volume's probably slowed down a lot, now I'm probably doing a lot of margin calls today. So unfortunately for those of you that took Bitcoin mortgages for me, I think there's two things about it. I think a lot of the shakeout that we've had right now is healthy, because we've had a lot of non tenable solutions in particular, the 10 to 20% yield farming solutions that were coming on the back of inflationary networks that was predicated on demand for the token persisting. I don't want to go into what that actually is, but it's not a tenable solution. I think having some of those things unravel right now is actually good, over the medium to long term for the ecosystem, because at the end of the day, blockchain has huge application of financial services.
Mike Cagney: (
As we talked about earlier, trillions of dollars of market cap reallocation has nothing to do with token trading and token repo, right? It has to do with getting mortgages on chain dis-intermitting interchange on chain, creating loan, marketplaces on chain. Those are the things that are gonna create value and have sustainable impact. That's what we're very focused on. So I think near term a lot of banks are gonna use that disruption as an excuse to say, well, I don't have to deal with this right now. It's too disruptive and there's no reason this is actually the absolute best time to lean in and be doing work on chain, but doing real work, not digital token stuff work.
Penny Crossman: (
Well, unfortunately, we're running out of time, I wanna thank Mike Cagney. Mike has said he's willing to stay around for a few minutes. If anybody has any questions for him, you'll probably be right out here. Thank you to Mike Cagney.
Mike Cagney: (
Thanks.