Mike Cagney’s return to fintech’s center stage had been foreshadowed by a handful of reports suggesting that his new company would be focused on the origination of real estate-related assets and that, somehow, blockchain would figure into the mix. But Cagney, who played a foundational role in building SoFi into one of fintech’s biggest success stories before his departure, isn’t the type of entrepreneur who thinks small and nichey. With his new company, Figure, and the blockchain protocol it has built, Provenance, Cagney and his team of 80 professionals are taking aim at the gigantic world of institutional capital markets transactions. Why? Because that’s one place where the vig (i.e., rent-seeking) still sloshes around in copious amounts. But unlike SoFi, which is taking aim at banks, Cagney is now fixing his gaze on the administrators, trustees, custodians and other intermediaries who take a cut out of each securitization and other types of deals. On the eve of the first transaction to be put on Provenance (a HELOC), The FR’s Gregg Schoenberg sat down with Cagney to learn more about his plans and how blockchain is central to his mission.

FR:    Nice to see you, Mike. To kick things off, can you give me the elevator pitch on Figure?

MC:    Good seeing you as well, Gregg. Essentially, Figure is a financial services platform we built, in part, to be the first customer on Provenance.

FR:    Which is the blockchain you have created?

MC:    Yes, and we figured out pretty early on that unless there was adoption on this blockchain, it would end up like a myriad of other blockchains, which is a very interesting technology that no one ever uses. So we created Figure to generate assets to put on that blockchain, in order to engage the buy-side and sell-side to actually use it.

FR:    So Figure is an originator of assets, and the protocol entity is Provenance, which will not be controlled by Figure.

MC:    Yes. We built the Provenance blockchain and are releasing it to the public in a permissioned way. Right now, Figure happens to have a majority of the token (which translates to control of the Provenance foundation), but it plans to sell enough tokens in an upcoming ICO to get below 50%.

FR:    So as to further distinguish the two entities, Figure is based in San Francisco, led by you, and Provenance is based in Reno, not led by you, right?

MC:    That's right.

FR:    Is Provenance located in that crazy, huge blockchain industrial park out there?

MC:    Ha, we're not in a crazy, huge blockchain industrial park, but there is a crazy, huge blockchain industrial park in Reno.

FR:    It's amazing.

MC:    Yes; people don't actually know it yet, but it’s enormous.

Aha Blockchain Moment

FR:    I remember that towards the end of your time at SoFi, you started talking about blockchain specifically for title registry.

MC:    Yes, but I wasn't really a blockchain guy. Actually, to be honest, I was always moderately skeptical about blockchain, because I generally associated it with crypto and not with the applications of the technology to solve real problems. But after I left SoFi, I had an opportunity to dive into the characteristics of a blockchain and the distributed, immutable, trustless infrastructure at its heart. I then saw for myself the massive amount of intermediation that you could go after with that kind of technology, and that's when I had the aha moment.

FR:    Did you have a sherpa that took you from A to Z, answering all those dumb questions people have when they're trying to understand blockchain?

MC:    I wish I had. Blockchain can be very daunting, because it's a very sophisticated technology. There's a lot of jargon and terminology that's foreign to someone in financial services, However, one person who was extremely helpful to us early on was Chris Larsen, who was CEO of Ripple at the time.

FR:    How so?

MC:    We met Chris with a preconceived notion about a public protocol, a proof-of-work process and a whole bunch of things that just didn't make a lot of sense. He was very good about challenging our assumptions and got us to rethink how to do things.

FR:    So was Provenance influenced by Ripple?

MC:    No, I wouldn't say that. In fact, it doesn't really look like anything else out there.

FR:    What is that core differentiator, then?

MC:     The core idea is putting an asset like a loan on a blockchain, not a token that references the loan, but the actual loan, which hasn’t been done. My view is that simply ‘tokenizing’ an asset that lives off-chain introduces more problems than it solves.

FR:    Problems like pledging the loan on-chain to one person and off-chain to another person?

MC:    Exactly. There are all these issues that come with a token representation. What we’ve done is create a blockchain where we can put the entire loan on the chain. So take Figure, which will originate a second lien mortgage product. To do that, we need title, AVM, a credit and a promissory note and demonstration of funding. With all of that, we submit a packet onto the blockchain. In fact, the signature of the prom note happens on blockchain, so that no one has to trust me that I did it the right way. It's viewed by each of these nodes and captured in a way that's irrefutable.

HELOC Transaction

FR:    Let’s turn to use cases. Next week, your first use case — putting home loans on the blockchain — goes live. Could you add some additional color on this deal?

MC:    Yes, and if you look at what we did in the last six months, it’s crazy. We built a five-minute HELOC (with video notary), a distributed proof-of-stake blockchain and an integrated servicing platform on-chain. So we’re very excited to do the first loan origination on blockchain.

FR:    Congratulations on this upcoming and meaningful step. Putting it into a larger context, is securitization the big elephant in the room you’re working towards? If yes, I’m also wondering how much of your inspiration came as a result of your securitization experiences at SoFI.

MC:    It was a little bit different in the sense that at SoFi, we created a student loan refinancing product that's had a huge impact for people. We also opened up the securitization market to non-bank, unsecured consumer lenders. But what we were doing was not what I’d consider audacious. However, what Provenance is doing — upending the entire way that we originate securities and trade assets — is really audacious. I never thought of doing this when I was at SoFi. And it’s not just securitization. It’s anything that requires administration, trustees, custodians or benefits from improved liquidity and transparency.

FR:    Yes, but in your early days of SoFi, you were pretty audacious, basically saying to banks, ‘We can beat you even though we don't have as much capital as you have.’

MC:    I think when we started SoFi, it was part of the brand mantra to take on the established financial system. What we're doing here is very different, in the sense that the technology we're bringing to market provides a huge benefit to the established financial system, including the buy-side, sell-side and originators.

Provenance Participants

FR:    Alright, let’s turn to some specifics. My understanding is that Provenance has four core groups of participants: nodes, members, market makers and the protocol foundation. Besides the protocol entity, which we already discussed, can you give an overview of what the other constituents do?

MC:    Let’s start with the the nodes, which effectively store encrypted information in a distributed format. With most smart contracts, the owner of the contract can see the raw data for a brief period of time. That wouldn’t fly for our protocol, given the privacy and Gramm-Leach issues involved, so we had to create a trusted execution environment in order to make sure that the owner of the contract didn’t have access to the raw data.

FR:    To ensure that your smart contract protocol wouldn’t enable information to leak between participants?

MC:    Yes; there would be a big issue if participants on the chain could see each other’s trades. But equally relevant is that seeing raw data introduces liabilities that financial firms don’t want to take on.

FR:    Before you go on, can you disclose who any of them are?

MC:    I can't, other than to say we have good participation from some of the largest buy- and sell-side firms.

FR:    Why have they been so eager to participate?

MC:    It’s the economic value proposition. Essentially, we’re saying, ‘It costs you 100 basis points to do a securitization in the traditional way. We want to charge you 30 basis points and free 70 up for the ecosystem.’

FR:    But in order for this to work, the nodes validating the transactions have to be visible actors, right?

MC:    Technically, you and I could be nodes, but that wouldn’t serve the greater purpose. It's important that we have key members of the industry involved — not firms you’ve never heard of — because we need feedback and guidance on the economic model we’re creating.

FR:    Could you analogize the nodes to primary dealers in the Treasury market?

MC:    Well, let me put it in blockchain terms. What we’ve created is a distributed proof-of-stake network that allows stakeholders to put up a stake in order to be a node on the chain. The protocol delivers to them a return on the stake every time someone uses the blockchain.

FR:    Via the token, which you’ve named Hash.

MC:    Yes; you pay with Hash — which is trademarked, by the way — to use Provenance. Some of that token goes to the node, some of it goes to the foundation, and the majority of it goes to the token holders. We've set it up in a way in which we're trying to deliver roughly a 15% return for the node. But I wouldn't liken it to a primary dealer function because the node never has access to the data.

FR:    So there’s no benefit to the nodes from the flow?

MC:    Correct. They don't see anything, and that's the whole point of the trusted execution environment we created. You and I can transact the loan, and while the nodes capture the transaction between us, nobody sees what’s in the block.

FR:    Which is encrypted.

MC:    Right. And you and I have the ability to de-encrypt that data. We both have keys to it, as it was our transaction. But the broader ecosystem doesn't see it.

FR:    Moving on to members, they are essentially the lion’s share of participants who are either asset originators or buyers who want to use the platform, right?

MC:    They could also be warehouse providers as well, but, yes, they can be anyone who wants to engage on the marketplace.

FR:    That seems straightforward enough. Let’s turn to market makers, one of which will be Figure, correct?

MC:    That's right. And this introduces a bunch of questions around whether Hash is a security or not. From my perspective, the SEC's gone back and forth on this, having said at one point, 'Yes, all utility tokens are securities,' and then more recently asserting that Ether was probably a security at one point, but is not a security now.

FR:    How do you look at it?

MC:    The SEC is confronted with a fascinating navigational challenge. For us, we want to work within the SEC’s guidelines.

FR:    Of course.

MC:    But nobody has done any of this stuff, which means that regulators have to figure some things out.

FR:    Besides Figure, could you describe who the other market makers will be?

MC:    The market makers will likely be sell-side broker/dealers.

Loan Funding

FR:    Describe what happens when a loan is funded.

MC:    Let’s say I'm delivering to the bank, call it $100, to fund the loan, and the bank delivers me Hash on-chain, I sell it back to the bank immediately, and it releases that $100. That second leg of the transaction is what actually gets packaged into this loan file. So, if you think about what I have at the end of the process, I've got all the inputs for the loan file, I've got demonstrated identity verification, demonstrated signatory of the prom note, demonstrated funding of the loan and an immutable instance of this asset. Net net, you know everything about it at origination.

FR:    Can you get a CUSIP?

MC:    You could put a CUSIP on it, but you don't have to because the blockchain is the registry.

FR:    So there's no need to go through DTC?

MC:    Nope, but there are other reasons why you might want to put a CUSIP on it, in the context of investor mandates or financing for senior notes.

FR:    What happens when a payment is due?

MC:    In 30 days, the loan gets a payment. It comes into the bank and follows the same process. The bank delivers me Hash, I redeem the token back out, the loan amortizes on the chain and in essence, the blockchain becomes a servicing platform that captures the payment or lack of payment.

FR:    This process is entirely enforceable on-chain, right?

MC:    We’ve gotten a legal opinion as to the enforceability and perfection rights, and they support that this works on-chain at least as efficiently as it works off-chain. So you have a perfectly immutable record of an asset, and if you and I want to trade, you can simply trade me token for loan in real time.  

FR:    Without two-day settlement?

MC:    Yes, instantaneously. The same holds true for pledging on a warehouse basis. Rather than having to pledge once every three days, I can pledge 300 times in a single day. I'm just moving the asset from me to the warehouse provider, which massively streamlines the process. Or think about repo. The third party goes away, so there's no need for a three-party repo agreement.

FR:    You and I could just swap and redeem back and forth?

MC:    Right, and it gets super interesting when you start securitizing. Normally, you cut the loan tape, PWC comes in to audit it and someone comes in to re-underwrite it. That process, plus distribution and ratings, is 100 basis points. But with blockchain, you create a pool of loans and you issue security tokens on them — just like we do with bonds today — but nobody needs to audit that loan, because I've authenticated it at origination. It's perfectly immutable, and no one has to re-underwrite it.

FR:    I would imagine you're working with advisors to validate what you’re claiming.

MC:    Absolutely, both legally and on the buy- and sell-side. And to build on this, the trustee becomes the smart contract that administers the cash flow, so you still are doing the aggregation of payment on the outside, and the waterfall is still intact. But the interesting thing is that with security tokens, rather than the bonds that trade once a month, I have real-time visibility in terms of collateral.

FR:    Recently, you mentioned to me that you were spending a fair bit of time in New York going over this together with different firms, right?

MC:    Yes. We have been in dialogues with over thirty major buy- and sell-side firms that usually would never get into a room together but are now doing it to figure out how to use blockchain. There’s a group of major law firms going through this process, too.

FR:    And to what do you attribute this spirit of cooperation?

MC:    They all see how impactful blockchain is going be in their business. I mean, we crossed the rubicon here when we addressed enforceability. The benefits are too big to ignore, and firms will be at a massive disadvantage to not be on-chain.

Roadmap

FR:    Let's turn to the roadmap, because as we've discussed before, some of the articles out there have suggested that you’re building a real estate start-up. In reality, the roadmap is about showing the world that you’re going to be eating your own cooking by first originating assets through Figure that are put on the blockchain.

MC:    Yes. Once we made the decision that we had to generate our own assets to get this to work, we wanted to create the best asset generation platform that we could, and that's Figure. I also determined that if I’m going to create assets that are put on a blockchain, I need to create assets that people want in size, are greenfield, and have a macro tailwind so that they can stand on their own.

FR:     And all this begins next week?

MC:    Yes; on Monday, we’ll put the first loans on the blockchain. Those assets will be in the form of a HELOC, which will be originated entirely on-chain and be sold to a major investment bank. This will be the first transaction of its kind. Then, later in the summer, we’ll look to do the first warehouse financing on a blockchain. And before the end of the year, we'll look to do the first securitization of those assets on the blockchain.

FR:    You have another product in the works too, right?

MC:    In September, we’ll roll out our 'Buy-Rent Back,' where we buy your home and rent it back to you. We’ll then take that property plus the rental stream associated with it and issue a token against that. That becomes an on-chain REIT.

FR:    This Buy-Rent Back product is essentially a reverse mortgage with some innovation around it, right?

MC:    Way better than a traditional reverse mortgage.

FR:    How?

MC:    A reverse mortgage gives you about 38% of the home value. With our product,  we're giving you nearly all the home value, and you get to stay in the home as long as you want. You're not liable for property tax or upkeep, and in our view, it serves as a great alternative for folks who are underfunded for retirement.

FR:    Which is a huge number.

MC:    By our estimates, you've got people 62 and over who have $6.2 trillion in their homes, and 75% of them are underfunded for retirement. When you think of it like that, you realize that these kinds of solutions need to happen. And in our view, this product has much more market appeal than a reverse mortgage.

FR:    Where does the ICO fit into your roadmap, and what’s your take on the ICO market more generally?

MC:    We think it's important to have the ICO in place this year for a few reasons. First, it's a way for us to deliver a return to our shareholder base. Second, we don't want to be the majority token holder, and we don't want to control the foundation. Finally, getting broad circulation of the token is actually a very good thing, as we believe there are several great use cases for the protocol.

As to your question on the ICO market, part of the problem is that people have been doing ICOs to raise capital first, and then trying to find a problem. We are going about this the opposite way: looking at the problems created by rent-seeking intermediaries and figuring out how blockchain can facilitate solutions.

FR:    Given that you are enthusiastically taking aim at so-called rent-seeking, I’d imagine that you see several large applications for Provenance within the financial ecosystem.

MC:    Yes. So far, we've identified over $90 billion of value that we can create in the financial ecosystem, and we're finding new use cases all the time across fixed income, equities, debt issuance, fund creations, securitization and remittance. It goes on and on.

FR:    I guess that’s why you have 65 job openings on your website.

MC:    Yes, and we have 80 people on staff already.

FR:    I remember looking around your office soon after you took the space, asking, “Who’s going to take all of these seats?”

MC:    Actually, we ran out of space.

FR:    Well, on that note, Mike, I wish you good luck in this adventure.

MC:    Thanks so much, Gregg.

This Interview has been edited for content, length and clarity.

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