Figure Securities, a subsidiary of the online lender Figure Technologies, has received approval from the Securities and Exchange Commission to become a broker-dealer and run an SEC-registered Alternative Trading System for digital securities custodied on the company’s Provenance blockchain.
It’s the latest evolution of the work the company is doing with Provenance, the distributed-ledger-based trading platform it originally built to sell the the home equity lines of credit and mortgage and student loan refinancings it originates. The blockchain stores information about each loan and related documents. Figure, which was founded by fomer SoFi founder Mike Cagney, has traded nearly $3 billion worth of loans on the platform.
In the course of selling its loans on its blockchain, Figure hit a stumbling block: It couldn’t bundle the loans into securities and sell them to investors on its platform without SEC approval.
“The challenge we had as we were building out our marketplace and our exchange is that we weren’t able to offer securities,” Cagney said. “Having securities trade on a marketplace or an exchange involves a lot more regulatory oversight than having loans trade on the same type of exchange.”
Figure worked with the SEC and the Financial Industry Regulatory Authority for more than a year to get permission to offer digital securities on its blockchain.
The original idea behind Provenance was to provide transparency, proof of loan performance, provenance — reliable information about who owned or owns an asset at any given time — lower costs and easier audits for loan buyers and sellers through distributed ledger technology.
All those elements were missing in the mortgage crisis of 2008. Investors in collateralized debt obligations, especially mortgage-backed securities, didn’t know much about the quality of the underlying loans or whether the borrowers were paying them back.
Blythe Masters, the former CEO of Digital Asset Holdings, which built a blockchain for the Australian Stock Exchange, helped design the system alongside June Ou, Figure’s co-founder and Cagney’s wife, who runs products and technology at the company.
In addition to the bonds Figure generates by securitizing loans, the SEC-approved trading system can be used for secondary trading of private company stock and trading of other types of digital securities.
“It opens up the whole universe of security tokens for us in terms of what we can do on that,” Cagney said in an interview. “It’s something that strategically we knew we wanted to build. It just took a while to work with the regulators to make sure they understood how blockchain works.”
Trading on a blockchain is different from traditional trading in that it’s bilateral: The buyer and seller face off directly with no intermediaries.
The trading of digital assets on a blockchain eliminates counterparty and settlement risk, Cagney argued. Stablecoins can be used to instantly buy securities, so both sides can see exactly what they are getting and there’s no lag time before settlement occurs.
“In the three years we’ve been up and running Provenance, and with billions of dollars that have passed through it, no one’s ever had to call Provenance” to handle a dispute or problem, Cagney said. This shows intermediaries are not needed for blockchain-based trading, he said.
“It’s because trades don’t fail on a blockchain if they’re done the right way,” he said.
Many over-the-counter markets would work better as transparent liquid marketplaces on blockchain, Cagney said.
“We can bring T-instant settlement, transparency and liquidity into a market that traditionally hasn’t had it,” he said. “We see this having a massive impact.” (Most securities trades settle two days after a transaction, a process commonly referred to as T+2.)
Likely users of the platform include family offices, institutional investors and high-net-worth individuals that will use a component of Provenance called Passport. Passport lets investors provide all their information for know-your-customer and anti-money- laundering purposes once, then have that accreditation stick to them every time they buy or sell anything on the platform.
Figure is still pursuing the national bank charter from the Office of the Comptroller of the Currency it applied for in November. Under the nontraditional charter the company is asking for, it would collect deposits but those deposits would not be federally insured.
This charter is the subject of a complaint the Conference of State Bank Supervisors filed against the OCC in the U.S. District Court for the District of Columbia in December.
The CSBS argued that Figure’s bid to open a bank not accepting federally insured deposits is “merely a thinly veiled effort” to avoid any controversy surrounding the OCC’s special-purpose fintech charter. The group has filed two similar complaints in the past about the OCC’s fintech charter. Both were thrown out of court because no company has been granted such a charter.
Cagney said the approval process is moving forward.
“We’re working with the OCC and I think making good progress,” Cagney said.