Crypto Exchange Figure Markets Has a Plan to Democratize Finance

What appears to be another post-FTX trading-and-custody play with institutions in mind, is really all about visionary disruption.

AccessTimeIconApr 2, 2024 at 3:58 p.m. UTC
Updated Apr 2, 2024 at 4:00 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now
  • Figure Markets combines alternative trading system capabilities with cross-collateralization of crypto and traditional assets.
  • MPC wallets matched with a goal of delivering a fully on-chain order book meet CEO Mike Cagney’s definition of a decentralized exchange.
  • Figure is using about $100 million from its balance sheet as a catalyst to drive borrowing and lending.
  • Bitcoin Mining in the U.S. Will Become 'a Lot More Decentralized': Core Scientific CEO
    13:18
    Bitcoin Mining in the U.S. Will Become 'a Lot More Decentralized': Core Scientific CEO
  • Why Core Scientific is Focused on 2028
    00:57
    Why Core Scientific is Focused on 2028
  • Bitcoin, Ether Rise Amid ETF Steam in Hong Kong; Solana's Latest Update
    02:14
    Bitcoin, Ether Rise Amid ETF Steam in Hong Kong; Solana's Latest Update
  • Bitcoin Whales Yet to Resume Accumulation: IntoTheBlock
    01:06
    Bitcoin Whales Yet to Resume Accumulation: IntoTheBlock
  • At first glance, Figure Markets, the cryptocurrency exchange recently unveiled by serial entrepreneur Mike Cagney, looks like another post-FTX trading-and-custody play aimed at institutions. But dig deeper, and a spectrum of value propositions appears, from cost-saving practicalities to visionary disruption.

    Key components include: an alternative trading system (ATS), a broker-dealer license, the ability to cross-collateralize crypto and real-world assets, and borrowing and lending using Figure Technologies’ balance sheet as a catalyst to get things flowing. All this is underpinned by multiparty computation (MPC) wallets, a largely decentralized order book and the backing of market maker Jump Trading.

    It’s definitely true that the billions of dollars of assets marooned on FTX prompted a rethink of crypto exchanges. For Figure Markets, the need to build an exchange evolved out of sister company Figure Technologies’ history of tokenizing non-crypto assets (over $30 billion since 2018) using the Cosmos-based Provenance Blockchain built by the firm.

    By Cagney’s own admission, experimental efforts such as creating an on-chain market in private company shares and trading Figure stock on the ATS, failed to gain traction. Likewise, onboarding heavy hitters such as Apollo to trade on-chain fund interests didn’t work either.

    Focus on market structure

    Cagney remains chirpy about this learning curve. “These are two very popular business models that people are pitching right now for blockchain. We've done them both and I can tell you neither work,” he said in an interview with CoinDesk. “So, we decided to take a step back and look at market structure. The thing that stuck out was Binance and Coinbase function the same way as FTX did, even after what happened there. They act as custodian and clearing agent.”

    The right direction was to use MPC, based on Jump Crypto's Silo offering, which represents a security-perfected interest that’s analogous to self-custody, and effectively delivers Cagney’s concept of a “decentralized exchange.”

    Cagney's version differs from a DEX in the sense of decentralized finance (DeFi), where anonymous parties trade using an automated market maker (AMM). It instead features a limit order book, but one that’s as close to being on-chain as is technologically possible to deploy at scale.

    “We can't scale that to a level to be competitive with Binance and Coinbase,” he said. “So you end up having to bring some order matching construct off chain, where you write back to the chain every five seconds. For five seconds, you're using some centralized construct of orders, but you're still not taking possession of the collateral which is important.”

    In any case, Cagney’s view is that AMMs are not good for consumers. “Everyone pounds their chests about AMMs, but the reality is AMMs get exploited constantly by market makers sandwich-attacking retail clients that trade on them. The real panacea is when we get suitable blockchain computation. But until then, we have to run episodic off chain matching to just meet the throughput that we need. That isn't disingenuous to the thesis of decentralization, or at least is in line with it.”

    Market makers like Jump saw huge value, both in Figure Markets’ decentralization, as well as the possibilities of cross-collateralization. But they flagged another issue, the problem around liquidity for lend/borrow, and the ability to access capital from a lend/borrow standpoint, Cagney said. “Look at the prime brokers in crypto, there's really only somewhere in the hundreds of millions of dollars of capital available to lend in an industry that could easily consume billions of dollars of capital a day.”

    To deal with that, Cagney has apportioned about $100 million from Figure’s balance sheet to get the lending flywheel turning.

    “What’s really interesting is the way you can democratize prime finance, so you don't need an introducing broker,” Cagney said. “You just attach your wallet to the exchange and trade. I don't need Robinhood, I don't need Schwab, I don't need TD [Ameritrade], and the whole prime system. What you ultimately end up with is a total reshaping of the way that financial markets work in a massively disruptive but extremely creative way to everyone in the ecosystem.”

    Edited by Sheldon Reback.

    Disclosure

    Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

    CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

    Ian Allison

    Ian Allison is an award-winning senior reporter at CoinDesk. He holds ETH.


    Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.