Figure Technologies, the blockchain firm founded by former SoFI CEO Mike Cagney, plans to launch a regulated stablecoin security in the United States. It involves adopting an existing piece of investment regulation to issue ‘face amount certificates’, a type of fixed income debt security that pays interest. Bloomberg first reported the news.
Many believe that traditional finance and decentralized finance will converge. Since day one, Figure Technologies has straddled the two. While Figure has succeeded in lending and other areas, Cagney has pushed forward despite encountering numerous regulatory hurdles on the payments front.
Figure Pay attempted to get a banking license but gave up after trying for years. The startup was one of the founders of the USDF stablecoin consortium, which adapted based on regulatory pushback and morphed into a conservative tokenized deposit solution. It was unveiled two years ago and is yet to receive a green light from regulators.
In theory, Figure’s latest effort complies with existing regulations. However, it remains to be seen whether the SEC will give the go-ahead.
What are face amount certificates?
Face amount certificates are relatively obscure. One of the main proponents is Ameriprise Financial. It is a debt security and will be issued in denominations of one cent in Figure’s case.
Figure incorporated a subsidiary, the Figure Certificate Company, and filed an S-1 registration statement including a preliminary prospectus, in September last year.
It plans to offer two types of certificates. One is designed for payments – Figure transferable certificates – and the other for longer term investment. Hence, the first one is redeemable (surrenderable) without charge and earns an interest rate of overnight SOFR less 0.5%, with a zero lower bound. Figure will pay all gas fees relating to transfers or redemptions on the Provenance blockchain.
In contrast, the Figure installment certificate carries a 2% penalty for redemption during the first three years. However, the interest rate is overnight SOFR without any deduction.
Although they can both be surrendered, they have a term of 20 years.
One aspect is inherited from traditional fixed income securities. Interest is credited daily but paid monthly. That means if you use certificates to make a payment, you lose the accrued interest since the previous pay date. That may see the certificates valued at a premium for payments.
However, on the topic of value, there are no plans to make the stablecoins tradeable. Remember, the purpose of these certificates is to comply with existing laws. Making them tradable adds a far higher hurdle for compliance. They can be surrendered, so arguably, that’s what matters.
Another compliant aspect is the certificate can only be transferred peer to peer between people or companies that have been through know your client compliance procedures. Investment regulations usually require transfer agents, and these certificates are no different.
Are stablecoins more ‘stable’ than certificates?
Another novelty is the mangagement of reserves to comply with regulations. It’s unclear whether the regulations would require 100% of the assets to be held in reserves. We suspect not. However, Figure Certificate Company has committed to keep 100% in reserves.
Regulations allow for an array of investments ranging from Treasuries to commercial paper and foreign securities. Figure says it expects the “largest portion of its portfolio to be invested in ‘high grade’ fixed-income securities.”
Meanwhile, Figure has had some success in lending. It founded the Provenance blockchain as well as the online mortgage originator Figure Lending, which it is planning to list. Figure Lending demonstrated the potential savings from the efficiencies that blockchain offers.
Figure is also starting to make headway in the funds sector. Alternative asset manager Apollo is a partner, and the Provenance blockchain was one of the solutions used in recent trials involving JP Morgan.
An on-chain settlement asset similar to a stablecoin enables true delivery versus payment, eliminating counterparty risks for all these use cases.