Figure speeds tokenization of public securities under the Celsius plan
Celsius Network’s mining operations and illiquid assets will be restructured into a new owned company … [+]
Last week, Celsius
Figure Technologies, led by CEO Mike Cagney, was named NovaWulf’s blockchain technology infrastructure partner that will tokenize NewCo’s common equity. The move marks the latest in a series of institutional finance deals in which Figure and its network of partner organizations have been involved over the past year. In a conversation with Mr. Cagney after the announcement, he explained that this latest deal marks a groundbreaking turning point, as it accelerates the timeline for offering tokenized public assets to a much wider investor audience.
Customers became creditors
In early June 2022, Mike Dudas, an early-stage crypto VC with Paxos at the time, warned retail investors about the potential for losses on the Celsius platform. CEO Alex Mashinsky questioned Dudas’ intentions and shrugged off the comments as FUD (Fear, Uncertainty and Doubt). Two days later, Celsius stopped withdrawals. Within a month, Celsius declared bankruptcy.
Alex Mashinsky, former CEO of Celsius Networks
What many Celsius customers didn’t realize was that under the platform’s terms and conditions, digital assets transferred to Earn accounts were treated as unsecured loans. About 1.7 million of Celsius’ customers were affected by the turmoil, many of whom were added to a pool of 100,000 other unsecured creditors.
The long game
Lehman Brothers Estate took over 14 years to resolve customer and creditor claims.
As with other restructurings involving complex structures and illiquid assets, negotiations and legal proceedings may delay final settlement. Perhaps one of the most extreme examples is the administration of the Lehman Brothers estate. While all customers and secured creditors eventually received all the money they were owed, the Lehman Brothers liquidation lasted 14 years and 13 days.
The plan
Under the proposed plan, minor creditors (those with up to $5,000 in claims) would receive roughly 70% of their investments in BTC
NovaWulf would invest between $45 million to $55 million (depending on NAV at deal closing) in NewCo, which will be owned 100% by Earn creditors. NovaWulf will manage NewCo’s assets, which include Celsius’ mining operations and illiquid assets.
Under the NovaWulf plan, creditors would own shares of tokenized equity in a NewCo that would manage … [+]
Figure Technologies will provide the blockchain technology solutions that support NewCo’s common equity, which will be tokenized. The tokenized equity will be available for trading on an alternative trading system managed by Figure Securities, Inc., an SEC-registered broker-dealer, built on the Provenance Blockchain. Figure will also offer secondary trading and lending services.
Figure technologies
Figure has systematically built an infrastructure that tackles the challenges regulated financial institutions face with the blockchain. Originally positioned to enable homeowners to efficiently leverage their equity, the company has transformed the way financial institutions think about lending, payments and marketplaces.
Figure boss Mike Cagney is no stranger to the “TradFi” world. Cagney began his career on Wall Street structuring and trading derivatives and structured products. Over the years, he has built businesses that solve the inefficiencies he saw firsthand. “In a stock trade, there are seven counterparties. There are five counterparties when you process a payment. Blockchain will disintermediate markets and enable true bilateral transactions.”
Figur CEO Mike Cagney navigates financial institutions through blockchain adoption.
Under Cagney’s leadership, Figure has assembled an ecosystem where regulated financial institutions can operate on the blockchain with confidence.
One of the first moves was the launch of the Provenance blockchain in 2018. It was later rebuilt in 2021 as a public proof-of-stake blockchain. Ancestry was designed to be a decentralized, open source tool that can be used as a source of validation and not just a “golden dataset.”
The following year, Figure, JAM FINTOP (a JV between Jacobs Asset Management and FINTOP Capital), and a group of banks led by Synovus
The consortium provides its FDIC-regulated members with an alternative stable coin that does not carry the market and regulatory risks that non-bank alternatives pose. The USDF operates on a private, permissioned version of the Provenance Blockchain to ensure compliance with banking regulations. This move was anticipated as the crypto world would soon be rocked by the TerraUSD crash.
While private crypto investors retreated through the remainder of 2022, institutional finance deepened its investment in blockchain initiatives. At the end of the year, Figure announced partnerships with Apollo and Hamilton Lane that focused on the tokenization of RWA (fund ownership) on the Provenance blockchain.
According to Cagney, Figure’s work with Apollo on blockchain projects involving mortgage origination, securitization and trading meant incremental successes leading to the fund tokenization engagements. Although limited to certain accredited investors, these projects will slowly open the tokenized asset door to more traditional investors.
Why Tokenization Works
During our brief conversation, Cagney discussed tokenization, blockchain adoption in institutional finance, and what makes the Celsius deal so special.
According to Cagney, the elegance of tokenization boils down to two factors: trust and risk. “[It] displacing trust with truth. [Counterparties] need not rely on testimonials to establish truth [with respect to the asset]. This means that people can trade without counterparty risk.”
However, when it comes to tokenizing RWA, Cagney carefully highlights the differences in tokenizing art (a form of IP or intangible asset) and financial products. “When [somebody] symbolizes a work of art, we do not know that Picasso, is real.” This example is relevant because it established one of the main principles that Figure’s partners had to follow. “If they wanted to [lend or originate]they had to do it on [Provenance] blockchain.
Tokenization can change the way financial products such as shares are issued and traded … [+]
Tokenization of public equity has always been on Figure’s roadmap. Figure Equity Solutions, a precursor to this effort, is a cap table management solution built on the blockchain that typically serves early-stage companies raising private equity. The Celsius agreement provided a unique opportunity to accelerate this timeline.
“The Celsius community is one focused on decentralization.” For Figure, tokenizing NewCo equity meant creating a native digital asset on a public blockchain, giving “constituents the unique ability to stay true to that ethos.”
The benefits
For Celsius customers and creditors, the streamlined share issue provides a fairer and faster path to liquidity. Unlike a traditional IPO, where allocations can be measured subjectively, the issuance of NewCo shares will be an egalitarian process. No prioritization of claims or special shares will be created, only one registered public share class.
For NovaWulf, issuing permanent capital gives them the luxury of time to work out Celsius’ mining operations and illiquid assets, giving NewCo opportunities to optimize its holdings. That option can be valuable.
In the aftermath of the GFC, Credit Suisse (CS) took advantage of the opportunity presented by the times. CS pooled “toxic” assets into a long-term capital vehicle to pay employee bonuses in a move similar to NovaWulf NewCo. Fund owners (certain CS investment bank employees) will be locked into the investment for at least 5 years. While it bought time for the pool’s asset managers to wait out the bear market, holders had to wait to cash in on their holdings. This trade-off paid off as the “toxic bonus” vehicle returned 72% by the end of 2009.
The future of tokenization
As cryptocurrency valuations declined, institutional finance invested in tokenization.
However, for tokenization to truly become mainstream, Cagney emphasized the need to build and continually strengthen the supporting infrastructure. Key to this effort is the use of trusted fiat on and off ramps, KYC/AML passes that enable investors to reuse credentials across platforms, and a regulatory structure [that works].”
While the Celsius bankruptcy provided unique circumstances to streamline the equity issuance process, it is illustrative of the types of opportunities Figure has seized to advance the use of blockchain in finance. The company has received several inquiries from restructuring firms that want to recreate the Celsius plan. When the right pieces fall into place, Cagney believes, “any security that can be digitally represented will be traded on the blockchain.”
