Interview: Jack, BlockBeats

Compiled by: Sharon, Jaleel, BlockBeats

Edited by: Jaleel, BlockBeats

DeFi is slowly expanding beyond the crypto community and having an impact on the real world.

Since the beginning of the year, the TVL of the RWA market has been continuously increasing, and discussions about RWA (real world assets) have become more frequent. RWA is the mapping of assets in traditional markets onto the blockchain in the form of tokens, for web3.0 users to buy and sell. The tokens of RWA have the right to receive the income of the assets. Some entrepreneurs have also adjusted their direction to the track related to RWA, hoping to accelerate business growth with the support of the gradually warming narrative.

Maple Finance is an institutional capital network that launched a licensed KYC loan guarantee loan project in 2021. It provides infrastructure for credit experts to conduct on-chain lending business and connects institutional borrowers with lenders. Maple Finance does not use the standard DeFi collateral model, which relies on reducing collateral assets in case of insufficient payment, but allows users to provide low-collateral loans to well-known companies based on reputation.

Sid Powell is the CEO and co-founder of Maple Finance. He founded Maple with co-founder Joe Flanagan in 2019. Sidney has a background in debt capital markets and institutional banking, having previously served as a senior manager at National Australia Bank and as the financial controller at Angle Finance.

During his career in traditional finance, he participated in the issuance of corporate bonds worth over $3 billion, established and operated debt financing programs worth over $200 million, and managed finances at a commercial loan fintech company. They believe that blockchain technology can solve the inefficiency problems of traditional markets and have developed Maple Finance to bring the debt capital market onto the chain.

Based on the background of such a founding team, it is not difficult to understand why Maple Finance, which was previously one of the market leaders in the private credit field focusing on unsecured cryptocurrency loans, has increasingly ventured into RWA-based loans in the past year as the RWA narrative heats up.

By taking advantage of the increased demand for US Treasury bonds, Maple Finance launched a US Treasury bond fund in April of this year, allowing non-US accredited investors and entities to directly access US Treasury bonds. On June 29th, Maple Finance's new lending department, Maple Finance Direct, announced that it will issue over-collateralized loans to Web3.0 businesses, with BTC, ETH, and collateralized ETH as collateral assets.

Today, during the TOKEN2049 conference in Singapore, BlockBeats exclusively interviewed Sid Powell, the CEO and co-founder of Maple Finance, to learn about the work and story behind Maple Finance over the past year.

Unsecured loan default is not a problem unique to DeFi

Currently, Maple Finance is one of the market leaders in the private lending industry, with over 332 million US dollars in outstanding loans. Looking back at the end of last year, Maple Finance experienced significant market turbulence due to the default of its unsecured loan partner.

On December 5th, 2022, Maple Finance, the largest unsecured loan agreement on the chain, announced that due to significant misrepresentations of its financial condition by its partner, Orthogonal Trading, the agreement faced significant default risks. Maple Finance will terminate all cooperation with the company (including revoking Orthogonal Trading's agent qualification for its subsidiary, Orthogonal Credit) and seek all appropriate legal means to recover funds.

According to the announcement and The Block's follow-up disclosure, Orthogonal Trading concealed the fact that the company was already insolvent. As an agent for the USDC pool and WETH pool managed by M11 Credit, Orthogonal Trading borrowed approximately $36 million and continued to delay repayment, putting the Maple Finance protocol and all depositors at risk of significant losses.

Related reading: "Maple Finance faces $36 million malicious default, is unsecured lending a false proposition?"

Regarding this, Sid Powell believes that this type of risk is not unique to the uncollateralized mechanism, but rather a systemic risk brought about by the entire financial system.

BlockBeats: As you may already know, many institutions and protocols have encountered default issues in their lending activities on Maple Finance. How do you view the future development of unsecured loans in DeFi? Can it really succeed?

Sid: I think so. There are also many unsecured loans in conventional banking systems, so this is not a problem unique to DeFi. In economic cycles, all lenders will face more default risks. Therefore, in the DeFi field, there have been some defaults on unsecured loans since last year, and recently there have been defaults on some other real asset platforms. A few weeks ago, there was a default by a borrower in an emerging market. In addition, I believe that three projects are currently in violation of contract terms. Although these are secured loans, they are still facing difficulties. This is because we are approaching the end of the credit cycle and default rates are rising.

Therefore, I believe this highlights the importance of credit expertise, which is what we strive for at Maple Finance. If you look at where our current products are positioned, we are trying to select products that we believe have lower risk. For example, tokenized government bonds, where the risk is the US government defaulting; over-collateralized loans, such as the loan issued this morning with ETH as collateral, where the collateral value is 2.5 times the loan amount; and the actual asset lending we are currently doing, such as tax relief. So fundamentally, this is a help plan provided by the US government or the US Treasury for small businesses affected by the epidemic, and it is a choice with lower default risk because it is a plan paid for by the US government.

We try to avoid loans to emerging markets because we believe the risks are higher and we have difficulty assessing the risks there. Although you can get a return of 20%, which is higher, you may lose 100% of your principal if the loan cannot be fulfilled. In addition, we have limited testing or experience with the legal systems of those countries and cannot ensure that we can recover our money, while in the United States, the United Kingdom, or other developed markets, we can be more confident in obtaining some returns in the legal system.

BlockBeats: What are the main achievements and accomplishments of Maple Finance in the past year?

Sid: I used to work in a bank, so I want to establish a lending platform to help innovative companies obtain funding. Traditional banks are very conservative and they do not really promote innovation or bring about development in new technology fields. Therefore, we want to create a new technology platform or lending platform to achieve this goal. Maple Finance has a pool of funds that provides loans to institutions. The work of Maple Finance is based on blockchain, and every loan and repayment has a record on the blockchain.

Since its launch in 2021, we have helped facilitate approximately $2 billion in loans. Initially, Maple Finance primarily provided unsecured loans to market makers and trading firms; over the past 9 months, we have focused on expanding our product range. So now, Maple Finance not only provides unsecured loans to trading firms, but also offers tokenized T-bills (Treasury-bill, referring to US government bonds). This is a product that is suitable for startups, DAOs, and people who have just raised funds. For them, this allows them to hire more developers with interest, and we have found that they really like this feature because banks do not provide services to companies engaged in cryptocurrency business.

The second new business we are working on is a mortgage-backed digital asset lending business. The lesson from last year's CeFi lending is that you don't know what happened to the loan and whether they performed well. People only found out there was a problem when they tried to log in and found their accounts frozen and unable to withdraw funds. So what we are doing is transparently recording all loans on the chain, and all collateral is held by a custodian. And it is secure, not re-pledged, and people can see its existence. In fact, we just completed the largest loan to date with this product, amounting to $5 million, which we launched just a month ago.

The third business is real-world asset lending, which is also an area that people are very interested in now because they want to see cryptocurrencies have an impact outside the crypto field. This infrastructure actually provides useful services for real-world businesses. Therefore, we provide tax-deductible loans to small businesses. The benefit of doing this for small businesses is that they can hire new employees, expand their business, and inventory. But this is the real world, so it has nothing to do with cryptocurrencies. Our Total Value Locked (TVL) has actually returned to $58 million, so we have grown four times in the past few months.

Establishing US Treasury bond products is our tactical opportunity

BlockBeats: How do you view policy risks such as a decrease in government bond yields or interest rates if the Federal Reserve adjusts its policies?

Sid: This is why we have diversified our development. I think other products, such as those of big companies, only have one type of national debt product. So if the Fed adjusts its policy and lowers interest rates, those products will result in profits that are not enough for people to earn, and they may only be able to earn profits of about 15 to 25 basis points. For us, this is a combination product. We allow people to invest in national debt, and then they can choose to cross-sell or increase sales of higher-yielding products. But if they want to reduce risk, they can return to national debt, but overall we will keep them on the Maple Finance platform, rather than like those companies that only invest in national debt. So we are currently working hard to provide diversified services for a comprehensive debt capital market.

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BlockBeats: You just mentioned government bonds, and there is also a very hot topic about risk-weighted assets (RWA). How do you view the development of government bond products and the entire RWA?

Sid: Yes, Maple Finance is one of the top three providers of national debt agreements. Currently, we have tokenized around $27 million in national debt, so I believe we definitely fall into this category. Other companies include Ondo, Matrixport, and even Franklin Templeton, a global investment company, has related products. Our use case is that startups want to hedge against inflation. For example, the inflation rate in the UK may reach 10%, so startups want to protect their purchasing power.

They invested their funds in national bonds, which provide capital protection and decent returns. This product may not have been viable last year because the yield on national bonds was too low at the beginning of last year. So this is a tactical opportunity, and we see the opportunity to establish national bond products, as people begin to reduce risk and seek good liquidity when national bond yields rise. Therefore, we provide people with a way to immediately earn interest and then redeem it within 24 hours. We offer daily redemption, which is very liquid and suitable for startups and asset managers who only want to temporarily store some cash but need to withdraw it quickly.

BlockBeats: What direction will Maple Finance move towards in terms of product development?

Sid: I hope that Maple Finance can become the preferred alternative to CeFi lending because of its transparency and lower risk. At the same time, I also hope that Maple Finance can become the leading platform for real-world asset lending, and our product development is advancing both of these goals. However, in terms of real-world asset lending, we hope that institutions will gradually adapt to the idea that the cost of lending on the chain is lower. The management fees they pay are only about 50% of those when using traditional credit funds. Because we operate on the chain, we can provide lower costs and better liquidity. Typically, they may need to lock up funds. If they choose a credit fund, they may need to lock up funds for three to five years. However, with Maple Finance, you can borrow and use this technology for a short term, such as one or six months.

As time goes by, I hope to attract more people to participate in this way, and ultimately I hope that Maple Finance can become the world's largest lending platform, but we will also focus on the technology field. Therefore, I really hope that we can fund some projects that reduce energy costs, such as nuclear energy. Banks will never fund such projects, only venture capitalists are doing this. So I think this is where our advantage lies, choosing new technologies and supporting their growth. This is the function of the capital market.

"Choking Point Action 2.0" cannot stop the trend

Since February of this year, rumors about US authorities wanting to strengthen regulation have been increasing. Multiple sources, including Coinbase CEO Brian Armstrong, have claimed that the Federal Reserve and financial regulatory agencies are taking massive action to pressure banks, preventing crypto companies from obtaining bank accounts and cutting off the connection between cryptocurrency and banks.

And banks such as Signature Bank, Silicon Valley Bank, and Silvergate Bank, which have been friendly to the cryptocurrency industry, have been liquidated one after another since March this year. Recently, the SEC has sued four large cryptocurrency trading platforms, accusing them of violating US securities trading regulations. Many people call this wave of regulatory pressure "Operation Chokepoint 2.0" and believe that it is a liquidation and suppression action "carefully planned by the US government and regulatory agencies to expel native cryptocurrency companies and control Bitcoin".

Source: LinkedIn

Against this backdrop, Maple Finance has completed a new round of $5 million financing, led by Tioga Capital and Blocktower Capital, with participation from GSR Ventures, Cherry Ventures, Veris Ventures, The Spartan Group, and others. The new financing will be used to expand Maple Finance's global services, with a specific focus on the Asia-Pacific region. Multiple jurisdictions in the region, particularly Singapore and Hong Kong, will also be used to build its newly launched pure lending division, Maple Finance Direct.

BlockBeats: Maple Finance has been around for quite some time, and you recently conducted another round of fundraising. I would like to know why you chose to conduct another round of fundraising, and where this funding will be used?

Sid: This fundraising is to extend the funding reserve period of the project. We have raised approximately $5 million, which can support our project operations until 2025. Due to the difficult environment, we are cautious and unsure how long this challenging situation will last. Therefore, our choice is either to enable the protocol to generate more revenue (which is what we originally intended to do), or to protect ourselves and ensure sustainable development and valuable technology. We believe that we can carry out this round of financing. Strategically, we hope to expand more business in the Asia-Pacific region and Europe. We believe that this is a very good area, such as Hong Kong and Singapore, where they are very forward-looking in terms of regulation and there are many financial technology companies. Therefore, we hope to cooperate with them and start using DeFi technology to help them expand their business.

BlockBeats: What considerations are there for expanding business in Asia and Europe?

Sid: In Asia and Europe, people can borrow money there, but we can also obtain funds from there. Family offices, high net worth individuals, and funds can actually invest funds into our fund pool, and then these fund pools can be used for loans, tokenized national debt, or loans in the United States or Europe. Alternatively, (people in Asia and Europe can) absorb funds, but there is still some risk involved. At the same time, trade financing from Singapore is still a very conservative way of borrowing. What we do is connect different capital markets.

Integration: DeFi needs to reform CeFi

BlockBeats: How do you view the boundaries between DeFi and CeFi? Should there be boundaries between them, or should they be integrated?

Sid: I believe that in order for DeFi to truly have an impact, it must be integrated with the financial system. Therefore, I think the initial form should be to establish partnerships to help people move from stablecoins to fiat currency. So I think we need more stablecoins to conduct more business activities on the chain, and then we need more access points. At the same time, we need more banks to allow people to convert stablecoins to fiat currency, or to work with companies like Coinbase and Circle to enable people to convert from stablecoins to fiat currency, whether it's USDC, USDT, or DAI.

As for DeFi, I believe it is a better form of infrastructure for the financial system. The traditional financial system is already very old and it used to be perfect, but with the development of digitization, we have to add additional parts to it, resulting in a Frankenstein's monster-like situation where each bank runs its own system and communicates through text messages. This is the system in Switzerland.

Therefore, I believe it may be time to completely reform the entire system. This is what I understand as DeFi. Therefore, DeFi must be integrated with the banking industry, and I believe new banks will emerge that use DeFi themselves. From what I understand, the Cygnet system is a fork of Ethereum and is the most reliable way for real-time settlement, and it is a bank that uses blockchain technology. JPMorgan is also building its own internal blockchain settlement system, so I believe we will eventually see new financial institutions built on top of blockchain. At the same time, I do not believe that the entire DeFi needs to be licensed. Some of DeFi does not require a license, and there may be some that do, such as Uniswap, which is a good example of a non-licensed DeFi, but lending may require more licenses.

Trend: Fiat Currency Will Become History

BlockBeats: Earlier you mentioned Coinbase and Circle, in fact, regulatory agencies have been cracking down on these platforms.

Sid: Regulatory agencies have been shutting down these platforms, so the "Choking Point Action 2.0" has made it more difficult for the cryptocurrency industry to interact with the banking system, leading to stagnant business activities and increased communication costs. This is the reason why the T-Bill product exists. The services provided by banks are too poor, the processes are too slow, and there are various hidden costs, resulting in a poor user experience. Therefore, people can choose to pay some costs in exchange for better services.

We may be more expensive than ordinary currency market funds or other savings products, but the problem we are trying to solve is to protect people's funds. We can provide a stable and conservative interest rate, and we will charge a small spread, while borrowers will also receive a small spread. Therefore, if regulatory agencies adopt another approach and allow people to transfer funds more freely, the user experience will be much better and more funds will flow in when using platforms like us or others.

Overall, we need more stablecoins and more bank access points, and you can see this trend now. I think Circle has done a good job in establishing these partnerships. Ultimately, people won't really go back to fiat currency, and you will continue to use stablecoins and use your Visa card for consumption, and you won't see it being converted to fiat currency in the background. And more and more, (using stablecoins) is like having a mobile phone. The earliest people who owned mobile phones may have used them on landlines, and then you started using (mobile) phones primarily. I don't know anyone who still uses landlines now, and the situation with stablecoins will be the same. In my personal consumption and banking business, I use stablecoins about half the time and fiat currency about half the time. Eventually, I will completely abandon fiat currency.

BlockBeats: Is there anything you would like to say to your readers in China?

Sid: We view DeFi as a global capital market, so I hope to integrate with the ecosystem and capital markets in China through Maple Finance. My vision is that DeFi will allow us to break free from independent capital markets around the world, whether it's mainland China, Europe, or the United States, and I hope that ultimately capital elements can flow globally.

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