Last week Figure Markets announced the launch of its YLDS ‘stablecoin‘, which is novel in several ways, including that it offers a yield and is registered with the U.S. Securities and Exchange Commission (SEC). YLDS is quite different from the biggest stablecoins in offering a return, but also has higher risk.
Under current U.S. laws, if an asset provides a yield then it’s a security, which is the reason Figure needed to register with the SEC. Not only does it offer a yield, but it is available to U.S. retail users and institutions. Interest accrues daily on the asset, and it pays out monthly.
Today the big US stablecoins don’t offer a yield, but U.S. citizens can earn yields on tokenized money market funds, which will often provide a better return than YLDS.
YLDS is issued on the Provenance blockchain, the permissionless ledger founded by Figure. A sister firm, Figure Lending, is involved in the mortgage sector and has registered more than $13 billion in mortgages on the Provenance blockchain.
“We see tremendous applications for YLDS,” said Figure Markets CEO, Mike Cagney. “Exchange collateral, cross-border remittances, and payment rails are some of the immediate opportunities. But we see this as a catalyst to a much larger migration of TradFi to blockchain.” They also envision wrapping the asset for use on other blockchains.
Figure has been trying to bridge the gap between TradFi and Defi for years, but has often been frustrated by regulators. It was one of the movers behind the USDF Consortium for DLT-based interbank payment, which was repeatedly blocked by the FDIC. Eventually the consortium gave up.
YLDS may signal a future path with fewer obstacles.
Last year the Figure group switched focus to crypto with the launch of Figure Markets, which initially is mainly a crypto exchange.
How YLDS differs from a typical stablecoin
With US stablecoin regulation as a work in progress, it remains to be seen whether the United States will regulate the use of the term ‘stablecoin’. The challenge is one of due diligence – users will make assumptions about the nature of the assets and often won’t check the details.
The assets that back YLDS will be invested in “the same securities that prime money market funds hold.” Prime money market funds are higher risk than the money market funds tokenized by BlackRock and Franklin Templeton, because ‘Prime’ means including private assets such as asset backed securities, not just government securities.
The mortgage arm of Figure has previously issued asset backed securities, so it’s not clear whether that might be amongst the YLDS assets.
Technically, the issuer of the stablecoin is Figure Certificate Company, a wholly owned subsidiary of Figure Markets.
The most highly protected stablecoins such as PayPal’s USD are issued by a ringfenced trust. This means in the case of the bankruptcy of an issuer, the assets clearly belong to the stablecoin holders.
Other stablecoins such as USDC do not use a trust, but there is an attempt to segregate the stablecoin reserves from the company’s assets, although some of these arrangements might need to be tested in court.
However, YLDS’ assets are not ringfenced. A quick read of the issuer’s disclaimer shows that “Figure Certificates are unsecured and solely backed by the assets of Figure Certificate Company (FCC), who is the issuer of the Certificates”.
Comparing YLDS to money market funds
While the YLDS token offers a far better return compared to mainstream stablecoins it provides a lower return than some of the most popular money market funds, despite its higher risk. YLDS provides a return of SOFR less 0.5%, which today equates to around 3.8%.
Both Franklin Templeton and WisdomTree offer tokenized money market fund yields of 4.5% or more and are available to US retail investors. Plus, the assets are in lower risk government securities.
Doubtless, Figure will lean into its technology prowess to offer more innovative features to set it apart.
Meanwhile, Ledger Insights has a simple framework for assessing stablecoin risks which it’s demonstrating in the new Mastering Stablecoins course. See below.
