Interview with Benjamin Peillard, founder and CEO of Cap, an onchain credit platform backed by financial guarantees or loan insurance, which is backed by Franklin Templeton.
1. Many people would say private credit markets are having a bad moment – what would you say to the skeptics about how Cap addresses such concerns?
The specific concerns people are having right now about private credit center on the double pledging of collateral. Private credit has always used CLOs, collateral loan obligations, to protect their lenders from default risk. The recent scandals have stemmed from a few companies double-pledging the same collateral to multiple private credit funds, which resulted in hundreds of millions of losses when there were defaults.
There’s no place to hide on the blockchain, and so if one of our borrowers has collateral pledged to them by an underwriter, it’s impossible for that underwriter to pledge it to somebody else at the same time.
2. What lessons did you learn from your experience in traditional finance at Citi that you are applying to Cap’s solution?
Based on my experience of working at Citi, I understand that it’s very unlikely for crypto teams to be able to underwrite credit better than regulated institutions with all the resources at the disposal of institutions. The only way to compete with regulated institutions is to rely on markets to underwrite credit and utilize smart contracts, because the market will always be better than individuals.
3. How pivotal is the use of blockchain technology in Cap’s platform?
Our use of blockchain technology is essential. Cap’s great innovation is introducing an automated credit marketplace that ensures every loan is backed by onchain financial guarantees or loan insurance. We’re relying on code rather than individual people to protect users. Blockchain-based smart contracts provide the infrastructure to do that securely and in a tamper-proof way.
4. What’s the biggest innovation that Cap brings to private credit markets?
Our greatest contribution is introducing a market-based allocation of credit. Because we’re built on smart contracts, we can create a marketplace for autonomously allocating credit in a way that could not exist if you didn’t have smart contracts.
Generally in private credit, you have to rely on individuals coming together to make decisions on where to allocate capital. This process is inefficient and tends to generate mistakes, including allocating capital to high-risk entities that may be likely to default on their loans.
Cap’s open market built on the blockchain enables anyone to interact with it, increasing access, and it relies on underwriters who have some edge or insight into the borrowers to “vouch” for them by putting up collateral. This system makes Cap way more scalable and competitive compared to legacy models.
5. The convergence of TradFi with DeFi is becoming more commonplace. In what ways does Cap deepen this integration?
The TradFi institutions that are borrowing from Cap today have never used crypto before. DeFi is completely novel to them. And certainly they do not borrow onchain. They borrow from Citibank. They borrow from private credit funds. So to see them borrowing onchain is already a huge step.
In the future, we want to explore more on the supply side, connecting to traditional venues where capital allocators deposit funds for yield. We are working towards integrating with asset managers and hedge funds on this front.
6. When you’re speaking to legacy financial institutions, what do you emphasize about the benefits of Cap for opportunities in private credit?
We emphasize specifically what helps them with their KPIs. Every institution will have their own KPIs, and the reality is that they’re not coming to Cap or the blockchain because they love decentralization.
They’re coming to the blockchain because it’s a good deal for them. So for the asset issuers like Fidelity or Franklin Templeton, they’re coming to Cap because we can give them distribution, a new use case for their assets, which helps them build their AUM.
For the borrowers, we’re much faster at originating loans, and we’re at a competitive rate compared to other venues, and so that’s what attracts them to Cap.
7. How is the messaging different when you speak with digital asset companies seeking to enhance their access to liquidity with Cap?
When speaking with digital asset companies, the conversations are much more technical. We really focus on the product and how it ties into their capital flows.
8. If you succeed in aligning incentives between parties, what does that outcome look like?
The goal is to provide safer yield products for the average investor that do not sacrifice on performance. Currently, a lot of people are stuck with the U.S. Treasuries’ yield. Even mainstream brokerage platforms market U.S. Treasuries as a high-yield option, which is not high-yield. The average US treasuries’ yield is 3.7% for a 1 month term. Cap’s yield is 5.4% with verifiable principal protection, supporting our ultimate goal of making a higher yield safer for the broader consumer.
