#18 Tom Pocock of CreditMint on Decentralising Corporate Lending and the Death of Utility Tokens

By Nasos Papadopoulos, EF Head of Content

Tom Pocock is the Co-Founder of Credit Mint, a company that’s decentralising corporate lending by using a public blockchain as the shared ledger for corporate debt.

The corporate debt industry is migrating from a bank-led model towards smaller lenders. But these new-wave lenders are tied to constant cycles of reconciliation, and trading is slow and expensive. On top of this, companies lose track of their creditors and the market is structurally illiquid.

That’s where CreditMint comes in - they fix these problems by using a public blockchain as the shared ledger for corporate debt. They provide a dealmaking platform, a trading layer and a settlements facility, all communicating with one digital asset on Ethereum.

Tom met his co founder Zac before they joined EF and since founding the company, another 2 ex-EFers have joined the Team – Joe Andrews and Arnaud Schenk – making CreditMint a perfect example of the magic of the EF mafia.

Tom studied Mathematics at undergraduate and postgraduate level at Cambridge before a career in finance spending three years at debt fund Park Square Capital.

After qualifying, he left immediately to explore his ideas to decentralise the financial system through blockchain technology and applied to EF after meeting his Co-Founder Zac.

In this episode Tom and I discuss:

- Why Tom left the finance industry to start a crypto business  
- The current state of the crypto space and Tom’s predictions for future developments, including the death of utility tokens
- Tom’s lessons on raising money after a gruelling few weeks of fundraising

So whether you’re curious about what it takes to start a blockchain business or want to find out more about the future of the capital markets this episode has you covered.


Why Utility Tokens Aren't The Future of Crypto

The Evolution of Truth Capital

"In twenty years we'll wonder why we ever held deposits in a bank"


Nasos: 03:00     Tom, welcome to the show.

Tom:  03:02     Thanks Nasos, it’s great to be here.

Nasos: 03:03     It’s awesome to have you on. To kick us off, can you tell me a little bit about what you do at CreditMint, and how it's going to change the world?

Tom:  03:11     At CreditMint, our grand vision is that blockchain is here as a piece of equipment to enable the financial economy to become more bilateral. Today, what we’re focusing on is a lot of company lending which is done in a way that is heavily centralized. It's done between very large banks and companies. It's very hard for those banks to release the capital from their balance sheets. There isn’t often a ready market there to get rid of that capital, and we see the economy going away from that very leveraged, very centralized model, towards people like you and I lending directly to companies, rather than having intermediary banks sitting in between with lots of borrowing and leverage.

 With CreditMint, we're focusing on one particular asset at first, which is called the syndicated loan. It's a surprisingly enormous economy, with about 4.1 trillion dollars of issuance every single year around the world, yet somehow people don't know it. People know about bonds, they know about equities, but the syndicated loan isn't very well known at all. Actually, it's how a lot of companies of a certain size finance themselves. They take out a loan from a bank, or a cluster of banks. The loan might be 100 million, or 200 million dollars in size, and it ends up being held by a relatively small number of eventual lenders. We think that we have the infrastructure through a public blockchain to be able to reduce the threshold for buying and selling that debt.

Nasos:  04:50     We'll go into a little bit more depth about the capital markets and the crypto space in a bit, but I'm curious, what is your personal motivation and interest for starting a business in this field?

Tom:      05:01     I think the really exciting thing about blockchain, particularly a public blockchain, is that it has the capacity to delete a lot of money and a lot of borrowing from the economy. That might sound like a bad thing, but actually a lot of money in the financial economy is just inter-institutional liabilities. It's not really doing anything economically useful or serviceable, it's just bank A lending to bank B, and bank B lending back to bank A, which creates a lot of charges, fees and a lot of systemic risk in the financial system, but it's not very financially useful.

The great thing about a blockchain is that it will allow people like us to invest directly in companies, lend directly to companies, or to other people in the very long term. To do so, trusting the companies, without needing a lot of institutions standing between us and them. In other words, blockchain will be able to delete a lot of gross capital from the economy, such as big balance sheets, lots of assets, lots of borrowings, but actually to retain the same amount of net capital in the economy, in other words, the same number of companies, equity and debt.

Nasos:  06:14    When you were working at Park Square in a debt fund, what were the problems that you kept running into that made you realize that this was something that you could possibly solve through the use of blockchain?

Tom:      06:23     We realized that as well as that grand vision, blockchain had some more immediate benefits to bring to companies like Park Square. Park Square, as you say, is a debt fund. They're not very big, they're about 12 billion under management, which sounds enormous but it's not very big in the context of the bigger economic system. They were struggling with all kinds of things. They were reconciling their books against their internal systems and against other banks. The first thing that struck me was, “Wouldn’t it be great if they and all other lenders could just mutualize their data somewhere put it all in one place?” Really, where that data ought to be is the financial asset itself.

If you were able to codify that financial asset so that there was one, and precisely only one, point of record for that asset, that would do away with this kind of crazy Dickensian system of proprietary databases that the financial economy still runs today. Yes, we're all using computers and it looks very up-to-date, but we still have quill and ink and are retaining ledgers that we need to constantly compare to one another, no one is quite sure whether theirs is the most up to date version of events.

I realized that as well as the grander vision of deleting complication from the financial economy, there is also a more micro vision as well of just being able to clear away with all of those processes of reconciliation at the same time.

Nasos:  07:43     Were there any doubts going through your head about applying to EF and leaving a safe, cushy job at a debt fund, to go and start your own company? What were the things that were holding you back?

Tom:      07:54     There were none at all, actually. The day I qualified, I left Park Square. I was very happy there, I think they were a great place to do the line of business that I was there to do, but I'd read the Ethereum yellow paper. I was not alone in realizing that this had massive implications for reordering the entire financial economy and I wanted to be a part of that. I realized that where I probably had a niche was in this, at least at first, in this very localized area of the economy, the corporate lending space. I realized that I would be able to make the implementations that Park Square wouldn't feel like, "Okay, the aliens have landed. What the hell is this blockchain thing?" If you're going to migrate a multi-trillion-dollar economy onto a public blockchain, you've got to do it in a way that the incumbents really understand what they're getting out of it, and it doesn't look like some strange, foreign piece of technology they can't wrap their heads around.

I felt that it put me in a relatively unique position to build that technology. As far as the EF application came, that was a little bit later down the road. By that point, I'd already met my first co-founder, Zach, so we eventually joined EF in October last year.

Nasos:  09:11     Tell me about how you met Zach.

Tom:      09:12     It was a strange meeting, actually. I think he had come to ask me which accountancy firm he should apply to. My answer was, none at all. You don't need to spend very much time with Zach to realize that his talents would be grotesquely wasted in the financial services industry. Whilst I didn't necessarily realize he's the entrepreneur that he actually is, I was very struck by the depth of his understanding, both of economics, which is really surprising, but also his domain of expertise which is computer science. I think during my second or third meeting with Zach, I realized he was the one because he took me from high-level scripting languages right the way down to the processes that are happening over chip. He told me a bit about when he was really young, he built a 4-bit or 8-bit computer. I really don't understand what he was up to still, age 31. But I realized that his understanding of computer science was very complete and well-integrated with his understanding of economics.

Nasos:  10:28     What did the earliest form of that idea that you two were working on look like? Did you have some sort of working prototype? Something that was close enough to the final version of what you wanted to build, to get an idea of how it could evolve?

Tom:      10:42     I know Reid Hoffman's constantly talking about if you're not embarrassed by your first product then it's too late. We were thoroughly, thoroughly embarrassed by our first product. It was barely a product, it was barely a proof of concept actually. Zach had joined me in January of '17, and we were just trying to build the basics, mark contract circuits, what was tantamount to a sort of sham front end, but just enough to give people the confidence that this could work but with none of the enterprise grade development that we knew was going to have to go into this. Which is why our first focus was to try to widen out the team as soon as we could, to people who were web development experts, as soon as we joined EF.

Nasos:  11:26     Tell me about those first hires that you made, or the initial additions to the team of Joe and Arnaud as well, how did that come about?

Tom:      11:34     We'd initially avoided the slightly stressful speed dating arrangements on the EF away weekend and in rather sort of self-congratulatory way, we were thinking, "Gosh, aren't we relieved not to have to go through our rather poor dating practices to try to find a partner." Then we found ourselves doing just that three months later. Three months later, we realized both Arnaud and Joe had broken up with their teams, but we'd also identified that they were amongst the most talented web developers on the program. There was something more to both of them though, which is that they both had a great deal of economic understanding. I think Joe had been a CTO of a start-up, so he really understood how to run a business. Arnaud's an incredibly deep thinker in a number of areas. There was something more to them than just talented developers, and we identified both of them as people we wanted to try to bring onto the team, and we were very glad to be able to do so, Arnaud in December and Joe in February.

Nasos:  12:41     We can get into the specifics of the capital markets application of what you're doing, but tell me a bit more broadly about the trends that you're seeing in the crypto space at the moment. What's your take on the landscape and how do you see it developing?

Tom:      12:53     I think I've been responsible for upsetting quite a few people with my comments in this area, but I might as well keep hacking away at it while I’ve got the platform.

Nasos:  13:02     Please do.

Tom:      13:03     I think we're very suspicious of the kind of utility token model that's used to finance a lot of blockchain start-ups. This ICO really erodes out of the fact that bitcoin, Ethereum, they need this thing, a token. In and of itself you might say, no innate value, but it was the requisite piece of value on their platforms to bind all of the nodes on their network into consensus, which is the primary function of a blockchain, is to provide an economic basis for dispassionate consensus. That's the whole point of a blockchain. Then more start-ups, particularly those start-ups that have identified Ethereum as a platform that could be used to buy and sell goods, to create obligations, they realized it had to have all these additional purposes and then couldn't work out how to finance themselves.

They wanted to try to do what Vitalik had done, which was to raise an enormous amount of money on the backs of a few promises, but they had no real use for their token, and so the utility token has arisen as a result of the fact that people couldn't work out what the function of the token should be for. So they said, "Well, it's now just a payment mechanism. It's a widget, it's a thing you buy and sell in order to use our platform." I think the reason this really upsets is first of all, the token doesn't represent an asset or a service. Ethereum and bitcoin, to some extent they provided consensus. I had one paper sent to me which was about nursing on the blockchain, clearly it's illegal to collateralize nurses, right? We outlawed that. Slavery is not a thing you're supposed to do anymore and so often these services, or people's offerings, can't be collateralized, so that's why the token ended up being merely a payment mechanism. It was, "Well we need a token to justify raising all this money, we don't know what to do with it, therefore let's make it a payment mechanism."

Now, there are a few things that are wrong with this. First of all, you can introduce frictional costs on your protocol that simply do not need to exist. If we’re using Ether to buy or sell, I'd have much more liquidity in that Ether than in the token that's being used to pay for my services. That's the first thing. Second, you've also got FX risk. If I want to get into an Uber cab and I have to go buy an Uber token to do it, there's going to be a time I'm holding that Uber token and goodness knows what's happening on the Uber money markets outside. It might be worth less or more than when I bought it, and that's a clear economic inefficiency.

The third thing is the most damning indictment of the utility token. Let's put it this way. Here's the base layer, this is the Ethereum network, and you've built a protocol sitting on top of that, right? If Ethereum tomorrow becomes 10 times more efficient, then the net amount of time that anyone buying my protocol token is going to hold that token, has just fallen by 90%. It's fallen by an order of 10 times. That means all else being equal, subject to people buying and selling these tokens to speculate, the value of that token will also fall by 90%.

You manage to buy this thing that, yes to some extent is long the underlying and protocol that you're building, but is short the thing on which it depends for its survival. That's a crazy situation. It's economically illiterate and I think the utility token in its most basic form will go away. It'll be a very expensive blip in history.

Nasos:  16:48     I was going to say, how do you see that playing out, because obviously the implications could be pretty big, given the amount of recent activity in that space.

Tom:      16:55     Exactly, I think all that will go to zero. We've spoken to John Pfeffer quite a lot about this, he's got some interesting thoughts on it. I think the most worrying thing for blockchain investors generally, was that people are still trying to work out, “Where is the value going to go in blockchain? Does it go to the base layer, to the blockchain itself? Does it go to the companies building on the blockchain, building the smart contracts that are going to run our new financial systems?” It's really not clear at the moment, obviously a lot of the code that is doing the work of those protocols is open source, it's available for public scrutiny. So does that make IP slightly more difficult to defend? I think no one has quite yet worked out how to capture value with blockchain protocols.

Nasos:  17:39     How do you stay up-to-date on developments in the space? Obviously, it's something that you need to do to make progress with the company. Give me a sense of where you started off in terms of your knowledge of the crypto space and blockchain technology; where you've gone to and how you've got there, I'd be interested to know.

Tom:      17:57     Two years ago I didn't know what a hash function was. I was a pure mathematician in my background so anything ugly that involved numbers was just not going to be something I was going to get involved with. I think my entry point was the Ethereum yellow paper. It's highly technical, it's almost unreadable, it's basically like machine code. It took me a long time to realize that there is a new viable form of capital in this space which is what I call ‘truth capital’. I think it took me a long time to realize that it was the one new innovation that blockchain provides.

In other words, let's go to proof of state model. I take my Ether token and I stake it against what's effectively a node, it's actually called a validator. If the node behaves well and keeps approving good transactions that subscribe to the rules of the network, it gets an income. And if that node behaves badly, then that Ether's going to get slashed and taken away. It's like a piece of credit or a piece of equity. You're endorsing, in this case, a record of events, whereas with a piece of debt or equity, you're endorsing the behavior of a company. If that company does well, and it behaves as you think it will do, then you get some value out of that and if not, then you lose your value. It's actually really similar.

It observes a lot of those old economic principles, but I think it took me about a year and a half to realize that it was the real economic innovation of blockchain. Because people haven't done this kind of thinking more widely across the market, most people who are buying and selling these tokens have no idea why they should be worth anything, nor even why the technology's there, but they think they're investing and are actually designed to do and they're of hoping that their token goes up. That’s bound to end in widespread upset.

The people who have issued those tokens will have done very well out of them. I think there will be a ‘cold towel over the head’ moment in a year or two years time, when people realize, "Oh, that's what blockchain was for." It was really to provide dispassionate consensus, it wasn't about anything else and that's why we're not doing an ICO at CreditMint, but we're doing a traditional equity round in the traditional way because we do not provide consensus. We're using Vitalik's consensus.

As far as keeping up-to-date on other protocols, we're interested in some. I think DFINITY is a very exciting product. They seem to have what's known as finality mechanism, which allows blocks to be conferred very quickly and a way that seems to be very hard for bad actors to gain. But actually, when you're looking at a new protocol and something comes across your desk, you can flick through the white paper in a few moments and know, “Is there any substance here or is it just big words and loud noises?” That's actually not so difficult to do and the number of quality potential future blockchains that CreditMint could use for our syndicated loans is few and far between. There may be three or four protocols that we're looking at very seriously, but Ethereum is absolutely at the top of that stack at the moment. It's got by far the biggest head start.

Nasos:  20:55     Talk to me a little bit about the concept of truth capital then. I know it's something that you've spoken about at the crypto panel we had a few weeks ago and it's something that I think is important to your philosophy of the business and what you're doing. What is it and what does it mean?

Tom:      21:07     As I see it, truth capital is the ability to stake capital. I'm really talking about a world in which we move to proof of stake away from proof of work. By the way, that is controversial in itself and I'll come onto that later. It's hugely controversial, but if it works, it's quite a neat way to allow people to put capital up against simply dispassionate record keeping.

I was saying earlier, in a proof of stake world, you'll send your Ether to a node (called a validator) and if it behaves well and tests correctly to the events on the chain, then you'll get a return on that capital. That's why it's like capital, because you've actually got a claim on genuine economics. Those economics are being paid by people who want space on a block. They're people like CreditMint, who are going to issue loans, and those loans need to be traded. That's going to cost gas, and that's going to be transaction fees paid across a block.

For example, if I bought equity in Shell and it turns out that Shell actually is a rubbish company and tanks, then I'm going to suffer for that if I back a node that's not behaving correctly. It's another form of capital. In some ways it's not different in its basic innovation to equity or debt. It feels like a fresh asset class, but it observes all of the old rules of capital.

Nasos:  22:40     To put it into context, how do you think we'll be looking back on these conversations in 10, 15, or 20 years down the line? You were saying just before we started chatting about the way people used to talk about the internet back in the early '90s.

Tom:      22:52     Well, I personally think we'll really struggle to understand this notion of soft consensus which we live in today. Take your bank balance, and suppose you've got £1,000 in an account. We tend not to be so good at doing reconciliations today, but our parent’s generation were very, very careful about checking all the transactions that went through that account and making sure the balance made some sense. The bank does the same at its end. If those two counterparties, i.e. the person who owes the money, and the person who owns it, were held by the same ledger, you would not need that reconciliation ever again.

I think this whole idea of having banks holding the records of events for transaction histories, in which they have a partial interest. If a bank winds down your account by £500, then that's clearly in the bank's favor and not in your favor. Having a decentralized, dispassionate record of events for the sum total of those transactions so that you and the bank both trust it, but the record of events are held by people who don't care. They're economically incentivized to behave well, I think we'll really struggle to understand why we ever held deposits in a bank. I think we'll have to tell the next generation, "Well look, it was that or the mattress. Those were the only two choices we had." I think dispassionate consensus is going to be something we're really going to struggle to work out how we ever lived without.

Nasos:  24:25     So you're coming to the podcast off the back of a few grueling weeks of fundraising. What have been the main lessons you've learned?

Tom:      24:33     I think the thing that surprised me the most is how much VCs talk to one another. I assumed it would be like the industry I was in, where everyone keeps very quiet about what they're working on, they don't want anyone else to know. VCs talk to one another all the time and you don't realize until you get there how easy it is to end up in this massive aircraft holding pattern. It sounds a bit like Heathrow airport, where the planes are all in long circles waiting for the next one to land, and you can end up with these circuits of pure tail-chasing. I hadn't realized that, and we were fortunate that we did have a first event who broke what I was starting to become concerned might become a deadlock. Once one person moves, then everyone moves, and I think that's what really surprised me.

I would have assumed everyone kept their own deal flow to themselves but actually, there's so much migration between funds. One analyst is at one fund and then you call them up two months later and it turns out they've moved to someone else you've also been speaking to. There's a lot of cross-pollination in this industry and that's been an eye-opener for me.

Nasos:  25:49     We spoke before a little bit about the experience you had when you realized you had to build this zero-knowledge protocol, otherwise it was going to be curtains for CreditMint. Have you had any other experiences where you thought the company was going to die, and how did you get through that moment?

Tom:      26:03     I think I was worried at a few industry and potential client meetings, when I was espousing the virtues of blockchain, saying, "Look, we'll be able to bring perfect transparency and liquidity" You just see a tensing of the shoulders and you realize you've said something that might be a heresy. Often it's a heresy, not because they don't want it, but they don't want someone else from outside to be enforcing it. What I have learnt in client meetings is that you've got to be a bit more like a shrink and let them talk to you and tell them what problems that they have, rather than going in and telling them what problems you think that you're going to be able to solve.

Which is surprising to the extent that I thought they would want a technology company to come in and say, "Here's how the world is going to be tomorrow," and present you something close to a fait accompli. I think I've learned the lesson not to go in and data dump, but rather ask them a lot of questions about what they're suffering. Often they will volunteer. They'll say, "We could do with a virtual data room that has a capacity to show management interviews," or whatever it might be. They'll offer you what you were going to present them with in the first place, but I think structuring a meeting that way around has been a surprising tactic for me. It works a lot better than telling them how the world's going to be in 20 years.

Nasos:  27:25     Let's end on that note then. Tom, thanks so much for coming on, it was a pleasure chatting with you.

Tom:      27:29     Likewise, thanks Nasos.



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