Bill Barhydt is the kind of smart person other smart people listen to. Before becoming an investment banker at Goldman Sachs, he developed rocket simulations at NASA - the fancy term is computational fluid dynamics. He spent the early days of the Internet age at Netscape, leaving behind the high-paying job on Wall Street. Long before anyone used the term "DeFi," he was founder and CEO of Boom Financial, which implemented his insight that a brick-and-mortar bank can't do anything a smartphone can't. Barhydt's company and the iPhone both launched in 2007, and less than five years later he gave the first TED talk on Bitcoin - which undoubtedly inspired some thought leaders to invest $5 in buying a Bitcoin.
In his current incarnation as founder and CEO of Abra - a global crypto platform that offers a popular broker for buying and selling cryptocurrencies combined with interest-bearing wallets - Barhydt recently donated some of his time to CoinDesk Studios to answer our questions about how to draw passive income from digital assets. The conversation was shortened for clarity and brevity, but you can listen to the entire 20-minute conversation here.
Q. Abra offers up to 13% interest on stablecoin stakes. How do you do that?
A. Abra combines CeFi - centralized finance - with DeFi (decentralized finance governed by smart contracts). With cryptocurrencies, we can lend deposits to earn a return, and then - unlike a bank - most of that return is paid out to the depositor. The way CeFi works is simple: institutional borrowers or private borrowers deposit collateral, and depending on how much collateral they deposit, they can borrow a certain dollar amount, or in the case of institutions, they can borrow Bitcoin or Ethereum.
For example, if I want to borrow a million dollars and I want to do it for free, I would have to deposit $10 million worth of bitcoin, and then Abra would lend me $1 million with 0% interest. That's a loan-to-value ratio of 10% [or LTV]. If I want to put down less collateral, the interest rate would just be a little higher - and it gets higher and higher until I get to about a 50% LTV.
For the DeFi part, I can put USDC or another stablecoin into a DeFi contract and effectively lend that stablecoin into the contract - typically a lending pool - and get a return. These returns can range from a few percentage points to dozens of percentage points.
Sometimes these returns are not just in-kind, meaning the return is not just paid out in USDC. You also receive a token from the pool.
At Abra, we do mostly CeFi. We plan to do more in DeFi over time, but putting depositor money into DeFi positions is much more complex in terms of risk management, monitoring, and overall resources.You will see the tokenization of almost everything. It will start in other countries, where the systems will allow existing laws and processes to be overhauled, and the U.S. will have to catch up. But of course, as the largest market, the U.S. will eventually have an incentive and motivation to catch up.
Q. At DeFi, what do you see as forward-looking tools for passive income?
A. In the near future, we will allow Abra users to bet directly into DeFi, bypassing our ability to generate "curated" returns for them, and they will be able to pay directly into DeFi strategies.
In terms of risk management, these users are completely on their own. We will try to select some of these opportunities to find ones that we believe have been vetted, where the smart contract code has been carefully reviewed and cleaned up, and hopefully have been in operation for a while. But at the end of the day, that's a risk to the consumer compared to our existing return products where the risk management processes are with us (Abra and its banking partners).
That (direct investment in DeFi) is not for everyone, but that's the benefit of working with a company like Abra. You can make those decisions for yourself.
We'll see how this area evolves over time, but for me, DeFi is a tool. It is a set of protocols that have inputs and outputs. It just so happens that the inputs have financial value and the outputs have financial value. We will see how both consumers and financial institutions will use these protocols over time.
People need to spend a little time getting an idea of where this area is going. It's better to do that than to blindly trust a service provider. We've been brought up to trust only the banks. And that hasn't worked.
Banks have negative net promoter scores. I have never seen another company with a negative NPS score. For some banks, every new customer they gain lowers their overall reputation - which shouldn't be mathematically possible, but it is.
Q. Interest rates are rising, and last month was not good for the crypto market. How do you deal with loans that could suddenly be underwater?
A. We don't actually get loans that are underwater because loan-to-value ratios are very low. So it's incredibly rare. A consumer loan doesn't go underwater because the loan-to-value ratios are too low. On the institutional side, only companies with huge balance sheets get high LTV loans, and they get a 24-hour collateral requirement. That happens all the time, and we've never seen a company miss a collateral call, and we manage over $1.5 billion worth of those positions.
In terms of interest rates, the interest rates of banks and cryptocurrencies are kind of parallel universes. Crypto has its own interest rate curve. Remember, most crypto borrowers cannot yet turn to the traditional banking system to borrow. If you go to a bank with bitcoin, they don't want to talk to you. They'll take a yacht as collateral, but not bitcoin. It could take six months to sell the yacht, whereas you can sell Bitcoin in six minutes. That doesn't really make sense, but that's our opportunity.
These two worlds will probably converge over time, but that could take 10 years, maybe longer.
Q. In the meantime, do you see opportunities to better leverage cryptocurrencies as securitized tokens?
A. I've spent a lot of time thinking about the implications of this. The conclusion I come to is that other countries will lead the way in this regard. The U.S. is overwhelmed not only with 80-year-old regulations (the Investment Company Act of 1940, which regulates mutual funds), but also with a myriad of regulations that make the whole thing an incomprehensible primordial soup of nonsense. A government like Singapore will simply see through all of this and say, "This is the right thing to do to enable securitized tokens." It could easily take decades for U.S. regulators to get to that point.
But that's what's going to happen. You will see tokenization of almost everything. It will start in other countries where the systems allow them to leapfrog existing laws and processes, and the U.S. will have to catch up. But of course, as the largest market, the U.S. will eventually have an incentive and motivation to catch up.
The idea of collateralized crypto loans, tokenized securities, and even the ability to enter into calls and puts against tokenized versions of real assets is extremely compelling to me.
Q. In one of your Money Talks podcasts, you say you'd like to see cryptocurrencies in the U.S. regulated by just one agency. But the next financial asset to be regulated by only one U.S. regulator will be the first. You mentioned Singapore. Are there other places that you think will take the lead when cryptocurrencies go mainstream?
A. We've talked to a lot of governments directly, and some of them are very small: Singapore is obviously a very small government that has been very aggressive in crypto and fintech. Bermuda has a very aggressive policy on digital assets, which makes a lot of sense for companies that may not even touch the fiat system.
Wyoming, right here in the U.S. - their SPDI (Special Purpose Depositary Institution) charter doesn't require FDIC insurance if you don't touch cash.
These regulatory systems are taking a hard and appropriate look at the digital future and asking, "How can this be reconciled with the traditional financial system?"
Q. Does this impact where Abra is headquartered or where it operates?
A. Yes, of course. You have to go where the customers are - where the puck is going, not where it's been (paraphrasing Wayne Gretzky's most famous quote). We think about that a lot.
I've given examples of where some of the smart regulators and forward-thinking members of Congress are operating, and I think they're going to make great gains from it. I would be shocked if a lot of companies didn't set up in Wyoming, Singapore, or Bermuda.
And we're looking at all of that. We originated in Silicon Valley as a traditional C-Corp with investors holding stock, but I'm not sure that's the way of the future. If I can create a liquid DAO (decentralized autonomous organization) with open source developers that focuses not on cash flow but on the benefits of what I'm building, then over time everyone can benefit from that benefit, then the perspective really changes. That's a technology-driven movement toward decentralization. And we're not yet in a position to have a regulatory discussion about what that means.
Abra is a simple and secure app that allows you to trade over 110 cryptocurrencies, get loans at 0% interest using your cryptocurrencies as collateral, and earn interest rates of up to 13% per year on Stablecoins and 7.15% per year on Bitcoin. Join nearly 2 million users by downloading Abra from the Google Play or Apple App Store. Do it today and get $15 in free cryptocurrencies as soon as you fund your account. You came, you invested, now conquer. Abra - Conquer Cryptocurrencies.