Abra: The Future of Crypto Banking (w/ Bill Barhydt and Raoul Pal)
ASH BENNINGTON: If you love our crypto content or are looking to learn even more about crypto, be sure to checkout and subscribe to our new youtube channel after this video dedicated to all things crypto. Find new videos every week. Be sure to check the link in the description. RAOUL PAL: Bill, it's been a while, but we got you on Real Vision eventually.
How are you? BILL BARHYDT: I'm great, thrilled to be here. Thanks for having me. RAOUL PAL: Listen, you've been in this space for a long time and you're new to many people, but not to others.
Let's go back and just go through a bit of your journey, how the hell you got here? When did you start your career? BILL BARHYDT: This is a circular path of-- I worked in cryptography when crypto meant cryptography not cryptocurrencies. I worked on Wall Street. I was at Goldman. I went through a phase of learning all about financial markets, fixed income, build trading systems, designed portfolio management systems. Then I got the internet bug and ended up joining Netscape pretty early around the time of the IPO.
That's more or less been my 20-year journey now is just really focused on the internet eating the world mantra that I've always had in my mind. The things that have always resonated for me is how the internet can basically act as a great leveler and democratize access to anything, whether it's entertainment and media, or now financial services, which has been my big passion for the last 10 years. I had a whole bunch of investments and startups in that area around payments, remittances, investing, now culminating with Abra, of course. RAOUL PAL: Talk to me about your crypto journey.
You started with cryptography, you're learning finance, so you're obviously going to meet this space at some point. Where did you meet them, and how? BILL BARHYDT: Now, keep in mind. When I was a cryptographer at the CIA, I didn't know anything about banking. It wasn't even really interesting to me. Of course, I made no money, so it didn't really matter anyway. I think one of my sons who worked at a movie theater makes more money per hour than I made working for the CIA as a cryptographer.
The idea of dealing with money was so foreign to me, it didn't even factor in anything. That obviously changed later, getting to banking, and then exits and startups, whatever, but it was a long route. I first started getting into banking when somebody recruited me back to my NASA days from Goldman, because they connected the dots on my math background and said, this would be amazing for you if you just dug in a little and they pushed me, and I did. That was a really long journey. Then the second part was payments. At Netscape, we built the first credit card gateway for the internet to actually formally accept an encrypted payments, and then ended up building like a whole key management business in Europe for Netscape for PTTs or telecoms that wanted to basically figure out a key management strategy, not dissimilar to the discussions we have today about not your keys, not your crypto thing.
Then that's basically led me down the rabbit hole of payments and banking, spent a lot of time in developing markets learning about how regulation and governments, especially in the middle of this whole Choke Point thing. I don't know if your viewers are familiar with what happened with this Project Choke Point that the US government was basically executing to block services like in the remittance world and arm sales that th March 9 , 2021 - www.realvision.com 2 The Interview - Crypto: Abra: The Future of Crypto Banking they didn't like. Totally legal services, but they basically cut off their access to bank accounts, and we're still dealing with the [?] of that.
In the meantime, I'm trying to build banking services in developing markets for the bottom of the pyramid and hitting all kinds of roadblocks that are just nonsense for people trying to store $25 in an account. That led me, this is maybe a year after I'd read the Bitcoin whitepaper to say, okay, I'm tired of this, there has to be a better way. At that point, I've already personally started going down the Bitcoin rabbit hole. I had done a TED talk. RAOUL PAL: What year was this? BILL BARHYDT: 2012, it was when I did a TED talk at the main tech conference in early 2012 I think it was, so about nine years ago. and Bitcoin -- RAOUL PAL: Hi, I’m Raoul Pal.
Sorry to interrupt your video - I know it’s a pain in the ass, but look, I want to tell you something important because I can tell that you really want to learn about what’s going in financial markets and understand the global economy in these complicated times. That’s what we do at Real Vision. So this YouTube channel is a small fraction of what we actually do. You should really come over to realvision.com and see the 20 or so videos a week that we produce of this kind of quality of content, the deep analysis and understanding of the world around us. So, if you click on the link below or go to realvision.com, it costs you $1.
I don’t think you can afford to be without it. RAOUL PAL: What year was this? BILL BARHYDT: 2012, it was when I did a TED talk at the main tech conference in early 2012 I think it was, so about nine years ago. and Bitcoin, Nobody knew it or even heard of it. Silk Road was booming at that point, Bitcoin was that about $2, maybe $250. You could still mine on a good personal computer at that point. It was just a totally different time.
My interest was more about banking than store value at the time because I said, hey, this solves a lot of problems. Especially with all the middlemen problems I was dealing with in the remittance world, in the banking world, and that really pushed me towards this model. Of course, later on, my interest evolved dramatically as we get now into defi and store of value, Bitcoin as digital gold, what's happening with, like I said, Ethereum to [?] and this whole shift to moving every aspect of financial services into some type of Ethereum-based smart contract is just incredibly interesting to me.
It's been a long journey of basically taking everything I know. I feel like it's the first job I'm qualified for. Because after all these years, I have all these things that I understand around internet and marketing and banking and consumer internet and cryptography and now, all of a sudden, I get to use it all in one job. It's like a dream. I actually can't believe I get to do this most days, to be honest with you, and not every day, but most days.
That's the long circular route that it took me to get into crypto, cryptocurrencies and why it's so interesting to me. Our mission at Abra is particularly around the democratization of access. RAOUL PAL: Why don't you talk to me about Abra? How did you set it up, so you go from, this is interesting. I'm interested in payments.
What made you then? BILL BARHYDT: I wanted to build a crypto based banking service. At the time, it wasn't crypto, it was Bitcoin. I wanted to build a Bitcoin based banking service where Bitcoin would be the core, so that I could in theory, eliminate middlemen. You could have the option of storing your own keys, you could send money person to person, you could invest in other assets.
Today, we call those things like synthetics. I had this like big vision idea of building a banking application with Bitcoin as its core. Now, that's evolved significantly since then, where I would say Abra is one of the leading like global retail crypto banking apps. But the original vision was very, very simple. I wanted a single app that would work anywhere in the world, where anybody could access a single app to send money, store dollars, store Bitcoin, send Bitcoin, send dollars, eventually invest in any kind of asset and using Bitcoin.
I've had this long-held belief that Bitcoin is going to become a core component to collateralizing different asset classes over time. That was one of the original tenets for Abra, which we don't talk about much, because it's obviously from a retail perspective very complex. In the background, it's always been a core technology component of what we do.
Today, it's evolved. Literally, it's in trading and investing in over 100 cryptos, earning interest on your dollars, stablecoins, as well as crypto, borrowing against your crypto balance, really moving in the direction of being that full bank for cryptocurrency. Ironically, now, even though we have lots of people with six and seven figure deposits in Abra, we also have people in the bottom of the pyramid countries putting $4 or $5, $6 in Abra in a single app. I say ironically, because it was really the developing markets that pushed me to do this in the first place.
In the meantime, we've got every single aspect of the income pyramid or component of the income pyramid using this one single app. I don't know if there's any other app in the world, banking, or otherwise, maybe WhatsApp that has that gamut of income and user profiles that we do now. RAOUL PAL: So, your vision really in the end is to bring a bank into that for everybody? Anybody who has a phone have a bank? BILL BARHYDT: Yes, that's right. I think crypto is the future of banking.
At this point, I just don't see a scenario where that's not true. I really don't see how cryptocurrencies aren't at the center of banking in the future. Right now, it's on the edge but I think it's moving towards the center, and it will take over.
RAOUL PAL: When you go back and speak to your old mates at Goldman, as we all do, do they get it now, and how do they see that? BILL BARHYDT: Yeah, they get the digital gold store of value story for sure. Partially, because you can't argue with a trillion-dollar market cap and nobody thinks Bitcoin is going to zero now, I think there's myriad discussions around where does it really fit in? Is it the Fed? Is it going to be better technology? But nobody thinks that's going away. As a matter of fact, I did have dinner with a colleague who's on the managing committee, and we had this exact same discussion. Then the second part of the discussion was where is defi going? What does defi mean? Is it really going to work? Can it scale? That's probably similar to discussions I was having five years ago about Bitcoin. Will Bitcoin even work? That was the narrative five years ago? Does this work? Is it just for drugs? Is it just for the dark web? Now, we're having analogous discussions about defi. Will it scale? Is it legal? What happens when these contracts are hacked, etc., etc.?
All the questions, all are valid questions, but we haven't evolved yet to the equivalent narrative for Bitcoin, but I think it's going to happen even faster with defi and all these decentralized apps that are going to come down the pipe, whether they're on Ethereum or Cardano, faster than what happened with Bitcoin. RAOUL PAL: When I look at this space and you look at the rapid space of innovation going on at defi, and then you see that the central banks have figured this out, and then now having to bring out the central bank digital currencies, I don't see what role there is for the average money central bank in Middle America or Middle Europe. BILL BARHYDT: It's tough. I think banks have a big problem. When the bond markets are not looking good, there's a hunt for yield and you're certainly not going to find it at your community bank. Their value proposition, their value add is-- look at it in the context of the internet itself.
The only reason why you couldn't basically allow the internet to eat banking from the inside out like it did with every other industries is regulation. The fact that governments print the money, and they also decide who gets to distribute the money via the banks. If that changes, there's no reason for them to exist, at least not in the form that they do.
That's a real problem if you're in banking. For everyone, I don't think anyone else is going to care because I think over a 25-year period, what's going to happen is that banks will become crypto centric, and it'll just seem logical by the time it's done. It'll be like who talked about Kodak now, or who talks about Blockbluster. They were a central part of our lives 25 years ago, and it's just logical that they don't exist anymore now.
I think that's what's going to happen to traditional banks. I just don't see the value proposition going forward. RAOUL PAL: If the moat was regulation, then what is happening there? Because this is the big problem with defi, it's still nobody knows where regulation falls on this. How do you think it's going to play? Because there's centralized defi and then there's truly decentralized defi, which is almost impossible to control. I think the regulators are so far behind.
BILL BARHYDT: Sorely. Think about it. The definition of a decentralized system, at least to me, is there's no off switch. Once there's no off switch, and the two best examples of that that I know of are BitTorrent, which was probably the first, besides the internet itself, but BitTorrent and the second being Bitcoin. You can't shut off either. I would posit there's no way to shut off either of those services today.
I think Ethereum is close. I think it can get there, but not quite yet, but I think it's moving in that direction. Even with proof of stake and a lot of people are like oh, it's not decentralized. These defi services aren't quite D yet.
Shut off Amazon Web Services, and you'll see what I mean. I think in three or four years, there will be no more off switch. At that point, to your question, what role does a regulator play if you can't shut something off anyway? Because there's nobody to go to and say you're doing it wrong, you're not following the rules, shut it off.
The analogy I liked with BitTorrent was they couldn't shut BitTorrent off, so the music industry started going after individual named users based upon IP addresses with these RIA lawsuits. They realized what a great idea that was after a few months and stopped doing it, after everybody started hating the music industry. I just don't see regulators starting to sue or go after individual users of the services and at that point, there's nothing they can do.
RAOUL PAL: The only point of fragility that-- I keep trying to think through the fragilities as we get to that end state. The only point of fragility is your ability to interact with the existing banking system. BILL BARHYDT: That's right hundred percent.
RAOUL PAL: You want to bring money back into the US because you want to buy a house, a car, pay your taxes or whatever, they still own that. That can make it very awkward still, they can just say, you've come out of these protocols or wherever it is, you can't bring it back again. BILL BARHYDT: That's what they're doing.
If you look at what's happening in India, the discussions in Nigeria, it's about the on-ramps and off-ramps. Even China doesn't say, hey, we're not going to allow you to store ones and zeros in your pocket, which is like saying, banning Bitcoin. They're going to say, we're going to basically regulate the on-ramps and off-ramps and prevent you from transacting, and we're going to prevent third parties from acting as trusted third parties that hold your crypto. That's the best they can do. It's going to be those on-ramps and off-ramps that are basically going to be the Choke Point for a lot of this innovation going forward. Some will get it and become centers of innovation.
Some will put roadblocks in the way like I think India has 180 degrees the opposite perspective on this. They could become a mecca of innovation for banking and crypto if they would just do a 180 on their ridiculous perspective on continually banning crypto and then having the Supreme Court overturn what they're doing. Why somebody doesn't get held in contempt for trying to do the same thing over and over again, I don't know but put that aside, I really do think they have it completely wrong. RAOUL PAL: Because India has actually digitized pretty rapidly. They've built this layer on, the open API to their UPI payment system and the India Stack, they have something really powerful. BILL BARHYDT: Right.
I look at it like how do we leapfrog the West? Go look at the train systems in countries that leapfrogged us, because they built their trains in the 1990s. Well, what about banking? Why isn't Indonesia or India basically say, let's move our economy to this model over 20 years? If they came out and said that, I think people would move there to work on this. As opposed to the opposite, which is people leaving to go work, less in the pandemic, but euphemistically speaking, moving to work on these projects that are based in other countries and I think this a huge opportunity to reverse that trend. RAOUL PAL: What about the trend that came out-- Mnuchin's last famous thing of trying to push through the regulation of KYC on wallets and holdings? How do you think that plays out? BILL BARHYDT: That is very misguided. My understanding is even a lot of people like FinCEN, which is the regulatory body within Treasury that deals with that, probably considered that misguided based upon the hearsay from my network.
I think it was a feeble last-minute attempt in the last administration to exert control over something that is basically uncontrollable. Look, the Supreme Court has opined on software and software as well as free speech. I think the way we think about CIP, Customer Identification Process, in banking as it relates to the Bank Secrecy Act is completely out of whack. Nobody challenges it because nobody wants to be the one that-- everybody is afraid to take this to court. I just don't see how the extreme that we do in banking is actually illegal in this country, but everybody's afraid to fight it.
I'm not going to spend our investors' money fighting it, and I'm just going to follow the rules, because I don't know what else to do. Then our customers accept it because they have to do it with every other service they use. I think that there's going to be more attempts at this.
I do worry a little bit about the new administration, but I think ultimately, they're going to lose. You see it with Miami. You've heard about the mayor of Miami, you've seen in what's happening in Wyoming, little bit in Texas, there are pockets of people that get it. Eventually, it's going to spread. When I say it's going to spread, this understanding that you can't stop it, that we should embrace it, and then it has value is going to spread like wildfire. RAOUL PAL: Yeah, I totally agree.
Switching gears a bit, your app has been running for, how long now? It's quite a long time. BILL BARHYDT: Well, the current version is about two years old, but we had an earlier version with which was noncustodial. Now, we have the traditional custodial version, which is about two years old. RAOUL PAL: When you've onboarded new customers and your existing customers, what change in behavior have you seen? In the last two years, we've had yields. Yields are fundamental, these always been, what have you seen? What are people doing? BILL BARHYDT: It's a great question. A couple of huge changes we've seen, even over the last six months I would say.
The first is this the amount of crypto deposits that we get off of exchanges on to Abra has gone from being 15% of our business 15 months ago to being 60% to 70% of our business today. Meaning I bought Bitcoin maybe at Coinbase or Kraken, and it's just sitting there. I want to earn yield on it. I want to potentially borrow against it in the future. I hear Abra is a great way to do that.
I'm checking out Abra. I looked at it, I was like, wow, this app is amazing. I didn't know you could do all this with crypto. I'm not really a trader, there's really no reason for me to leave this crypto on an exchange.
Our business for those users is booming, and it's like millions every day flocking in. We still get the bank wires. We take unlimited bank wires from every country in the world. That's great.
It's for people who are also existing users moving money in. A lot of times, they just say that I'm going to put even more in because I can earn 10% on my dollars and 5% of my crypto and so we get people who do both. One of the biggest changes is clearly the amount of crypto based deposits we're getting.
Even though we allow you to buy easily, to see this with anyone else, they're moving what they have into Abra. That's the first big change. The second big change is the level of sophistication in the users that we're seeing. We get a lot of new users, what's the key? What's the difference between these 100 cryptocurrencies? We have guides for that. There's this 25% to 40% of our user base at any given time that is actually really sophisticated now. That creates a challenge for us, because we have a huge dichotomy between newbies and people that are like, I need this advanced stuff and catering to that range of users is tough.
One example would be we're not a sophisticated trading app. We're not trying to be. If you're a pro- trader, you're not going to use Abra. You might use our OTC function if you want to put something in storage for long term, but other than that, you're going to go to a trading site and use all the tools. Now, we have sophisticated people who were just investors saying, hey, I want to advance-- what are the entry types when I use Abra, which two years ago, no one would have asked for that. We're now getting this second generation user which is really interesting.
Like I said, these features are not socio-economic dependent, by the way. I have Chief Investment officers from funds using Abra with a seven-figure positions like an interest accounts, and I got poor farmers in Mindanao putting $15 in Abra by walking into a 711 equivalent with cash in Philippine pesos, and walking out with the pesos digitized on their Abra app. Same questions by the way, no difference.
They want exactly the same thing. This kind of evolution and understanding has been really interesting to watch. RAOUL PAL: Talk to me a bit about the differences globally because you've got a very global business.
You're seeing, as you said, too ridiculous opposite ends of the spectrum. I'm really interested in the global part, forget about the US, we can talk about that all day, but let's talk about when you talk about Mindanao, I was like, okay, I want to hear about this, what's going on? What are you seeing globally? BILL BARHYDT: A few interesting trends. We take a tremendous amount of deposits and cash at retail. This is happening in Southeast Asia, Central America, Middle East.
Now, these users have to go through the same onboarding process that you and I do. They go through the same, know your customer, KYC, where they take pictures of their IDs, or passport, or whatever they have, they're on-boarded, but the cash is in their pocket. They have a different view in the app than you do.
If you start up Abra and press add money, it's going to say deposit crypto, use your bank. They'll have another option which is deposit cash. Then it'll bring up a map in their area which shows them where they can go to deposit cash. I could launch it in the US, but nobody wants that. RAOUL PAL: How the hell did you set up? BILL BARHYDT: What we did years ago is we started basically putting quietly these relationships in place with companies in the remittance space, retail, that already had large cash businesses. We used our network.
I used to run a remittance business which I sold to Digicel in your neck of the woods, and is their mobile money app now, and so I know that world really well. All I did was basically leverage that network and started doing deals with these different cash networks all over the place. I have a really good guy who runs that business for us now out of Southeast Asia, but he runs it in different countries.
Then we've been quietly building this cash network all over the place, but again, it's for a very specific type of customer, to your point. Now, our users in Singapore are wiring money to Abra, our users in Hong Kong are wiring money to Abra, our users in Jakarta, it's a mix. Our users in Manila, it's a mix. We could have in half. You go into the remote areas, it's cash. I think that's going to be true for quite a while.
RAOUL PAL: Are they using it for crypto or are they using it just for remittance payments? BILL BARHYDT: No. A lot of it is speculation. A lot of it is altcoins. We have people in developing markets that are buying alts.
They're buying Ethereum. They're buying Bitcoin. They're also sending money, but I'd say it's 65% to 80% speculation on cryptos just like us. Like I said, it's no different than the seven-figure depositor. It's just a smaller amount of money.
Then it probably means even more to them on a proportional basis than it does to the CIO, and so I'm very sensitive to that. I'll spend time onboarding friends of friends who are depositing seven figures. Then I'll spend two hours at night, answering questions from people all over the world who are depositing $50. It really helps me to understand that there's no difference at the end of the day, if anything, that person is more passionate than the other person. RAOUL PAL: How did you get that reach to all of these places? Again, it's a very US centric world that we live in these days, and people don't think that people in the Philippines on a remote island would even understand this, because we're still trying to get people to understand it here. BILL BARHYDT: The opposite is true, because if you look at places where we're popular in Africa, Southeast Asia, more people are holding crypto than in the US or in Europe, proportionally.
The challenge for us has always been how do we do all these deals which was your first question. Then how do we integrate it in a way that it has an easy to use experience, and we have more partners, locations that we have employees, so managing that network is complicated. It has to be done in a way that it doesn't tax the company because it can be all consuming, and so it's pretty automated. The way I look at it is, okay, we've mapped uptake of crypto and geographies to cash. That part of the business is like, all right, we know where we want to accept cash but there's other payment types.
There's SEPA in Europe, there's FasterPay in the UK, there's Spain, Mexico, there's INTERAC in Canada, there's ACH in the US, and the list goes on and on and on. What we did is we basically took abra.com as the website, and we built a marketplace. We built it as a big test. We said, all right, we don't want to start adding all these payment types to the app.
One, unless we know they work, because we're always dependent upon a partner. Again, the on-ramps and off-ramps we talked about, and does it work? Will it scale if we get 10,000 people doing it in a few minutes, for example, as an extreme, which might happen when Elon pumps those again. Is it going to be usable inside the app? We ended up building this crypto marketplace in abra.com. The best way I can describe it is it's like KAYAK for travel but now for crypto.
You basically say I'm in this country, I want to buy this crypto, and it'll show you all the payment methods that are available in your country. Like in Australia, there's five payment methods, a couple are in cash, a couple are in bank accounts, and it says to you, for this payment type, for this much money, here's how much Bitcoin is going to land in your wallet, and you can choose which one you want. It gives us visibility into which payment types are interesting, which ones actually work well.
Meaning do they actually settle from the partner as fast as they say they're going to settle? That's how we tested FasterPay's support in the UK, INTERAC in Canada, Spain, Mexico. Now, the ones that work well, we're adding back into the core Abra app. Not only are we making really good money on the marketplace, which wasn't even our original intent, it's actually a profitable business for us but it's now allowing us to figure out which of those payment features to add into the core Abra app for certain countries. The second part is localization. The app is 100% English and that's blown me away. We are going to localize the app this year, but all these people are using it and I feel bad for it.
I don't want them to do it, it's just we haven't had the resources and time to do it yet, but we are doing it now. The app will be in multiple languages this year. Even then, everybody's using it. RAOUL PAL: Amazing. Go to the other part, keep up what you do. Talk to me about security.
Because I think the space-- and I don't know, I want to pick your brains on this. I think the space is behind on the narrative. That you need to keep everything in cold storage and five-year life, and all of this stuff. It feels that the reality is that storing with online services, the high-quality ones, is actually very secure. BILL BARHYDT: It is, but there's a narrative here which is just as important as the reality.
Because the narrative leads to the emotion. People want to have a good feeling about what they're doing. The last thing that they want is to put 10% of their savings into something and just not be sweating the price but be sweating the safety. Whether it's true or not is almost secondary at that point, because if you're so emotionally distraught over what you're doing, the reality almost doesn't matter anymore. You need to basically give people comforts and the reality needs to, in some cases, be better because most people don't really have a good understanding of information security.
I'm a cryptographer and I understand all that stuff, so I can actually ask questions to my team that a lot of CEOs can ask. Let's break it down. The first thing is the emotional part comes from a message of control. The message here is, what we didn't talk about is, I'd say 35% of our user base, they use Abra ephemerally.
They're not using our interest earning accounts. They're not borrowing, they deposit, they trade, they get out. The same day, sometimes, maybe the next day.
Their dependence on Abra from a custody perspective is minimal to none. They just liked it, it's super easy. Most of them are using cold storage when we asked them, some of them are using other wallets that they they're used to. We don't care, that's fine. We care in the context of we want them to have control.
That's the message. If you want to go offline with your crypto, it's totally fine with us. If you want to keep it with us, you can keep it in the trading account where you have a hundred percent 24/7 real time access to trade. If you want to move it to the interest earning account, you have 24 hours in most cases access to it, even if it's multi-millions of dollars, and you're earning interest. For that, you forego real-time access, and we have that range.
When people understand that, it really resonates. Then there's the practical aspects of how you manage this. What we've done is we've built a whole series of cold, warm and hot custody solutions that maps to trading, interest earning accounts, or ability to move between counterparties who are borrowing, and then cold storage, where we might be managing reserves that we need access to in a few hours' notice, and each one has its own security requirements that we even go to the board and say, okay, here's what we're doing, here's how it works.
We're not going to share with you our secret sharing techniques, and here's who can't travel together. All the details of the sophisticated solutions that we have to build go all the way up to the board. I think it's a key part and component of the retail crypto banking story is that you have a story that combines user control with an understanding that you have online funds and offline funds, and that the company that's managing this has a really good explanation of how they're managing each one of those things and if the company gets hacked, why my money is not at risk. That's a key part of the story. No company is unhackable. If you're online, some aspect of your company if somebody is highly motivated is probably hackable.
That's true for 100% of companies on the planet, I don't care who it is, including Amazon, anyone else. The question is, if they get in, what damage can they do? I'm very confident in our case, there's nothing to hack. Meaning if you get in, you might be able to change the logo on the abra.com website on Amazon, but that's about it. That's hard to do. Intrusion and detection, and the way you respond has to be based upon-- this idea of nobody's getting in, don't worry about it is a bunch of nonsense.
There is way more people trying to get in than there are people trying to keep the other people from getting in. That's always going to be true. I can't hire people fast enough to keep everybody else from getting in, but what you can guarantee is there's nothing to find when they get in.
Anyway, it's a long answer but the bottom line is that the story of security has many components to it, and you need to address the emotional aspect of this in a way that resonates with the consumer, not just with the CEO and the board. It's hard because not everybody understands cold, hot, and warm storage. They just understand, hey, I've heard that there's been a hack to these exchanges. What's going to happen when you guys get hacked, and why aren't you going to get hacked? It's pretty basic.
You don't want to talk it down, but you have to give people this emotional comfort. RAOUL PAL: What do you do? Can you offer them three different pricing tiers, for example, or you say, well, here's your levels of security, choose your own? BILL BARHYDT: No, you don't need to because it's part of the offering. It's embedded. The fact that you have crypto in your trading account, the fact that you have crypto in your interest earning account, the fact that we're lending some of it to earn yield, the fact that we have some of it in reserves so that we can process deposits, it's just table stakes.
It's not an offering in the sense of I have a custody offering. Here it is, pick which one you want. It's I want to trade, so I have to keep some crypto here. I want to earn interest on my ETH, so I'll put it over here, or I want to withdraw it to my hardwired wallet.
How do I do it? Okay, well, there's a withdrawal function. It just goes to whatever address I provide. It's just table stakes for offering those services. The key again is are you giving you users comforts, that they just take it on faith, that this is best in class, world class security that I consider to be completely 100% safe at all times. RAOUL PAL: The only one about security people still get confused about is how this space is earning so much yield and what risk they're actually taking? How do you think through that? BILL BARHYDT: I think through that a lot because I manage 100% of my liquid assets through Abra now, cash and crypto.
I'd say three things. The first is we, the management team, we basically set up the interest earning accounts to be the product that we wanted for ourselves. We looked at the other products in the market. We said what do we, or don't we like, let's do it exactly the way we want.
That's one. Two, let's be as transparent as we can as to how this works. I listen to podcasts after podcast where other CEOs avoid questions. They don't talk about the percentage reserve. They don't talk about how many counterparties.
They don't talk about concentration risks. I said we're not going to be that party. I said we have nothing to lose, let's just lay it all out there and say, if this works for you, this is how I manage my crypto, go for it. If you want to use Abra trading and you don't want to earn interest, it's perfectly fine.
But we're going to tell you how it works. The third thing is making sure as we're digging into these details of who we're lending to, how do we set collateral requirements on a per borrower basis? How do we set interest rates on a per borrower basis that we're being smart? That we're basically saying, okay, if it's DRW borrowing with a trillion dollar balance sheet, yeah, they're going to have different collateral requirements than a three-guy hedge funds that wants to go 4x levered on positions that they think are delta neutral, but probably have systemic risk. We're going to get 2x collateral from the delta neutral, three-guy hedge funds, and get 25% collateral from DRW, because they could buy Abra 100 times over. You have to be smart about understanding that use of funds, and you have to be willing to talk about it so that people understand that you're actually taking this seriously. We run an investment committee at Abra that meets weekly to look at existing counterparties and adjust limits, for example, onboard and approve new counterparties that have gone through two to four weeks of due diligence in the background around use of funds, compliance and a bunch of other things. Just like venture private equity.
Then we set rates and collateral requirements for every single partner individually. That rolls up to be the rates. We don't start off saying, okay, the rate needs to be 10%. Make sure you back into it. We would never do that.
Never. There are companies that are. I know because we've hired people that used to work there. They told us it's crazy. We will never basically say make sure the rate works out to be this, we'll say do exactly what is right for this counterparty, and then tell me what the rate needs to be as a result.
RAOUL PAL: How do you see the evolution of these super normal yields, because they are high yields? We know the yields are pretty high, so it's going to keep attracting capital, and the less blow up, there's some risks that get exposed in the space, the more capital it's going to attract. How do you think it evolves? What was interesting to me, I spoke to another friend of mine about this, too. He's like, well, I sold some of my Bitcoin the other day, and I just keep it in USDC. I've suddenly realized I don't need to go back to my bank because if I'm not using the money in the national world that I live in, a bank doesn't exist on it and I don't need it. BILL BARHYDT: Well, this why I do refer to Abra as a crypto bank. Obviously, it's not regulated with a banking license.
We do have a Trust Bank partner that manages the issuance of those interest accounts. But from the consumers perspective, it's cash, it's crypto. Hopefully, stocks eventually and other asset classes that they want in the same app. I think that you're going to see more and more people be willing to store dollars first and foremost. We get it.
Our users are mostly in crypto first, and dollar is second, because that's how they find out about Abra. But we are starting to get people now who are coming in first and foremost with their big dollar positions, and then adding crypto for a couple of reasons. One, because they have more dollars, and two they are waiting for to take part of that stable coin position and convert it to Bitcoin or ETH at the right price.
Even then, they'll keep most of it in the USDC or TUSD positions. I do think that the demand for dollars has been incredibly high in my world. I think you're going to see an expansion of the first-generation counterparties and crypto lending to move into traditional ending, Supply Chain Finance, peer-to-peer loan origination, other forms of finance. I think that as defi grows, as stablecoins get used in traditional finance, I think that we'll have a little bit of downward pressure on rates because you'll be competing with banks. But the demand has been so high.
Especially as crypto prices are rising, that I think the dollar side of the business is going to be really good for a while. RAOUL PAL: What blew me away recently, I was speaking some guys in Singapore who were involved in option market making, a bunch of other things. I said, tell me about stablecoins, particularly its heavy use in Asia. They're like, nobody in the West has any idea how many corporations are using it to trade finance. They just pay each other, and people are missing this whole thing. I think it's money laundering or ways of getting money out of closed economies.
It's not. It's actually ways for businesses to pay each other. You're getting businesses using Abra for that kind of thing. BILL BARHYDT: Think about this for a second, Foxconn is a large investor. One of our largest shareholders in Abra.
They're one of the largest lenders in Asia. Just in their supply chain finance business. In my opinion, that's the future of Supply Chain Finance, because most western investors are shut out of those deals because they happen too fast. Now, you can basically invest in those deals in near real-time.
You're going to see marketplaces pop up, like you don't have Yieldstreet, Fundrise, Condrey, that are basically offering a high net worth retail investors in the US access to these 10% real estate deals. You're going to see the same thing happen in supply chain finance and peer-to-peer loan origination. The banks are basically-- I don't talk about this as much, but this is part of why I think the banks are fucked because they can't compete with marketplaces like that.
They don't want to. RAOUL PAL: Again, like the Malaysian exports, who is exporting textiles to China, if they do it normally, that's going to apply for the export license of the money in the textiles and you don't have to speak to the central bank and the Chinese side, there's no Malaysian/RMB markets, you have to go through the FX. What they do is they do ringgit tether, tether RMB. They make instantaneous payments. There are no restrictions on them and there's also funding available by the market.
BILL BARHYDT: It's effectively a fully decentralized system that has no off switch, that no government is in a position to stop. It's not like the person who's doing the minting, whether it's Trust token or USDC, Circle, it doesn't know who that Counterparty is. They have to onboard themselves just like as somebody a bank. I actually foresee stablecoins, maybe even more so versus Central Bank Digital Currencies, as at least for the next three or four years, the future of banking for Supply Chain Finance, loan origination, but also the crypto banking which was the initial bread and butter. The other part of your question was what's going to happen with Bitcoin and in Ethereum rates, which are that's 75% of crypto collateralized lending today, dollars is still only about 25% to 30% because it's still a crypto centric world.
That will flip in the next five years, meaning if we have this conversation in five years, it'll be 80% dollars. In today's dollar terms, if the Bitcoin price goes up 10x, then obviously, it'll be a little bit different. But assuming that the Bitcoin price was normalized in today's value, they probably won't in future price terms. The question in what happens to the rates on Bitcoin or Ethereum? Well, look at the band, as Bitcoin goes up into the right, there's a 16%, 15% to 18% spread, above and below that normalized the stock to flow the target price, which is holding. The channel hasn't been broken for a long time.
What that tells me is the volatility along the way to $2 million Bitcoin and 50,000 Ethereum, whatever happens is going to be the same as it's been all along. That means that all of these trading strategies that require Bitcoin, all of these plays on premium are going to keep going for many years, which means that the demand for Bitcoin is going to continue. I think that we're going to be in a 3% to 6%, maybe 3% to 7% range of Bitcoin and Ethereum interest rates for five years.
I don't see how it doesn't change. At some point, it has to change because it's a deflationary asset, obviously. You can't, otherwise you would be paying 100% of Bitcoin in an interest every month at some point.
The system eventually has to give, but I don't think it's going to give for the next three to five years. It's part of the reward of what I call the front- - what do you call the Navy SEALs that are the front men when they go into battle? They're the ones who are bearing the brunt of this transition to a new asset class. When Bitcoin is stable at $15 trillion in market cap, this is going to look totally different. I don't know how interest rates are going to look when that happens. I haven't completely thought it through, but the current model will work. Then it depends on what happens with the dollar at that point.
If there's no more dollar, then all bets are off. It's hard for me to get my brain around what happens to traditional yield curves as it moves to Bitcoin in that model, because there's no fractional reserve, there's no printing of money. RAOUL PAL: I've also thought that through and thought, it's a weird old world right now, where the world's pristine collateral is US Treasury bonds, and every time there's a lending problem, I just thought of collateral for the system. The Fed lowers the cost of collateral. You as a collateral owner gets less of it, and in fact, they make more of it, but then comes the opposite so the I think it's going to get higher rates.
BILL BARHYDT: That's my point. That model is unsustainable in a deflationary asset model, and anybody who thought it through realizes that, I think that we're in another six or seven years of transition to where it'll stabilize, and so after year five of the current cycle, I think the rates will have to come down, but I can't say I've thought through what happens in a model where people want to borrow. The current theory is that hey, everybody's crypto rich who got in early, they're going to want to borrow against those assets. The dollar rates make sense, but what happens if the dollar goes away? You can't borrow at that point because it's nothing to borrow.
You have to use the Bitcoin. If that happens, then my theory is it's not about interest rates, it's about the diffusion and basically the spreading of Bitcoin to every nook and cranny of the world, where you actually see a massive redistribution of wealth. And that's the Austrian theory.
If the private money existed, that it would be hoarded in the early days, but eventually, you'd have complete total wealth distribution, because you can't hoard it, if it's the only money. That's where I come out if the dollar goes away in terms of interest rates, but I don't want the dollar to go away. I don't want it to die, but we're not helping ourselves with our current policies.
The bond market's just scaring the shit out of me. I am starting to think these things through and all it tells me is keep hoarding, keep borrowing in shitdollar and shitcoins and keep hoarding. Eventually, we'll see who wins. But I think Bitcoin wins either way, the question is, are we borrowing in dollars off of our portfolio, or are we simply spending the Bitcoin because the dollar is gone? I don't know which one it's going to be. RAOUL PAL: No. To finish off, what is the most exciting thing that you're seeing in the space? There's a lot going on.
There's NFTs going on, there's defi, there's all sorts of stuff going on. What is the thing that makes you guy go, that's really exciting? BILL BARHYDT: I think this topic of I have a personal Treasury in Bitcoin, that I'm eventually going to borrow against while we're in this transition is a new narrative that I'm hearing every day, every single day. Combine that with stablecoins built on the Ethereum network and you basically have the future monetary system, at least for the next 10 years.
Then we'll see what happens to the dollar. Like I said, if there's no dollar then you're not borrowing. That is the most exciting narrative, because that's the basis for Bitcoin and Ethereum as the future of banking, in my opinion. Bitcoin as the reserve asset, Ethereum as the application layer that makes all of this move around, including the institutional aspects of defi, but also the retail facing pieces that companies like Abra offer. That's the part that's most exciting, or the story that's most exciting to me right now, is that so many people are starting to intuitively get this. That they should be managing their personal Treasury, eventually in Bitcoin or at least part of it now and then eventually borrowing against it.
RAOUL PAL: Because the old way is you make a bit of cash, you stick it in the bank, you look for a term deposit, you had a bit of interest, and that's your reserve. BILL BARHYDT: Turn into an annuity for yourself. RAOUL PAL: Yeah, and you might have been slightly apocalyptical, so you might have had some gold as well.
That was our previous reserve asset. Now, people look at Bitcoin. But my only thought about that, okay, I can see that, not easy to do with a 70 vol asset that falls 80% every four years. That's my only struggle is we'll talk about a reserve asset right now but once your new house has disappeared out the window, and you're looking at buying a new car, you'll actually sell some of this stuff. That's my only issue.
BILL BARHYDT: Yeah, I agree with that. That's why it hasn't happened yet. The question is once Bitcoin gets to 10 trillion, and think about how much, in Bitcoin value, how much is moving off of exchanges. In dollar terms, there's still more on exchanges than there was a couple of years ago, but in Bitcoin terms, it's way less. As that continues to happen, I think those 80% drawdowns have to stop because it's no longer a real-time tradable asset in the traditional sense, at least not in the first-generation sense. It truly is at that point a store of value, and that transition has then happened.
We're in the middle of the transition. You can't have a transition to anything like this without volatility. It's like saying, how do I get my car from zero to 100 kilometers per hour? Well, you have to get to 10, you have to get to 20, you have to get to 40, it's physically impossible to get to 100 without those steps in between. Well, that's what's happening with the price of Bitcoin right now. But once you're at 100, you can stay at 100. You can choose to decelerate or not, but this is the price we have to pay.
For us, as the people on the frontlines, we should be getting the benefit of that. That's what we think anyway. I don't think that the people who use it 10 years from now were going to look at it that way, because it's not going to be going up and down in price the way it is now. RAOUL PAL: Also, there's a number of things with that. As you go up the quality spectrum, volatility falls. It's got the lowest vol of all, then FX, then equities, so we know as it goes, it loses volatility over time.
Also, I don't know how much of the volatility of Bitcoin is actually the volatility of fiat money overall, because that's another part of this equation, is what is the volatility of M2 right now? These are things we've never really had to deal with before. I've been looking at some charts spending time thinking about, okay, what does the S&P look like in Fed balance sheet terms. Bizarrely enough, there's been no bull market really. It's just traded sideways since 2009, and that's like, huh.
When you look at gold versus equities, they've been in the same range. BILL BARHYDT: They're both as a store of value. RAOUL PAL: Yes. Therefore, I then looked at gold versus a basket of 27 global currencies excluding the dollar.
To give you an idea of what is fiat currency doing versus gold, because gold is like the trusted understanding of value. Fascinating is those currencies that underperformed gold since the Global Financial Crisis by 60%. What it's suggesting to me is there was a currency devaluation of fiats, not of the individual currencies against each other, not dollars against euros, they're all fiat because of banks.
We're just seeing Reserve Bank of Australia today implementing yield curve control. It's basically unlimited printing of money if anybody sells my bond. When I look at that, and I think, wow, has all the fiat currency fallen 60%, and this the bit we're missing when we look at volatility and Bitcoin, are we measuring the wrong thing even? I need to get my head around this. BILL BARHYDT: Intuitively, everybody, even non-economists get the idea that there's a global debasement that going on, because, my favorite analogy-- RAOUL PAL: I see it because it's non-CPI, which is what [?]-- BILL BARHYDT: Exactly, exactly.
But I go to my mother, I'm from New York and she's a Yankees fan, she's got a Mickey Mantle card somewhere. I said, hey, how much is that card words? He knows exactly what it's worth. I said, why? Well, nobody's got one.
Everybody wants one. I said, great. Here's 10,000 more, what happens to the value? He's like, oh, I don't want that. I don't want that.
Well, no, no, no, no, we can't have that. But you say the same thing about money and people like, huh, yeah, you're right. Why don't we do that? That's dumb. Exactly, exactly. But that's the big lie is that the global debasement is death by 1000 cuts. It has been true for 100 years.
It's just that now we're in an end game of a cycle, and the last time we were in the end game, it didn't end very well. I don't know how these ends, but I hope it's not war. If it has to be a move to another-- either the world comes together, and agrees that everybody gets to write down their debt, I don't see how that happens, but I don't know how we get out of this, but I know that the last time it happened, it didn't end well. When I don't know how something is going to end, it really bothers me.
RAOUL PAL: I think in the end, Neil Howe's [?] fourth turning is like the framework for all of us. We don't know the answers, but we know that change is happening and it's real. This is not noise. The internet is disrupting money and all value.
Somebody put it to me that finances now has basically unlimited TAM. The total addressable markets of every person on earth, they can even disrupt the financial system. That wasn't necessarily of the case with Facebook and others. This big.
Bill, listen, fantastic. Really enjoyed that. Lots to dig into and lots of ideas. I thoroughly enjoyed it, and we'll get you back soon. BILL BARHYDT: Thanks for having me. It was really interesting.
RAOUL PAL: Yeah, brilliant. BILL BARHYDT: Thanks, man. NICK CORREA: Thank you for watching this interview. This is just a taste of what we do at Real Vision. To learn more about the complex world of finance, business, and the global economy, click on the membership link in the description. Give us 7 days to change your life.
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