Bill Barhydt is the kind of smart person other smart people listen to. Before he was an investment banker at Goldman Sachs, he developed rocket simulations at NASA, the fancy term is computational fluid dynamics. He spent the dawn of the Internet Age at Netscape, leaving behind the high-paying Wall Street job. Long before anyone used the term “DeFi,” he was founder and CEO of Boom Financial, which realized his insight that brick-and-mortar banks don’t do anything that a smartphone can’t. Barhydt’s company and the iPhone both debuted in 2007, and, less than five years later, he gave the first TED Talk on Bitcoin – no doubt inspiring a few forward thinkers to invest $5 to buy one bitcoin.
In his current incarnation as founder and CEO of Abra — a global crypto platform that offers a popular brokerage for buying and selling cryptos combined with interest-bearing wallets – Barhydt gave CoinDesk Studios a bit of his time recently to answer our questions about how to draw passive income from digital holdings. The discussion has been edited for clarity and brevity, but you can listen to the entire 20-minute conversation here.
Abra offers as much as 13% interest on stablecoin stakes. How do you do that?
Abra combines CeFi – centralized finance – with DeFi (decentralized finance governed by smart contracts). In crypto, we can lend deposits to generate a return, and then – unlike a bank – most of those returns are given to the depositor. The way the CeFi piece of it works is simple: Institutional borrowers or retail borrowers deposit collateral, and depending on how much collateral they deposit, they can borrow a certain amount of dollars, or in the case of institutions, they can also 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 give me a $1 million loan with 0% interest. That’s a 10% loan-to-value ratio [or LTV]. If I want to deposit less collateral, the interest rate would simply be a little bit higher – and it’ll go higher and higher until I get to about a 50% LTV.
For the DeFi piece, I can stake USDC or some other stablecoin into a DeFi contract, and effectively, I’m lending that stablecoin into the contract – typically a lending pool – and make a return. Those returns can range from a couple of percentage points to dozens of percentage points.
Sometimes those returns are not just in-kind, meaning the return is not just paid in USDC. You’re also receiving a token from the pool.
At Abra, we’re mostly doing CeFi. We plan to do more in the DeFi space over time, but putting depositors’ funds into DeFi positions is considerably more complex in terms of risk management, monitoring and overall resources.
What is it about DeFi that you see going forward as tools for making passive income?
Soon, we’re going to start allowing Abra users to make direct bets into DeFi, bypassing our ability to generate “curated” yield for them and for them to make deposits directly into DeFi strategies.
From a risk management perspective, these users are completely on their own. Now, we’re going to try to curate some of those capabilities to find the ones we think have been vetted, where the smart contract code has been carefully audited and scrubbed, and hopefully has been operating for a while. But ultimately, that’s a risk on the consumer versus our existing yield products where the risk management processes are on us (Abra and its bank partners).
That (direct investing in DeFi) is not for everyone, but that’s the advantage of working with a company like Abra. You can make those decisions for yourself.
We’ll see how this space evolves over time, but to me, DeFi is a tool. It’s 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’ll see how both consumers and financial institutions take advantage of those protocols over time.
People need to spend a little bit of time with this just getting some conviction for where this space is going. It’s better to do that than to blindly trust a service provider. We’ve been educated to just trust the banks. And that hasn’t worked.
Banks have negative Net Promoter Scores. I’ve never seen any other business with a negative NPS score. For some banks, for every new customer they gain, their overall reputation goes down – which shouldn’t be possible mathematically, but it’s happening.
Interest rates are climbing and this past month has not been kind to the crypto market. How do you deal with loans that might suddenly be underwater?
We don’t really get loans underwater because the LTVs are very low. So it’s incredibly rare. A consumer loan doesn’t go underwater because the LTVs are too low. On the institutional side, only companies with huge balance sheets get high-LTV loans, and they’ll get a 24-hour collateral call. It happens all the time, and we’ve never had a firm miss a collateral call, and we manage upward of $1.5 billion dollars in these positions.
As for interest rates, bank rates and crypto rates are kind of like parallel universes. Crypto has its own yield curve. Keep in mind that most borrowers in the crypto space cannot go to the traditional banking system yet to borrow anything. You go to a bank with bitcoin, and they don’t want to talk to you. They’ll take a yacht as collateral, but they won’t take bitcoin. The yacht might take six months to sell, while the bitcoin you can sell in six minutes. It doesn’t really make sense, but that’s our opportunity.
Those two worlds will probably converge in time, but that could take 10 years, maybe longer.
In the meantime, do you see opportunities to better leverage cryptocurrencies as securitized tokens?
I spend a lot of time thinking through the implications of that question. The conclusion I come to is that other countries are going to lead the way in this. The U.S. is simply too bogged down in not only 80-year-old regulations (the Investment Company Act of 1940, which regulates investment funds), but multiple piles of regulation on top of that, which makes it an incomprehensible primordial soup of nonsense. A government like Singapore will simply cut through all of this and say, “This is the right thing to do to enable securitized tokens.” It could easily take U.S. regulators decades to get there.
But that is going to happen. You’re going to see the tokenization of almost everything. It will start in other countries where systems will allow them to leapfrog over existing laws and processes and the U.S. will have to play catch up. But obviously, as the biggest market, at some point the U.S. will be incentivized and motivated to catch up.
It’s all extremely compelling to me, this idea of collateralized crypto lending, tokenized securities and even being able to take calls and puts against tokenized versions of real-world assets.
In one of your Money Talks podcasts, you say you’d like to see crypto regulated in the U.S. by only one agency. But the next financial asset that’s regulated by only one U.S. regulator will be the first. You mentioned Singapore. Are there other venues you think will take the lead as crypto goes mainstream?
We’ve talked to many 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 digital asset policy that makes a lot of sense for companies that might not even touch the fiat system.
Wyoming, right here in the U.S. – their SPDI (special purpose depository institution) charter doesn’t require FDIC insurance if you’re not touching cash.
These regulatory regimes are aggressively and appropriately looking at the digital-first future and are asking, “How does this integrate with the traditional financial system?”
Does this affect where Abra is domiciled or where it operates?
Oh, sure. You need 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 mentioned examples of where some of the smart regulators and forward-looking congresspeople are operating, and I think they’re going to reap big windfalls from that. I would be shocked if we didn’t see a lot of companies set up shop in Wyoming or Singapore or Bermuda.
And we’re looking at all of this. We originated in Silicon Valley as a traditional C-corp with investors holding shares, but I’m not so sure that’s the way of the future. If I can set up a liquid DAO (decentralized autonomous organization) with open-source developers that doesn’t focus on cash flows but focuses on the utility of what I’m building, then everyone can profit from that utility over time, that actually changes the perspective. That’s a technology-driven movement toward decentralization. And we’re not equipped to have a regulatory discussion about what that means just yet.
Abra is an all-in-one simple, secure app that allows you to trade over 110 cryptocurrencies, get 0% interest loans using your crypto as collateral and earn interest with up to 13% APY on stablecoins and 7.15% APY 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 crypto once you fund your account. You came, you invested, now conquer. Abra – Conquer Crypto.
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