Preston Pysh (00:08:45):
What were they saying the reason for shutting it down was?

Bill Barhydt (00:08:50):
I think FinCEN had already issued their guidance around prepaid access, which basically points to money transfer rules and whatnot. And also, you could Google me and find out that I used to run a remittance company. You put two and two together, and that was it. And it was nothing nefarious. Like I said, I didn’t need a bank account to run the business except to pay employees.

Bill Barhydt (00:09:11):
So finally, I was able to work that out and it’s all good. But it’s a little different today. You can get a bank account painfully if you’re in the crypto space. To store customer funds is another story, but certainly to pay employees. But it was a lot of heavy lifting to figure out, what could you really do with crypto that is useful in the early days of Bitcoin?

Bill Barhydt (00:09:34):
I mean, nobody said crypto. It was Bitcoin. In the early days of Bitcoin, could it be useful for anything? And that was really tough. I’m a very skeptical person by nature, but I also knew the magnitude of the problems and the holes left in the banking system for these kind of bottom half of the pyramid, not just the destitute, but to the entire bottom half of the pyramid.

Preston Pysh (00:09:57):
But what was interesting because… So this is whenever I first started coming into it, is in the ’15 timeframe that you’re talking about. And I just remember distinctly back then, it was just so speculative. The price was in the $200 range. Later in that year, it started going up to $300 or whatever, $400. I just kind of remember that we had no idea like the speed at which this might take place.I just remember looking at previous price charts and I know it went up to $1,000 and then it just crashed extremely hard, 80% down.

Preston Pysh (00:10:30):
And it seemed to be finding some footing there. But no one had any type of expectation of like what the code was doing and this idea of it becoming scarcer. I mean, we understood that that was part of the process, but we didn’t really fully understand how these four-year cycles were really going to create these waves of adoption, I guess. I guess I’m just trying to put myself in your shoes back in that timeframe. You didn’t want to do it just like a speculative exchange. You were thinking in a banking kind of way, which I guess for me, I wasn’t even like remotely in that frame of mind back at that point. So walk us through some of that.

Bill Barhydt (00:11:10):
I had two kind of competing perspectives, which still didn’t really involve pure speculation from a business perspective. I’m a hardcore libertarian. I always had this perspective pre Bitcoin that the Federal Reserve should have competition. And I had written an outline for a book on this that I don’t think I’ve ever talked about. Actually, I think it was in the late ’90s I wrote this outline that there should be multiple feds.

Bill Barhydt (00:11:33):
Now, you wouldn’t call it that. You would just have competition. And this was even before I read a lot of the Austrian economists’ ideas on the topic about private money, and they did a way better job of explaining it than I ever could. I give those papers to people all the time now. But I had this innate idea that the government shouldn’t have a monopoly on money, without knowing full tilt that there was this whole Austrian school about it and Ron Paul’s ideas about it.

Bill Barhydt (00:11:59):
And then I had the second idea that we’ve got to solve this money transfer problem. We’ve got to solve this remittance problem. We’ve got to make banking and lending accessible and capitalism accessible to everyone because that’s the rising tide that lifts all boats to me, having watched it firsthand in time I spent in Asia and other places. And so could Bitcoin facilitate this?

Bill Barhydt (00:12:23):
I was researching for a short TED talk I did for a closed session to TED on Bitcoin. I think it was trading about a dollar. And I came up with this crazy concept of marrying these two ideas I had: one, could it basically be the basis for money transfer, payments and banking? And two, I had just recently read comments that a group at the UN had decided that the dollar wasn’t a viable reserve currency anymore. And this was basically in 2011.

Bill Barhydt (00:12:50):
And so in 2012, I gave this talk and I merged the ideas and said, hey, is it possible that you could end up with a non-government actor creating a reserve currency? And could it end up being a trustless currency like this? Now, I just said it two sentences way better than what I could have said in 2012, because we didn’t have any lingo for any of this, by the way. Things have changed a lot.

Bill Barhydt (00:13:12):
And so I was just flying by the seat of my pants to try to make a point that this trustless system that no one had ever seen before, in theory, with no off switch already, which was super powerful already. Even in 2012, it was the most powerful supercomputer in the world if you just looked at its collective hash power back then. And could that become the basis for a new monetary system?

Bill Barhydt (00:13:33):
And that was simply the question that I asked back then. And it was only a result of the fact that I’d had this gnawing idea in the back of my mind about, why do we simply outsource money to the government automatically? And we just blindly accepted. It makes no sense to me. Well, it isn’t true. It does make sense to me why many people blindly accept it, but we shouldn’t. We should question it at least, and then maybe accepted it or not. I obviously come out on the ‘or not’ side of it, but we should at least question it.

Preston Pysh (00:14:04):
Yeah, for sure. I mean, when you’re looking at the promise that your buying power of the work that you’ve already performed is going to be eroded no matter what, I’m with you a hundred percent. It makes perfect.

Bill Barhydt (00:14:19):
There’s access as well. So there are two parts to a monetary system. There’s, what is the store of value and what preserves that store of value? For a lot of people, they don’t care about that. For example, [inaudible 00:14:33], in Mexico, most of that money is spent before it’s received. They’re not overly concerned with the pesos purchasing power over time, at least not intuitively. It would intuitively obvious they should be.

Bill Barhydt (00:14:46):
What their concern is, can they get the money? Is it cheap? How much money did they have to lose in sending the money they got? How easy was it to get? And if the banks or ATM machines are offline, am I screwed? That’s what kind of goes through the mind of certain people in certain segments of the population. But then there’s of course our segment of the population, which is we’re getting screwed because we simply have, again, the proverbial finger on the print button.

Bill Barhydt (00:15:14):
It’s not that simple, but that’s more or less what’s happening. And so both of those things are happening at the same time with the same monetary system. And different people have different perspectives on why that matters to them without thinking about the other person’s perspective at all.

Preston Pysh (00:15:31):
So talk to us more about the mission of the business. So you stand up the company. Was the idea to always kind of go into this borrowing and lending piece of Bitcoin? So talk to us about that.

Bill Barhydt (00:15:45):
Not the way we’re doing it certainly today, but it was. I mean, my mission remains the same, and that is to build a global bank that democratizes access to anything that we do. I want to offer services to every single person on this planet. Now, that’s not realistic for every feature we launch out of the gate on day one, but that’s the end game for me. I want to build a global bank with crypto and Bitcoin at its core, smart contracts, Bitcoin, all of it, and enable all forms of lending, wealth management, payments, money transfer, and displace the middleman.

Bill Barhydt (00:16:22):
The way I looked at it is that from the earliest days of Netscape, where I watched businesses get disintermediated from the inside out by software and the internet, that has not happened in banking. We have the nice, sorry, lipstick on a pig kind of model of banking software, where the web apps or the mobile apps look cool, but it’s the same core. It’s the same fed. It’s the same repo markets. It’s the same inter-banking markets.

Bill Barhydt (00:16:47):
It’s the same BIS we’ve had, the same BS we’ve had for a hundred years. It has not been disintermediated from the inside out. This is our opportunity. That’s our mission, is to help facilitate that. Now, we may put ourselves out of business over time, right? Because over time, it may turn out that all of this can become trustless and you don’t need a company like Abra to facilitate any of the services that we’re facilitating. And it’s possible. It’s possible we become a pretty front end on a lot of different things.

Bill Barhydt (00:17:17):
Today, we’re not there. You need a custodian. I know a lot of people don’t agree with me, but you need the custodian. You need the service provider. You need liquidity management because we have an existing banking system. And you need the hard line into the matrix, as I call it, to make these things work. We may not in 25 years. That may be great. I don’t know. But we do today. And so that’s how I look at it, is, how can we facilitate democratization of access to all financial services on the assumption that they’re all going to be crypto-based in the coming decades?

Preston Pysh (00:17:53):
So let’s talk about the policy side of things. This infrastructure bill was massive for just like everybody in the space is talking about the few lines of descriptions that were in this bill. The amount of conversation and the amount of buzz around it was crazy.

Bill Barhydt (00:18:12):
Yeah. I wonder if Moses had as much feedback when he came down the mountain. I mean, it’s crazy what’s been going on for these four lines of texts.

Preston Pysh (00:18:22):
So talk to us how you’re perceiving as a person who’s in the borrowing and lending space and perceiving the terminology that really seems like it’s going to evolve is digital asset and digital asset security. It seems like the two big catches, the two big rockets.

Bill Barhydt (00:18:39):
That’s right. So I think that there are so many things happening at once here. And I was shocked. I don’t know if you saw the video that I shared that Ted Cruz put out, which I think it was the most retweeted tweet I’ve ever had in my umpteen years on Twitter, where he basically said, “There’s not five of us in the Senate who actually understand what the hell this thing is and yeah, we want to regulate it to hell.” He’s absolutely right. And it makes no sense whatsoever.

Bill Barhydt (00:19:03):
Okay. So let’s put that aside. Those of us on the inside, we accept the fact that they don’t know what it is, but they’re going to do something anyway and accept that. I mean, look at the BitLicense. I mean, the BitLicense shouldn’t exist in that form. That was hastily written before Bitcoin was really even a big thing, and mostly in response to the FinCEN guidance. So without actually understanding where the market was going to go. And that’s my big fear here.

Bill Barhydt (00:19:28):
And the other thing I’ll say is words matter. So the IRS or treasury is trying to make the case now, well, that’s not really our intent by basically extrapolating this potentially broad definition of broker. Well, as a citizen, I have to look at this and go, well, yeah, I guess you can try to interpret intent. And we do that all the time, back to the original Federalist papers, whatever. But you don’t need to hear. If this is your intent and you’re in cahoots with the people who are writing it, fix the damn language. The words matter.

Bill Barhydt (00:20:01):
It’s not that hard. And so since it’s not that hard, really, given that they are in cahoots, you have to take a step back and go, okay, why are they really leaving it this way? Why are they giving themselves such broad leeway to interpret the word broker any way they want, to potentially go after a software developer or a miner? Do I really believe they’re going to do that in the next three years? Probably not. Does my opinion matter? Probably not.

Bill Barhydt (00:20:29):
The fact remains that they have broad-based leeway according to this document to do that. And you get another nut in FinCEN or the IRS or the SEC who interprets this some other way, look out. And so that’s very worrisome and I think it deserves a fight. I have to agree with Senator Cruz on this, they don’t know what they’re doing. Or they do know what they’re doing, which is even scary.

Preston Pysh (00:20:57):
Yeah. I kind of side on the first take, but you don’t know. Are they saying that or do they actually know what they’re doing?

Bill Barhydt (00:21:06):
You said something else, by the way. You said they’re going to fight DeFi. I’m struggling with that one because I don’t think that they can. And I think that the SEC and the CFTC understand the difference, meaning most services today that call themselves DeFi are de, meaning there’s an off switch, right? And so if you can go after the off switch and you fall under existing regulation, in their opinion, you should expect they’re going to come after you.

Bill Barhydt (00:21:32):
It’s the difference between running Uniswap the webpage and Uniswap the protocol, or a DeFi protocol that you can’t shut off because the contracts are out there and are running on a let’s call it a sufficiently decentralized system like Ethereum with no off switch. Okay? I believe that they would recognize that they can’t shut off those services and they would also recognize there’s no one to go after, unless you want to put somebody in jail for doing something that is already out there and can’t be shut off, which BitTorrent has already shown us.

Bill Barhydt (00:22:03):
They’ll go after the users and fail. Before they would go after Bram, the protocol creator. So I do think there’s going to be a lot of cases brought against services that market themselves purely as DeFi, but aren’t truly de. And we’ll see how that plays out. But I think there’s going to be a lot of rude awakenings in the coming months.

Preston Pysh (00:22:24):
I get the impression that Gary Gensler views it as there’s Bitcoin, and then there’s everything else. Do you see it that way? And how much does that matter that Gary Gensler feels that way versus all the other participants and key stakeholders that are involved in this?

Bill Barhydt (00:22:41):
There was an interesting public comment from, I think it was a Republican, I want to say congressperson who’s on the oversight committee related to the CFTC, who said, “Hey, you’re overreaching here.” You should, of all people, know the difference between the CFTC’s writ and your writ and the SEC. Now, he understands crypto tech better probably than his counterpart overseeing the CFTC. And I don’t know that for sure, but I’m guessing having taught at MIT and I’ve spent time with him when I presented there, that he doesn’t know what he’s talking about, at least in terms of how it works at a very high level.

Bill Barhydt (00:23:14):
Kind of like mine. I’m not a coder anymore, but at a high level, he could explain it. But he’s totally wrong. A lot of what he said at the ASPEN, I agree with in terms of their ability and or the CFTC’s ability to go after some of these DeFi services under certain circumstances. But the automatic assumption that everything is a security is just nonsense. Even enforcement will tell you it’s facts and circumstances. The lawyers will tell you it’s facts and circumstances.

Bill Barhydt (00:23:39):
Okay. What are the facts and what are the circumstances? And so they going to have to pick and choose their battles because unfortunately, he’s not going to get the army of people he probably wants from Congress. He’s going to get more, but he’s not going to get an army. They will pick and choose their battles. And they’ll go cherry picking people who are probably running, basically either issuing security tokens, or enabling the exchange of security tokens and DeFi services, whatever. They’re certainly going to go after them. I have very little doubt about that.

Bill Barhydt (00:24:06):
I do think that a lot of the comments around everything is a security don’t resonate with me. Ethereum is not a security. I’m sorry to my maximalist friends. Migrating a proof of stake does not turn Ethereum into a security. Cardano is not a security. These systems use utility tokens as gas. Maybe the way they raised money by today’s standards was a security offering. You can maybe make that case. But that ship has sailed.

Bill Barhydt (00:24:35):
They had no guidance. They didn’t go after anyone in those days. And to do what they did, for example, in the Ripple case now it makes no sense. I believe what Ripple did was a security offering when they raised the money, but to wait seven years, I’m guessing billions of dollars later to go after it, it makes no sense.

Preston Pysh (00:24:52):
Do you think that they’re doing the Ripple case to try to set a precedence or some type of case law that can be used against other protocols and developers and whatnot? Do you think that they strategically picked Ripple because they saw that as being their highest probability of getting a favorable win?

Bill Barhydt (00:25:12):
Well, they don’t want to lose. But if you’re an enforcement lawyer, part of what you’re going to do is you’re probably going to go work in private practice at some point, and you really don’t want to have a track record of losing and picking bad cases, I’m guessing. On the other hand, right now, crypto is a shiny object. So if you’re an enforcement and you have the ability to choose what kind of case you’re going to work on, I’m guessing right now, if you could choose, you’d probably prefer to work on a crypto case.

Bill Barhydt (00:25:36):
So you’ve got to combine that, you want to work on a crypto case and you want to work on a crypto case you don’t want to lose. So in there somewhere is the belief on someone’s part that what Ripple is doing as a company is a security offering. They’re wrong, and we can win. Otherwise, I don’t think they go into this thinking we have no chance of winning this, but we’ll make life difficult for them for five years. I just find that hard to believe.

Preston Pysh (00:25:58):
How about the time frame? So none of that has even taken place. And then after it does, we’re talking like two, three years before any of this becomes real. And I just think about how much this market has matured in a two or three year timeframe.

Bill Barhydt (00:26:12):
And all that things can be fixed between now and then as well, or broken more.

Preston Pysh (00:26:17):
What do you mean by that?

Bill Barhydt (00:26:18):
You can have bills that fix wording in the definition of a broker. You could have bills that actually make it worse in theory. It’s an easy target. To your point about it won’t be adjudicated for a few years, you don’t know who the interpreter is going to be on the regulatory side. And that was my point earlier, where if you get some nut who just doesn’t understand the original intent and decides to go full tilt towards our worst fears, who knows what that could mean?

Bill Barhydt (00:26:45):
It could mean another China, too, where we migrate mining out of the US again three years from now. I pray that’s dreaming that that could even happen. But I don’t think it’s a zero probability outcome given the current wording that you could end up with someone in a regulatory position of power who could interpret this that way, for whatever political reason they choose to do so. I would say the odds are against it happening, but it’s a non-zero probability, which is why this needs to be fixed.

Preston Pysh (00:27:13):
So I saw you commenting or re-tweeting some of Caitlin Long’s posts recently and kind of what she has going on with Avanti. How are you viewing her decisions from a regulatory standpoint? She seems to be really kind of understanding at a very high level where this is all going. So help us understand some of the thoughts that how you see what she’s doing and how she’s positioning herself, and then maybe how that applies to you at Abra.

Bill Barhydt (00:27:39):
It’s super interesting. We talked every once in a while. And she’s brilliant. I mean, her ability to go deep on this stuff is just awesome. Thank God we have her in the community, not just for Avanti, but in the community at large. So Caitlin, thank you for what you do. We come at this from a different perspective. I understand originally the money transfer there were kind of FinCEN guidance on prepaid access. I’ve been a prepaid card issuer.

Bill Barhydt (00:28:02):
It just turns out that the early days of crypto, most of the regulations stemmed from that world because we didn’t have the idea of Bitcoin or virtual currencies in that regard in existing regulation. So FinCEN, IRS, and other states used that existing regulation and layered on top. It turns out I came from that world. She came at this more of an eye from the traditional banking world. So we’re kind of meeting in the middle now in terms of our understanding of where this is all going.

Bill Barhydt (00:28:33):
I mean, she’s taking a very ambitious approach in terms of being able to issue true dollars, not just even stable coins, true dollars through Avanti and being able to access the fed directly. And we’ll see. I think she’ll get it done. I think it’s going to be tough. I think the fact that she’s servicing institutions only and not retail is probably the main reason why she’ll be able to get it done in the next couple of years.

Bill Barhydt (00:28:57):
I think somebody doing what she’s trying to do directly for retail would have it five times harder at least, but we’ll see. And I think that’s one of the reasons why I’m bullish on, for example, Circle. I think there’s a much better chance that Congress will enable the fed and others to work with private industry to back stable coins than necessarily just to come up with a central bank digital currency. And just given the politics of it, it’s going to be very difficult.

Preston Pysh (00:29:21):
That’s interesting that you say that. So I agree with you. It seems like not everyone would agree with the two of us on that playing out. Part of my reason for thinking that is I just think it’s a little complex for the government to do technologically and then to manage that without going into some type of outsourced model. The time for them to mature the tech, to put somebody on contract, to test it to make sure that it doesn’t disrupt the entire global economy if there’s a mistake. All of those things seem to me like it’s going to go down that path.

Bill Barhydt (00:29:56):
You’re talking about digital seigniorage, first of all. And most people don’t really know what seigniorage is. I mean, it’s the process of creating money out of nothing effectively. It’s a debt-based instrument, but effectively out of nothing. I’m not a macroeconomist, so I’m sure I got it wrong, but that’s how I look at it. It’s way easier to get a money transmitter license to put a bunch of reserves in a bank account and issue a smart contract to give you access to that reserve than it is to replace a hundred years of seigniorage processes and the contracts that underlie what a Federal Reserve note is from scratch in digital form.

Bill Barhydt (00:30:36):
I haven’t looked at all those regulation, but I know they’re extremely complex. The processes are extremely complex. What goes on behind the scenes to get that money minted is extremely complex and it’s not going to be easy. We’ll have 10 competitors to Circle in the market before we have the central bank figuring out how to replace analog seigniorage with digital seigniorage.

Preston Pysh (00:30:58):
So when I’m looking at the buyer bill, or at least the draft of the buyer bill that’s out there right now, this seems to be the really big document. This is a 60-page document that’s going to really kind of break out the terminology. It’s going to, from what I understand, really put the restriction on stable coins. And a lot of the language that appears in this bill is coming out of the treasury.

Preston Pysh (00:31:21):
They had a really hard time until I think it was Caitlin that really kind of laid it out that helped make it click for me on why the stable coin piece was such a big deal. And what it really comes down to is just clearance times. And when you look at the capital requirements of these banks and they’re doing their risk-weighted and risk-adjusted asset capital requirements, they’re used to doing this dollar-for-dollar capital requirements that have this overnight reconciliation. Period.

Preston Pysh (00:31:51):
And so if everybody’s reconciling those books on a day for day basis, no one’s getting clearance faster than that. And now you enter in this stable coin market, which is absolutely exploding, like in the last nine months. You know the numbers better than I do. I mean, it’s like exploding in market cap size and your clearance is immediate or in some cases a couple of minutes. And you’re putting that up against something that these capital requirements are used to a 24-hour adjudication period of reconciliation. It’s almost like comparing something that’s moving 10 miles an hour to something that’s moving at the speed of light.

Bill Barhydt (00:32:33):
Yeah. She makes a really good case for this, for sure.

Preston Pysh (00:32:36):
What are your thoughts on some of this?

Bill Barhydt (00:32:39):
I have a slightly different perspective. We’ve talked about it, Caitlin and I, and I totally get where she’s coming from. I think that the existing banking system, as it relates to reserve management, can be mostly fixed to address this. I think that the stable coin model is actually in some ways better because banks that can participate in fractional reserve banking, meaning traditional bank, DDA-based issuing banks, can’t with funds earmarked for prepaid stored-value products or prepaid access products in general. That’s my understanding.

Bill Barhydt (00:33:13):
And a lot of this comes down to FDAC rules because they’re the ones that the banks ultimately report to for these prepaid access products because they’re considered, in many cases, high risk products, not just crypto, but prepaid cards and other products. My understanding is they have to maintain one-to-one reserves. Now, they don’t necessarily have to be purely dollar based. They can be treasuries and other things. But they do need to remain a hundred percent reserves, was always my understanding.

Bill Barhydt (00:33:36):
Now, Caitlin’s point is a little bit different in terms of the risks associated with reconciliation and settlement and the way things move on a blockchain and settle on a blockchain versus the way they move in traditional banking markets. I get that and I agree in terms of how things work today. My response is that I think that there’s a better chance of fixing that than there is of the fed, the treasury, IRS, FinCEN, and everybody else with the state getting together and figuring out how to build a digital seigniorage system. That’s my gut. And I’m not deep in it enough to tell you what the answer is, but I understand the problem on both sides enough to know where I’d place my bet in terms of what has a better chance of being fixed in terms of the risks.

Preston Pysh (00:34:19):
They need to move out on this like six months ago and here we are. And the size of this is only like going exponential.

Bill Barhydt (00:34:27):
It is. But again, I’d rather trust something right now like Circle with a hundred percent reserves, whether the reserves or treasuries or whatever, than a bank that’s issuing a DDA. It’s actually safer, for everything I know, minus the issue she’s raised.

Preston Pysh (00:34:43):
But that’s you understanding what’s going on? And some of the other participants in the system maybe don’t or they’re such a bureaucracy that they don’t understand that here you are, you’re comfortable, you know what’s on your books. You’re collecting this thing that’s already cleared, like cleared at the speed of light. And they’re holding things that they’re rehypothecating that they won’t even know cleared for another 24 hours. It’s entering into this operational risk and this capital requirements risk or market risk that I don’t know all the players in the game really have an appreciation for. And if that’s true, is it introducing a massive systematic risk to the global economy that they’re losing control of?

Bill Barhydt (00:35:30):
I don’t know. Look, I mean, the prime broker model has been around for a very long time. I talked about this when the GameStop thing was happening, that we didn’t know what kind of systemic risk was being created by prime brokers lending out and rehypothecating those shares. Who is going to be left holding the bag if retail and institutions end up fighting it out that way with equities that are basically being managed by banks? Because Goldman’s a bank. So I think this is a much smaller market than that today, but it’s growing way faster. I mean, I look at our lending business that didn’t exist 18 months ago and I’m like, wow.

Preston Pysh (00:36:05):
If I was going to disagree with you on that, so there’s no way the GameStop rehypothecation is anywhere near the stable coin market cap size.

Bill Barhydt (00:36:16):
That’s one company. I’m talking about the entire market. So yeah. But you could end up with a model where if you’ve got people leveraged short, this thing goes to infinity because retail has gone crazy. There’s got to be systemic risk. It’s a very low probability for a company like GameStop, but it’s a non-zero probability. I just think that prime broker market is way bigger in the aggregate than the stable coin market is today with the rehypothecation going on and with certain players in the market.

Bill Barhydt (00:36:49):
But our space is growing way faster, an order of magnitude faster, and it is going to catch up over the next 10 years. And the bigger problem in my opinion is what’s going to happen with the non, let’s call them the quasi unregulated actors. And I’ll put Tether in that bucket for now, even though they’ve agreed with the state of New York to issue audited statements on their reserves. They’re effectively an unregulated entity by, I would guess, US state and federal standards. And they’re just one company.

Bill Barhydt (00:37:21):
We can end up with these Tether-like actors all over the world rehypothecating smart contracts against assets that maybe don’t even exist. We ultimately have no way of knowing. You’re starting to see things like I think BitMEX put out this proof of reserve.

Preston Pysh (00:37:36):
I want to talk to you about that. So I found that to be really interesting. Is this something that you’re thinking about doing?

Bill Barhydt (00:37:42):
I’ve just started looking at it. So I have to marry that with how we manage reserves. So we don’t issue, for example, retail accounts directly. Their issued by a trust bank. We work with different lending licenses and different models for different things. That’s legal. From a technology perspective. I think it’s super interesting and it makes a lot of sense. I’d love to be in a position where it’s just all out there in smart contracts and on a webpage and everybody can validate it.

Bill Barhydt (00:38:06):
I mean, you’re marrying two different worlds. It’s another hard line into the matrix and you’re trusting that the hard line is actually looking at the right matrix. So when you say proof of reserves, you’re always trusting, whether you’re trusting the entity that has the look inside to get you the data. It’s like digital identity. Who’s the Onramp? Because you’re trusting someone. Proof of reserves means you’re trusting somebody who’s taking a look to give you that data. But that’s fine. It’s better than what we have right now in most cases.

Preston Pysh (00:38:35):
Let’s talk a little bit about trends. So as an exchange, as an entity, a borrowing/lending platform, you have access to just data and information and trends. If you’re able to share, I’m just kind of curious, as of right now in the middle of August 2021, what are some of the things that you’re noticing or kind of like your eyebrow kind of goes up like, “Well, that’s kind of interesting. What the heck is going on there?”

Bill Barhydt (00:39:03):
There’s a lot of it. We have kind of a dual track in our company in terms of who our customers are. We have high net worth customers depositing millions of dollars to earn yield, for example. Bitcoin, dollars, stable coins, et cetera, et cetera. We have people in developing markets using the exact same service, walking into retail with $50 in pesos or Philippine pesos and Guatemala and El Salvador doing the same thing, literally walking in with cash, walking out with Bitcoin earning yield in their average wallet. And it blows my mind.

Bill Barhydt (00:39:38):
They’re also doing slightly different things. But that overlap is mind blowing to me. That one will wire a million dollars and the other one will walk in with cash and both for exactly the same reasons. 10 years ago, that wasn’t happening anywhere on planet earth, with the same app. It’s of the same binary download for both iOS and Android. And if you’re using it from a country where we support a cash deposit, you’ll actually see that option in the app, but you won’t see it if you’re obviously a US user, where we don’t have that option. So that’s one thing.

Bill Barhydt (00:40:08):
I would say we’re also seeing a very different evolution of our retail and institutional businesses right now. The interest in the speculative aspect of the businesses right now is much stronger on the retail side. It was growing quickly in the first half of the year. It’s definitely died down. But it’s still growing relative to the fact that it didn’t exist a couple of years ago.

Bill Barhydt (00:40:28):
But clearly, the retail interest right now is way out ahead for us. And I think you’re seeing that right now in when we bounced off the, I’ll date the podcast a little bit, but we’re seeing Bitcoin bounce off those lows the last few weeks. It’s all retail-driven right now. And some of it is whales. We’re seeing a lot of whales that are accumulating and basically looking at prices to come in, but what we’re not seeing is the institutions right now buying.

Bill Barhydt (00:40:54):
And it’s very similar to what we saw in like December of last year. Well, it’s actually a lot of high-net-worth family office money. People were using the word institution incorrectly. We’re starting to see more of that institutional buying in the first quarter. But yeah. So I would say those two things have been super interesting for us to watch.

Preston Pysh (00:41:11):
Talk to us about interest rates and how some of this is being… You go on there and you look at your stable coins, they’re yielding 8%, I think is the last number that I saw. Bitcoin for your platforms at 3.5%. Talk to us about that trend because six months ago, nine months ago, the numbers were way higher, especially for Bitcoin. What’s driving the interest rate to go down? Do you see a floor being set and the interest rate coming back up? And what is really fundamentally driving this for people that are trying to learn and understand some of those dynamics.

Bill Barhydt (00:41:49):
Off the bat, I’ll say a couple of things. One, we use a model of what we call responsible yield. And responsible yield means we never intend to subsidize yield. Never. And we always look to generate a positive net interest margin on the business. We want most of the interest, the vast majority, in fact, to go to the depositor, whether it’s a consumer or an institution. But we want a self-sustaining business.

Bill Barhydt (00:42:14):
So we’re not in the business of subsidizing yield. And we know for fact that there are other companies out there doing that in order to grow the business. It’s not sustainable. By definition, it’s not sustainable because nobody has infinite resources to subsidize interest payments to something. And I’m not even talking about the legality of any of that. I’m not an expert. But I would venture a guess that some regulators would have some questions about subsidizing yield, at least as a core business model, maybe as a one-off promotion. I don’t know. So we’ll start off there.

Bill Barhydt (00:42:40):
Now, the crypto space has evolved kind of its own yield curve, obviously, for a few different reasons. The banks traditionally, or most banks won’t play in our space. If you’re a miner sitting on a billion dollars worth of crypto and you want to expand your business and use that as collateral, most banks won’t talk to you, at least not banks that do collateralized on yields some time. Now, a company like ours that will gladly take that Bitcoin as collateral, it’s a fantastic model. And so that’s part of why this space has evolved, right?

Bill Barhydt (00:43:10):
So we’ve got a combination of minors, we’ve got hedge funds, all basically sitting on myriad forms of collateral. And then obviously retail depositors that we can marry that with, who’ve done quite well. And then of course there’s DeFi. That’s the smallest one piece of our business, but it has grown significantly. And we’ve taken a very slow, methodical tack to that in terms of contract audits and testing with small amounts of money and scaling and getting out if things don’t look right to us in our tests, et cetera, et cetera.

Bill Barhydt (00:43:40):
But it’s actually been extremely lucrative for the relatively small amount of our business that we’ve done it with. And I wish we were at a position to go faster. I just don’t think that the market is really ready for that accelerated level of support just yet. And we’ve seen that in other hacks. But we also do a lot more code auditing, I’m guessing, than a lot of consumers do who use DeFi directly. So the net-net of all this is that the rates that we offer today are a direct function of all of those different lending models I just described, which have a demand model based upon where the markets are.

Bill Barhydt (00:44:14):
If right now there’s a lot of demand for dollars because miners are setting up shop in the US, but they can’t get in business fast enough. The facilities are ready. The transformers aren’t ready, basics aren’t here yet. So in some cases, there’s a 12 to 18 month wait-in-line function for scaling up hash power in the US. So that’s limiting some of the dollars. When the market is screaming higher, some of the exchanges that offer leverage are borrowing dollars to do that, borrowing stable coins directly.

Bill Barhydt (00:44:44):
Those markets are a function of where the Bitcoin price is, as opposed to just hash power. And so there’s different things going on, different dynamics that are at play here across the board. And then there’s different coins and different DeFi projects that might basically have different price action for different reasons. If Cardano was launching a smart contract system and the staking numbers are going through the roof, well, there’s less Cardano in circulation, and that has implications for interest rates, et cetera.

Bill Barhydt (00:45:10):
So all of this is happening at same time in a way where the crypto kind of banking system has evolved in its own unique way versus the traditional banking system. Now, you can’t pay interest in kind on Bitcoin deposits forever because Bitcoin is a deflationary assets. Back to your other question about where this is going. So that’s unsustainable. You can do it in very small amounts, the interest in very small amounts so that it becomes unsustainable over a very, very long period of time.

Bill Barhydt (00:45:38):
But the interest rates are high enough right now where it’s unsustainable. Certainly less than five years out, I would suspect given the rate of growth in the crypto space, Bitcoin rates specifically will have to come down, unless you’re paying in something other than in kind, meaning in dollars or another token or rewards coin or something besides Bitcoin. It’s just the deflationary nature of Bitcoin. The number of people coming in. The math just doesn’t work.

Bill Barhydt (00:46:03):
But for the other pieces of the business, it’s unclear how this is going to evolve over time. Now with Ethereum potentially becoming deflationary for the first time, and it actually did have a few days last week where it looked like it was deflating, who knows how that will evolve? Super interesting. But again, our take from day one has been be the responsible method for generating yield and be very transparent. I get the same question every Friday and money talks. And every Friday I’m happy to go in-depth and much longer than I am even right now on the explanation of how we generate that yield.

Preston Pysh (00:46:38):
Talk to us about stable coin yields. What’s your expectation for that in a 5, 10-year timeframe? Because right now your yields are in a different universe compared to the 10-year treasury and anything you’d get from a traditional bank. Is your expectation in five years from now that it’s even more extreme than that?

Bill Barhydt (00:46:58):
Yeah, but so is venture debt. The fact that I can earn 50X what I might earn in a bank account is not really the operative point of it. There’s lots of ways to make 10% yield via lending. I mean, Yieldstreet and [inaudible 00:47:08] and Cadre. By the way, I went out and tested every single one of these services before we launched Abra for a few years. And I’m still waiting to get money back that I lost in some of those services.

Bill Barhydt (00:47:17):
So I get the high yield. Then I also worked in fixed income at Goldman. So there are lots of ways to generate yield. All of it has different risk models. And so let’s be totally honest and transparent when we talk about risk versus yield. This is not a riskless investment that you’re making. We map each individual deposit to a specific lending opportunity and we have a risk management process for doing that. I personally keep all of my liquid cash in crypto in this because I also know how the risk management model works and I’m comfortable with that level of risk. I perceive it as relatively small, but it’s not zero.

Preston Pysh (00:47:57):
Your comfort level is because it’s over collateralized?

Bill Barhydt (00:48:01):
No. My comfort level is in I know who the borrowers are. I know how we onboard the borrowers, how deep we go in due diligence. I know how the DeFi piece of this works, et cetera, et cetera. And so I sit in on those investment committee meetings when we’re onboarding new counterparties. I listen in on the risk management. So firsthand, I know what’s going on. It’s not tenable for every customer to sit in on that meeting, but it is my job to articulate in forums like this that I’m comfortable with that process because I helped create it, approve it and present it to our board.

Bill Barhydt (00:48:33):
So incumbent on all of us to understand that this is not a riskless investment. To any service out there that’s offering yield on crypto that’s telling you that this is a risk-free return, they’re lying to you. And so I think it’s important that as a space, at least that we’re upfront about the fact that we’re making investments here.

Preston Pysh (00:48:54):
Billy, have you ever considered breaking the company into almost two different entities that would firewall the risk of… Because your institutional books. My understanding is that the model for a lot of the borrowing and lending platforms in the crypto space is that the institutions aren’t necessarily held to the same over-collateralization that a retail person is if they’re going to take out a loan.

Preston Pysh (00:49:18):
So that’s a systematic risk that’s introduced by those institutions for not being overcollateralized and spill over into the retail investors. Have you ever considered firewalling through a different EIN number so that if retail people wanted to ensure that there was no rehypothecation and that they were absolutely overcollateralized and that the risk of institutions couldn’t spill into their deposits, do you think that there’d be a market for this? Is this something that you’ve entertained? And do you think that this is a good idea in the first place?

Bill Barhydt (00:49:48):
Yeah. I’ve thought a lot about this and as a customer, I’ve thought about it. I don’t think the demand would be there quite yet because the… I would venture a guess, a lot of the people listening right now wouldn’t be able to dig into the detail of the question.

Preston Pysh (00:50:04):
So they wouldn’t want the lower yield?

Bill Barhydt (00:50:06):
Yeah. What are you talking about, Preston? I don’t understand the difference. Just tell me how much yield I can make. Now, on the other hand, I’m all in. I manage my liquid assets this way, cash, and crypto. So I’m not looking for a junk bond return here. And so we’re managing this as if it was our own money because it is. Now, that having been said, I’m not saying I don’t like the idea you just outlet. I’m just saying that I think the demand…

Preston Pysh (00:50:38):
You don’t think the market is there.

Bill Barhydt (00:50:40):
Or skill is there for that.

Preston Pysh (00:50:41):
If you had to guess, how much of a drop in yield would this be? Because I think I agree with you. I think that if you would present this as a product, that people out there, at least the people that I’ve talked to outside of like your hardcore Twitter Bitcoin zealots. I mean, I’m one of them. So I’m not making fun of anybody. I think that small niche group of people totally get this, but they’re very small in volume and you’re a business trying to make money.

Preston Pysh (00:51:12):
And the conversation that you’ll have on the street is, hey, I’m getting X percent from this platform. I should probably switch over to that platform because there’s no discussion whatsoever of risk that’s associated with the corresponding yield. So what kind of yield do you think a person would get if they were buying a product like this versus what you can offer?

Bill Barhydt (00:51:34):
I honestly don’t know. I’d have to think about it.

Preston Pysh (00:51:38):
Do you think it would be significant? I guess that’s more of what I’m asking. Because I suspect it would be.

Bill Barhydt (00:51:44):
Probably. Dan Held has done a really good job of tracking the space in what I would call a responsible way. He publishes a Google sheet of where he’s testing services. He puts a lot of time into this, which has nothing to do with his day job. I call him a friend. We talk on occasion and we just met at an event in Mexico and caught up. And I’m very impressed, not just because he’s also chosen Abra, but because of the level of detail and the amount of time he’s put into this. So people who don’t follow Dan, you can go and look at his Twitter feed and read about what he’s done to capture what’s going on in my world of both yield, high interest services, as well as retail lending.

Preston Pysh (00:52:26):
Jack Maller has had a big announcement recently, where he’s doing zero fee trades, but just for Bitcoin. He’s focusing solely on Bitcoin and ignoring everything else. I’m kind of curious to hear your thoughts on this? Is this pose a major competitive risk to other exchanges that have every token known to man listed on their exchanges? Is he going to eat into one of their largest revenue sources by taking it to a zero fee?

Bill Barhydt (00:52:59):
I like what Strike is doing. I like the idea of using… I mean, look, where I came from, I like the idea of using lightning for money transfer. I’m enamored with it. I’m spending probably too much time on it right now in terms of my own time, digging in, understanding how nodes work, the economic incentives of nodes. I realize it’s not what you’re asking, but that’s their core business right now.

Bill Barhydt (00:53:21):
Now, he’s extended that by saying, if you don’t have the Bitcoin, I’ll give it to you with no spread. And I think that’s what he’s saying. I haven’t really dug in. I don’t know how their app works in detail. I think they have an ACH function. The way the app is set up today, it’s not going to eat into the speculative buyer markets, at least I don’t think so, beyond a lot of the hardcore Bitcoin maximalists who are huge fans of his, and deservedly so.

Bill Barhydt (00:53:48):
But beyond that, I don’t see… There’s a lot of competition out there. It’s not just about price. And so he will get some business there, but I think he’s going to end up subsidizing that at large scale in an Uber-like model. And at some point, his investors are going to demand that they figure out a business model. And it’s hard enough to create economic incentives around lightening, but doing it where you have a zero spread business is going to be even harder.

Bill Barhydt (00:54:13):
I really want that to succeed. I mean, we’ve looked at it ourselves to try to figure out what economic incentives will be in place to run lightning long-term to deal with remittances and other things, or is that one area of the business that we actually do subsidize? I don’t know. We’ll see what happens. But I think, look, he’s been fantastic for the Bitcoin world and we need a lot more people like him who are going to go out there and take risks. But from an economic perspective, I don’t think that’s a huge announcement, honestly.

Preston Pysh (00:54:41):
This is the last one I have for you. And I don’t know anything about this question, but it seemed like the person who was asking it kind of had an insight as to maybe something you’re working on. And the question was, will Abra try to disrupt the home mortgage model? What was this in reference to?

Bill Barhydt (00:54:56):
Wow. I’d love to know who asked that. I didn’t see that in your Twitter feed if it was public. I hope so. Here’s an interesting tidbit for you. So in the app, you can borrow in, I think this is now a US part of it. We can borrow globally pretty much, but in the US, I think we’re up to like 46 or 47 states now. I think we just turned on Wisconsin or another state today. And so California and New York are coming. And then there’s, I think, one or two other states.

Bill Barhydt (00:55:20):
And then if you want to borrow more than $100,000, we’ll onboard you directly outside the app. And so we’ve had a lot of borrowers in the DC space, moving from San Francisco to Miami, who’ve actually borrowed the down payments for their home from app. Now, this is creating problems in the mortgage space. And I went through this recently because buying a home in Northern California, I’m one of the holdouts who’s not leaving. So the banks won’t deal with crypto. They just will not. Back to the original comment around lending. And now we’re talking about home mortgages.

Bill Barhydt (00:55:54):
So how do you basically deal with qualifying for a mortgage if you’re like let’s call it crypto rich in any way whatsoever? It’s a big problem. So my answer to that person’s question is I hope so. I hope we do end up having to solve this problem, because it is a big problem and our lending business is growing quickly and it’s created this problem.

Preston Pysh (00:56:19):
So help me understand because the person who’d be borrowing against their Bitcoin is paying a really high yield. Somebody obviously doesn’t want to pay that type of yield when they’re borrowing for a house payment that might take them years or whatever time frame.

Bill Barhydt (00:56:32):
That’s different. What I’m saying is that you may be willing to use Bitcoin as collateral for a down payment, but that doesn’t mean you qualify for the mortgage. Because most banks, if you simply borrow against the Bitcoin on Monday, won’t take it for the down payment on Tuesday, because they’re going to insist on the source of the funds. And they’re going to see it’s a Bitcoin collateralized loan and go, “Whoa, we’re done.”

Bill Barhydt (00:56:57):
And so now they’ll come back to Abra and say, “Can you help me?” And they have been. So I easily see Abra now needing to get into that primary business because the source of the equity for the down payment part of the business isn’t recognized by the banking system. And by the way, these tend to be very wealthy people in the US who have a higher net worth and more stable income and are probably better borrowers.

Preston Pysh (00:57:27):
Well, they can probably pay off the house three to 10 times over.

Bill Barhydt (00:57:29):
Yeah. But they don’t want to pay capital gains or… Just being smart. But the banks can’t get out of their own way. So I think this is a huge opportunity and the answer is, yeah, I wouldn’t be surprised if we end up going full tilt into the mortgage business.

Preston Pysh (00:57:43):
So how do you get around that though?

Bill Barhydt (00:57:46):
You figure out how to underwrite.

Preston Pysh (00:57:48):
Ah, I got you.

Bill Barhydt (00:57:50):
So there are two different loans. So one is crypto collateralized, the other one is not. But if you can’t get the other loan any other way, and let’s just say at scale, that’s worth a hundred basis points, that’s huge.

Preston Pysh (00:58:04):
For the underwriter, they’re really just concerned that the collateral is still over collateralized, right?

Bill Barhydt (00:58:10):
You’re giving them a lot of credit. I think they hear the word Bitcoin and they’re like, “We’re done.” I honestly don’t think it’s as sophisticated as what you’re giving them credit for. And this is with firsthand knowledge, by the way. It’s hard for me to speak for every bank making these decisions, but I personally went through this, and a lot of the feedback I got made no sense.

Preston Pysh (00:58:32):
Wow. So yeah, we need some underwriters to figure out that they’re not assuming a lot of risk.

Bill Barhydt (00:58:40):
Big opportunity.

Preston Pysh (00:58:40):
Massive opportunity. Yes.

Bill Barhydt (00:58:41):
I mean, you’re talking about a trillion dollars of wealth that didn’t exist 10 years ago.

Preston Pysh (00:58:48):
All this does is just further the speculative attack on fiat currency as soon as you have an underwriter that actually understands that there’s little to no risk actually being assumed on their part.

Bill Barhydt (00:58:59):
Yeah.

Preston Pysh (00:58:59):
Unbelievable. We’re so early. And people are looking at the price and saying, “Oh my God, it’s $46,000. I missed it.” You have not missed anything at all. We’re so early. Bill, I could talk to you all night. I really appreciate you making time to come on the show. Give people a handoff if they want to find out more about you and about Abra.

Bill Barhydt (00:59:21):
Yeah. So I’m pretty active on Twitter on occasion, Bill Barhydt. And also obviously I have my day job at Abra. So please download Abra, check it out. You can also follow Abra Global on Twitter and we’re abra.com. But yeah, I’m pretty easy to find. So I’m sure your listeners will find me real quick.

Preston Pysh (00:59:38):
All right, Bill. Thanks for coming on the show and making time.

Bill Barhydt (00:59:41):
My pleasure. I really enjoyed it.

Preston Pysh (00:59:43):
Hey. So thanks for everybody listening in to the show. If you enjoyed the conversation, be sure to subscribe to the show on whatever podcast app you’re using. We really appreciate that. And if you have time, leave us a review. So thanks for joining us this week, and we’ll catch you next Wednesday.

Outro (00:59:58):
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