The Pomp Podcast - #933 Bill Barhydt On How Bitcoin Will Disrupt Everything

Episode Date: April 25, 2022

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What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Now let's kick this thing off. Bill Barheit is the CEO of Abra. In this conversation, we talk about everything from regulation to crypto payments to DeFi protocols and how we can bring all of this technology to the mainstream. I really enjoyed this conversation with Bill, and I hope that you enjoy it as well. Before we get into this episode, though, I first want to talk about our sponsors. This episode is brought to you by BlockFi. BlockFi provides financial products for crypto investors.

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All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. All right.

We next have my friend Bill Barheit. Bill is the founder CEO of Abra. He spent a ton of time in the intelligence world. He spent a bunch of time building various mobile money, financial service platforms, etc. all around the world. Abra has become a very large business today, and he's got some very unique thoughts, I think, about just the crypto market in general, but also where some of this technology is going. So, Bill, how are you? I'm good, man. How's it going? All right. Let's do this. Maybe let's start with just kind of your overall read. Obviously, we had a lot of like various price action in Bitcoin, lots of excitement, lots of drops, whatever. We saw plenty of macro hedge fund managers, billionaires, et cetera, all coming into the market in 2020 and beginning of 2021. We sort of see institutions coming into the market. We've got public companies with it on their balance sheet. Like a lot of progress has been made in the last two years, nation states, et cetera. like what's your general reader is like is bitcoin winning is that maybe like a fair way to phrase it i think bitcoin is gaining acceptance i i i think winning i mean what does winning mean right i mean

bitcoin doesn't care so so bitcoin is gaining acceptance and i i think where we were at the beginning of last year was that everybody was saying oh the institutional money is coming into Bitcoin and crypto. And that really wasn't true. I think two things were happening. One, a ton of high net worth money, family office money was coming in. You can call that institutional money. I don't. But that's one. And two, we had this kind of grayscale ARB, which wasn't really an ARB, as you know, which was basically causing a lot of money to come into the grayscale trust, which was basically causing more Bitcoin to get hoarded. When that opportunity ended and unwound, Obviously, kind of coinciding with the China mining ban, the network effects kind of paused.

Now, what we're seeing coming out of last year and into this year is true institutional interest. Asset managers, even larger family offices, other types of trusts, hedge funds that aren't just crypto native. Obviously, we have a ton of crypto native hedge funds now who do nothing but hoard crypto. But the true asset managers are now looking hard or holding or saying, if we don't get into this, we're going to miss the boat. That is a different narrative. We saw this in all of the Q1 allocator meetings that traditionally happen in January and February in particular, that the volume of interest from the institutions was unparalleled, nothing even close to what we saw last year. And that's a big change. Now, combine that with what's happened in the traditional capital markets over the past kind of six months, and given the incremental extreme volatility that crypto has traditionally faced, and the fact that we're at, what, 42,000, 43,000 Bitcoin, 3,200 Ethereum, wherever we were a few minutes ago, tells me that, okay, this is really interesting. Now, there's always a chance the bottom falls out temporarily, but the fact that we've basically held this level when stocks have had an extreme sell-off is really impressive to me.

And I think that basically crypto is looking for a reason to go higher at this point. So when you think about kind of Bitcoin as an investment asset, there's also Bitcoin plus other technologies that people are trying to do around the payment technology. Um, have we gone mainstream yet? And if not, what is it going to take to get kind of mainstream adoption where, uh, maybe 50% or more of payments in, in a society or an economy are actually done on crypto rails, not on fiat rails. Yeah, I think this is what we're not even close, right? I mean, we've barely started, but this is coming and I think it's going to happen. And the, this year is a couple of things. One, I think there's going to be broad acceptance that in international markets, people are going to want to hold Bitcoin and not spend it. But they're going to realize

that they have instant collateral for credit. And this is going to become a booming business in international markets. I don't think it'll have a huge impact on the price of Bitcoin in the short term because those payments will tend to be smaller. But you're going to see billions of dollars in dollar-based or fiat-based payments using Bitcoin and Ethereum as collateral for those payments. And these are markets that are traditionally exclusively debit markets, right? Pretty much India, Bangladesh, Turkey, Philippines, Indonesia, massive countries that have no credit markets. They're going to basically over the next 10 years start to adopt Bitcoin, probably the next five years, adopt Bitcoin as savings and then leverage it for credit.

Okay. So that's part one. Okay, go ahead. No, so part two is, you know, what really happens in the U.S. and in established credit markets? And this is where I think you're going to start to see the credit card networks play a huge role. I think that stable coins are going to become the backbone for settlement in different payment systems, including the card networks. I think this demo that was published of Tether over Lightning was super interesting to me because you can do true micro transactions on debit rails without actually having to use any credit for settlement whatsoever. Debit rails in the United States actually are credit-based, meaning that somebody is extending credit to someone else in order to facilitate a debit transaction because the system doesn't have what we call straight-through processing.

All of this is going to be changed by the finality of crypto settlement in the next couple of years, maybe five years for certain transactions, and then for every transaction over the next 10 to 15 years. When you think about kind of crossing this chasm or bringing the mainstream adoption, the payments, I think, as you outlined, it's pretty clear cut. There's a whole bunch of what I'll call crypto native stuff, though. this is all sorts of DeFi staking or automated market making and kind of all these things that if you're in crypto, you're like, oh, I get that. But if I told, you know, my mom or somebody on the street, they'd be like, dude, you sound like a crazy person. Like, how do we get that stuff into the mainstream as well? So, so that's a great question, right? So you tell the average person, oh, I'm making, you know, 17% on USDC and Anchor. They're like, what the fuck are you

talking about? What is USDC? Well, first of all, I don't understand what you just said. What is USDC? What is Anchor? You may as well be making 17% on Jujubees because I don't understand what you're talking about. So I think there's a few things. Yes, the computer science and crypto native folks will continue to push the envelope and take that free money, if you will, and the risks that go along with it. And it's acting as a big global test that DeFi can basically act as lending, payment, trade rails for a kind of new banking system. And then what happens over the next kind of five to 10 years is that these DeFi rails become plumbing in next generation banking services. I know at Abra, we use DeFi to generate a certain amount of yield that we pay to our high

net worth investors today. And it's in the background. They don't know it. They just know that the blended rate is 8% or whatever it is. And it's a risk adjusted rate. We go through a risk committee process. And it's, you know, you know this with other companies you're involved with and, you know, it's all in the background. And so that's the future of banking. The future of banking is going to be consumer facing, high net worth, retail, business facing services that all use these DeFi rails, but in a way that hides the complexity of those rails to the average investor or bank user. And this actually represents a big problem because for regulators, there's no border here. There's no off switch. They're 24-7. Think about it. Stock markets are

closed more than they're open. These DeFi services are open 24-7. You can use collateral. Bitcoin is collateral to get a loan for your DeFi 24-7, 365. And you can pay it back 24-7, 365. You can tokenized equities. And those markets are open 24-7, 365. So the DeFi markets are the plumbing of the future. They represent not only a technology shift, but a regulatory shift because there's no borders. There's no off switch. Eventually, there's an off switch today, but eventually there'll be no off switch and the regulators will have no chance. What do you think their response to that is? Do they change the rules or what happens? I think in the short term, the regulators for lack of legal clarity, meaning regulators interpret laws. There's no law today

that uses the word DeFi or Bitcoin at the federal level. So what will happen is they'll try to interpret existing laws to kind of make this oval peg fit in their round hole, just like they did with the original FinCEN guidance and the original CFTC guidance that basically alluded to Bitcoin to be a commodity, which I never agreed with. It's just software. But that ship has sailed, and so we have what we have. They're going to try that. But eventually, what they're going to realize, it's untenable because it's a big-ass planet. And when you have something that has no borders, our rules may not make any sense, or they may not any value, or they certainly won't protect anyone. And so at some point, the rules just won't matter. But they will try in the short

term, probably the, you know, certainly five to 10 year timeframe. And that'll help institutions that prefer to ask for permission, that don't really understand the basis for which our constitution works. You know, it's not Germany where you actually have to ask for permission to do everything. But a lot of institutional investors like to ask for permission because it saves them in their minds a lot of hassle later. All that's going away. It's just a question of when. Yeah, it's fascinating. Another thing that is kind of related to this is not regulators, but uh we'll call it accounting i'm gonna read this because i don't want to mess this up but there's a staff accounting bulletin 121 and uh it says it noted the high technological legal and

regulatory risks associated with the custody of crypto assets relative to traditional assets you think it's unlike netflix yeah you you you think it's short-sighted why it's not that it's short-sighted, it's just wrong. I'm sorry, I didn't mean to interject, but look at the Netflix example. If you're long Netflix, and I know a lot of people who've got the vast majority of their wealth in the FANG stocks. And I know people who have got the vast, some people who have all of their wealth in Apple and they just borrow against those shares and pay no taxes, which is perfectly legal, perfectly reasonable way to live. Except if Apple was to basically miss on iPhone shipments and the stock was to fall 40%, that guy might start getting a lot of margin calls on all the

loans it has outstanding, which could cause a cascading effect on having to sell some of the Apple shares, which is making this position even more precarious. So again, I don't see a lot of accounting rules or SEC statements regarding people holding FANG stocks. I think what people don't understand is that when you have something that is the fastest adopted technology in history, It trades 24-7. It's highly leverageable, especially outside the US. The chart at log scale looks up and to the right, like when in doubt, zoom out. But on the way up in that extreme kind of exponential growth, you're going to get these kind of volatile spikes. That's exactly what happened to Amazon from 1998 to 2010. It's no different. It's just that the SEC and these

folks that do these accounting documents, they're more comfortable with stocks because it's something that they feel that they can control. They can't, obviously, but they feel that they can. It's just not true. The reality is that all of these warnings, it's wrong in the sense that they just don't understand what they're warning you against. It's lack of education and lack of experience using the technologies is a dangerous combination, right? It's a toxic combination if they start creating rules, but don't actually understand what the ramifications of it are. So put it in context. If the CFTC and the SEC would agree today that Bitcoin is a come on, at least in terms of regulatory standards, ask the average lawyer who makes these decisions

and tries to figure this out, what a UTXO is. And my guess is, is you'll, you'll get a blank stare. So, so that's a problem, right? If you don't understand first principles and what something is at its core, and yet you're tasked with figuring out how to make this work with in some cases, 80, 90 year old regulation, it's, it's insanity. And so that's why in most cases, the best thing to do is nothing and get out of the way, let the markets figure it out, go after clear-cut cases of fraud and abuse, and let the markets handle everything else because they get it better than you do. It's wild. Joe, John, what questions you guys got? Bill, my question would just be on the institutional side. Just talk me through kind of what you're seeing, how it looks

today, and what it might look like in the future. Yeah, sure. So right now, it's pretty basic, Right. Most kind of individual partners at institutions that we talk to are involved in crypto in some way. Oh, I've owned Bitcoin in the past. I own some Bitcoin now. I'm testing DeFi. Like the number of people that we talk to that are personally involved is incredible. I mean, it's it's way over 50 percent. Right. And it also depends upon the events. There's some conferences where it's just like a bunch of boomer, you know, investor types who just don't get it. But but, you know, for the for the certainly the younger crowd, I would say the under 40 crowd, the number of people we talk to who are personally in crypto is incredibly high. And so now. Those people are really pushing, I think, a lot of these institutional asset managers to come up with crypto strategies, and that's basically starting to take effect.

I mean, we are seeing I've spoken at, you know, probably upwards of 10, at least 10 allocator conferences this year where, you know, by and large, everyone in the room is trying to figure out a crypto strategy. This is significantly different than where we were last year when for most firms it was still too early. So the last year has seen the biggest shift I've seen in traditional asset managers looking at crypto as a viable component to the to the portfolio. You know, I haven't seen it yet at the sovereign wealth fund level where, you know, they probably feel that they're not allowed to hold directly. They may need securitized versions of the crypto. But for private asset managers, everyone is either figuring out their crypto strategy already has one is already allocated. or is trying to figure out an allocation. And even the largest, I've spoken to reps from some of the largest ones that haven't publicly announced and kind of off the record have said,

yeah, we're already doing this in very small amounts. And for them, small amounts might be hundreds of millions of dollars, right? Yeah. Bill, can you talk about your guys' borrowing product for a little bit? Just who's borrowing this stuff? What kind of collateral are they using? What kind of rates are they getting? Can you just talk about the economics behind that? Sure. So we run a blending desk, mostly institutional.

We have some retail facing as well. We have lending licenses in the U.S. and I think 44 states, but our institutional business operates in like 100 countries as well. Our lending book is I think about a little under $2 billion now and growing very fast with zero at the start of COVID. So it's our fastest growing business. And basically what it does is it takes collateral in CryptoX and lends out in CryptoY, where CryptoY may be stable coins, for example. So we might take in Bitcoin or Ethereum as collateral, lend out dollars. We might take in USDC as collateral, lend out Bitcoin, depending upon the use case. And so we go very deep in onboarding potential institutional clients in terms of use of funds, balance sheets, existing leverage of the system, etc., etc. And then make, you know, investing, lending decisions based upon all of these factors. It takes several weeks to do that.

And the rates would be commensurate with risk profile, collateral, et cetera, et cetera. We also do a certain amount of DeFi investing today. This is extremely complex because we go very, very deep in terms of analyzing smart contract code. So we've got, you know, MIT analysts who will, graduates who will go into Solidity code and test DeFi positions for weeks at a time before making small allocations from our lending book in order to further pump yield for our users. And so all of this in our lending business creates kind of a blended yield for different products, for Bitcoin product, the dollar

stable coins, Ethereum, et cetera, et cetera. Gotcha. Bill, if you had to kind of put money on one thing that most people are not expecting to happen in the next 12 months. Leave us with what's that one thing that you're like, yeah, I think this is going to happen and everyone is not expecting it. Oh, wow. Not expecting it. So let's see. So on the payment rails, I think you're going to see the first payment services on the card networks that use crypto as collateral this year. Okay. And so there's already cards out there that pay crypto rewards that's great i i use a couple uh but you're going to see the first traditional card network product this year that pay in dollars but determine your credit worthiness in crypto i don't

know if i would say no one's expecting it i just think that it's a it's a massive opportunity in the crypto space that i don't see a lot of people talking about i think um the biggest problem in kind of the dap world right now is metamask uh you need you need a phd in computer science to basically use MetaMask. And if you don't have a PhD and you try to use it, your chances of losing your NFTs or your stable coins or your DeFi investment are tremendous. I've read stats that there's double digit percentages of people that have basically lost stuff via MetaMask. And so I think there's going to be a tremendous effort over the next couple of years to solve the MetaMask problem. And as investors, we both have funds. And so, you know, we're seeing a lot there and

Abra is working on stuff in this area, which we'll be announcing. I know others are too. But we think that the payment space, as it relates to solving the MetaMask problem, solving the credit problem for people who are long crypto, is the biggest opportunity that we see in the crypto space over the next few years. I tend to think that that's probably a pretty good selection of a problem. And the bigger the problem, the bigger the financial opportunity, right? If you can end up being a part of that solution.

So that's awesome. Where can we send people to find you on the internet or find out more about Abra? Sure. I'm Bill Barhite on Twitter. You can go to Abra.com, obviously, download the app and join millions of people who are using Abra today. Our trader and borrow products are live in over 100 countries. And yeah, so just go to Abra.com.

I'm pretty active, not every day, but some days on Twitter, Bill Barhite. And my guess is if you're motivated, you'll find us. Yeah, I'm pretty active. It's not every day. We got to get it to every day. We need you tweeting every day. Yeah. Great insight.

I have a job. We, we've, we've, uh, we've 10 X the size of the team, uh, over the last kind of 15 months.

So I'm pretty busy. Twitter is a job, Bill. What are you talking about? Yeah, exactly. It's, it's,

it's, it's a, it's a, it's not a job, but it's an adventure for sure. Awesome, buddy. Listen,

thank you so much for, uh, for coming on. We'll definitely have to bring you back and anyone who wants to go check out Abra, go ahead and do that or follow Bill on Twitter. Yeah. Good to see you guys. Later, buddy.

Thanks so much for listening to today's episode. I really hope you guys enjoyed this one. Make sure you're subscribed on Apple, Spotify, or your favorite podcast player. And if you're looking to try to transition to get a new job in the Bitcoin or crypto industry, we've got you covered. Head over to palmscryptocourse.com.

We've developed a curriculum with the top teams across the industry. It's a three-week intensive training program with over 50 events packed into that three-week time period. Go to palmscryptocourse.com to learn more and I'll meet you guys for the next episode.