Bill Bardhydt has been trying to solve the problem of mobile money transfers for over a decade and he may have finally found the proper solution in the form of Abra. Even before the development of the famed M-Pesa platform in Kenya, Bardhydt was fascinated with the idea of allowing anyone with a mobile number to send money to any other mobile number in the world.
Eliminating the Middlemen
Bitcoin is well known for its ability to remove third parties from online payments; or at least replace them with a decentralized group of miners who are unable to seize funds. This is the key aspect of Bitcoin that is vital to the success of Abra.
“I basically decided that if there was any way that you could solve the problem of moving funds between any two phone numbers in the world at global scale, you basically need to eliminate all middlemen from the transaction,” Bardhydt told American Banker Editor-in-Chief Marc Hochstein at the recent blockchain conference. “I realized what I wanted was a model that allowed two people to share a digital asset between them with no middlemen. That’s really hard; especially if the digital asset is supposed to be dollars on one end and pesos or euros on the other end.”
Creating Synthetic Currencies
Although Bitcoin enables payments with no middlemen, the key issue with that system in its current form is the volatility associated with the underlying bitcoin asset. The general public doesn’t want to track the price of bitcoin when they’re sending money on their phones. Bardhydt says he has come up with a solution to this problem:
“I basically invented this idea of a digital dollar: what we call at Abra, synthetic currency. A synthetic currency is basically the digital equivalent of hedged gold. If I owe you $100, in theory I could hand you $100 worth of gold [based on the spot price of gold at that moment]. But, of course, if you couldn’t sell the gold immediately, you’re taking volatility risk on the price of gold. I could hand you some type of [contract for difference (CFD)] or put option on the gold that would more or less eliminate the downside risk to you. A CFD would eliminate the risk in both directions . . . We could more or less agree that I was handing you $100, even though no paper money was changing hands.”
According to Bardhydt, Abra has figured out how to complete the CFD-denominated trade described above on a smartphone without requiring the user to understand how any of it works. Each phone has a private key attached to some bitcoins in a smart contract hedged to the value of any currency supported by Abra.
In the past, Abra has indicated that their smart contracts will operate in a decentralized manner on top of the Bitcoin blockchain. Bardhydt said the company will reveal how the system works at a technical level in a series of blog posts.
The counterparties who take the long position on these CFD contracts will essentially be able to earn interest on their bitcoin holdings without any counterparty risk. “They’re guaranteed to get the same principle back at the end of the trade,” said Bardhydt.
Real P2P Payments
Using this system of synthetic currency, Bardhydt believes he has finally created a system for real P2P payments denominated in US dollars. The Abra app can interact directly with the Bitcoin blockchain, which means there is no definable middleman in the money transfers. “Because the underlying asset can be fixed in fiat, I don’t have to expose any of the underpinnings of [the Bitcoin blockchain] to consumers,” explained Bardhydt.
Abra is not a custodian of funds, which lowers the possible regulatory requirements that could weigh down their progress. Abra does not have the ability to reverse a transaction or seize a user’s funds, even if they’re subpoenaed by a court. “The private key is on the phone,” said Bardhydt.
Getting Money On and Off the Phone
Although Abra allows anyone with a phone number to send money to any other phone number in the world, there is still the issue of getting money onto the app in the first place. Customers who have bank accounts will be able to add funds via ACH, SEPA, credit cards and other traditional payment options. Those who do not have bank accounts will need to use cash.
Retail tellers and individual tellers will be allowed to sell digital cash on the Abra app for physical cash from other Abra users. This aspect of the app is sort of like Uber for money transfers (think Western Union).
The entire fireside chat between Marc Hochstein and Bill Bardhydt is available as a recent episode of American Banker’s podcast.