The 250 million immigrants scattered around the globe will send an estimated $586 billion to their countries of origin in 2015, in the largest and most effective foreign aid program ever conceived. All told, 8 percent of that massive flow of cash, or a staggering $47 billion dollars, will go to pay the fees of firms like Western Union and MoneyGram. Immigrants from the poorest countries pay the most because they're sending money to places that don't have functional banking systems.
Tech entrepreneur Bill Barhydt (pronounced "BAR-hite") has an innovative plan to use Bitcoin to slash the cost of sending money to Third World countries. Last summer, he started a company called Abra to put his ideas into action. Several other firms are trying to do the same thing—there are 27 Bitcoin remittance startups by one count—but Barhydt's venture is especially promising.
Bitcoin, a system of digital currency, has the potential to take the friction out of sending money abroad, but delivering on that potential isn't easy. A conventional money transfer carried out by a bank is a complicated process that take days to complete; Bitcoin utilizes a cryptographically secure ledger called a blockchain that's virtually free to use and clears transactions within minutes. And it's converging with another major trend in technology: In five years, an estimated 80 percent of the world's adults will own a smartphone, allowing them to send and receive digital money without a traditional bank account. Just as cell phones leapfrogged landlines, Bitcoin and smartphones together could make traditional banking networks unnecessary.
But how do you graft Bitcoin onto the mess of a global monetary system that currently exists?
In theory, a Bitcoin remittance system would be as simple as an immigrant in the U.S. using his smartphone to instantly transfer Bitcoin to his wife's smartphone in Mexico. The problem is that most of the world's poor deal in cash, and they're far too savvy to store what little money they have in a highly volatile digital asset that most people have never heard of.
Barhydt set out to build a mobile Bitcoin wallet that addresses these problems. His first goal was to make it so that Abra users don't need to know what Bitcoin is. So when the Abra app is open, all a user sees on the screen is the current value of his Bitcoin account denominated in local currency. That's the easy part; the real trick is keeping that account balance perfectly stable even as the price of Bitcoin goes up and down.
How does Abra accomplish this? By selling the risk of a price fluctuation to third-party speculators through a classic maneuver known in the commodity futures and options markets as hedging. If the screen in the Abra app says the account balance is $200, that means the Abra user has locked in a price of $200 for his bitcoins, in much the same way a holder of crude oil locks in a price through hedging. The company is partnering with a derivatives company (Barhydt won't name the firm) that will make these hedges available to Abra users.
This asset portfolio—a mix of bitcoins and hedges—is tucked under the hood of the smartphone, and a user never needs to know what's in his portfolios. All he or she sees on the screen is the total account value. The goal is utter simplicity. "If I were Prada and I were designing a mobile cash wallet, Abra is what it would look like," says Barhydt.
Now comes the really hard part. Recipients of the funds at the other end need a convenient way to withdraw cash from the Abra app. But building a comprehensive network of bricks-and-mortar exchanges is prohibitively expensive.
"I had been pooh-poohing a lot of Bitcoin remittance services because they don't know how to address the last mile problem," says Barhydt. After observing the success of sharing economy firms like Uber and Airbnb, he came up with an idea.
Barhydt is building a peer-to-peer network of independent "human ATMs," as he calls them. Here's how it works: Let's say a woman in the U.S. wants to send $50 to her brother in the Philippines. First, she buys $50 in the app using her debit card, and then transfers the money to her brother's Abra wallet. After receiving the funds, the brother opens the app and pulls up a map that shows the location of the closest Abra teller.
The brother and the Abra teller meet in person, and the teller scans a QR code off the brother's phone, which
transfers $50 to his Abra wallet. In exchange, the teller gives the brother cash on the spot minus a fee that Barhydt says will be significantly lower than the 8 percent a traditional money transfer service would collect. If the teller charges a 3 percent fee, in this case he would pocket $1.50. (Watch Bill Barhydt give a demo of Abra at the Launch Festival Awards in March.)
To get these local networks up and running, Barhydt is reaching out to delivery services, taxi companies, mobile airtime resellers, and other existing outfits that already handle lots of cash in his target countries. But anyone with the Abra app installed and cash on hand can serve as a teller.
Luis Buenaventura, the founder and CEO of Rebit, a Bitcoin remittance service based in the Philippines, says he's doubtful that a fee of around 2 or 3 percent will be enough to entice people to participate in the Abra network. Earning enough to get by on such a low fee requires processing lots of transactions, but Abra distributes the exchange business among many individuals. "The remittance industry tends to benefit more from consolidation than from diffusion," Buenaventura says. (Buenaventura has spent the last year building a centralized Bitcoin exchange in the Philippines.)
Barhydt counters that Buenaventura doesn't appreciate the fact that mom and pop stores in all-cash economies earn a living by recycling the same currency over and over again for different services. "If they sell a bottle of Coke and then use that money to process a withdrawal, they've profited on that same cash twice," he says. Or an Abra teller might process a stream of deposits and withdrawals in a single day, earning 3 percent twice by paying in and out the very same cash. While international remittances tend to flow one direction from the First World to the Third, Barhydt hopes his product will also catch on as a local payment system.
Abra also provides a way for small businesses to earn money doing something they otherwise might pay for: converting the cash they accumulate into digital form. If the Abra network scales, a grocery store owner could potentially keep his money in Abra, using his wallet balance to pay rent or restock his shelves. But what if at the end of the day he wants to exit the system and convert the money he's collected to local currency? Barhydt says Abra is "aggregating every Bitcoin exchange in the world into a single network" so a user will be able to trade his wallet balance for local currency within the app and deposit it into a traditional bank account.
Throughout this process, Abra never touches customers' money. Its system is entirely peer-to-peer, as if the equivalent of a fully functioning branch of Western Union were jammed into the phone itself.
Why is Abra designed this way? Primarily so the company can avoid dealing with the maddeningly complex regulatory system for remittance firms in the United States. Forty-seven states, the District of Columbia, and three territories issue their own money transmitter licenses, meaning companies have to deal with 51 different government agencies before they're allowed to accept money transfers anywhere in the country. Each state has its own application processes with different requirements, timetables, and fee schedules. Remittance firms also have to comply with federal regulations imposed by the Consumer Financial Protection Bureau (CFPB) and the U.S. Treasury's Financial Crimes Enforcement Network (FinCen).
This regulatory maze is making life very difficult for Bitcoin entrepreneurs. Megan Burton, CEO and founder of the Bitcoin exchange CoinX, revealed at a public hearing last year that some of her company's state money transmitter applications had been pending for over a year. "We're unable to determine the path forward, as it's not a clear process," she said. In some states, the highest profile ventures get special treatment. "If you're a $100 million funded company, your license will come screaming through the door," says Faisal Khan, a banking and payments consultant.
But even the best funded cryptocurrency startups are struggling with this process. Fred Ehrsam, the cofounder of the leading Bitcoin wallet company Coinbase, recently revealed that his company has spent two years and $2 million navigating the money transmitter rules in just half the states.
Barhydt says because Abra is a software company that never touches its customers' money, it won't need to bother with state money transmitter licenses, FinCen, the CFPB—or the BitLicense, which is yet another regulatory regime that will soon be in place in New York State. "If there's no middleman, there's no one to regulate," he says.
Judith Rinearson, a partner at the law firm Bryan Cave who specializes in payment technologies, says Abra's approach is "clever," but that regulators "will find a way," even if it means creating a totally new framework. Attorney Amor Sexton, an Australia-based attorney and the global strategy director for the Bitcoin exchange network Igot.com, agrees with Rinearson. "None of these laws were written for peer-to-peer transactions, and the big question is can you apply existing frameworks to a completely distributed model?" she says. The bottom line is that "at the end of the day, somebody is going to regulate it."
Barhydt says we should all fear a scenario in which the government attempts such regulatory overreach.
Abra has raised $2.4 million in seed funding to date, and it aims to launch by the end of the summer. In March, the Mountain View, California-based company won the Launch Festival Awards, a prestigious annual competition for tech startups. "It's a fantastic app from a technology perspective," says attorney Amor Sexton. "Finally someone has figured out how to use Bitcoin in real life," the hosts of the TechCraft Podcast said in a recent discussion of the technology.
"Bill Barhydt is the sort of person you want to bet on," says Brock Pierce, a managing partner at Blockchain Capital. Pierce says he's "highly interested" in participating in the company's second round of financing.
By taking a peer-to-peer approach to payments, Abra faces another potential hazard: Its success could be its undoing. Barhydt's system of human ATMs and derivative portfolios to stabilize the value of its users' wallets are just a bridge between the fiat money system and a future world in which Bitcoin is a widely accepted digital currency for buying goods and services. Integrating Bitcoin into today's global monetary system is a messy task, but if Bitcoin becomes ubiquitous, all that messiness would be erased.
In the company's second phase, Barhydt anticipates allowing users to make purchases online directly from their wallets, instead of going through a credit card company that charges high interchange fees. At that point, why not just use Bitcoin? A scenario in which Bitcoin becomes widely adopted in a developing country isn't so far fetched. In Kenya, for example, it would replace M-Pesa, a system of using mobile phone minutes as digital currency, which has fast become the primary way that Kenyans pay for goods and services in the absence of a viable banking sector.
Abra is perhaps best understood in the context of the brewing battle between Bitcoin, which is an open system for digital money that nobody controls, and closed systems owned and operated by large firms. Mobile phones, encryption, and near field communication, among other technologies, will change the way consumers pay for things over the next few years. Silicon-Valley heavyweights like Apple, Facebook, and Paypal are refining their own proprietary payment networks. In the Third World, M-Pesa was launched by the cellphone provider Safaricom, and its impoverished customers pay significant fees to use its network.
This world's poorest people will benefit the most from Bitcoin because they'll save a fortune in fees and end up with a decentralized banking system that's far superior to what's currently in place in the First World. That's why we should all be cheering for the success of ventures like Abra.