Former Wall Street Banker Looks at African Chamas to Model New Blockchain Funds
|Jul 8, 2019||2|
Good morning defiers! For this week’s interview I spoke with Ana Andria, the founder of Akropolis, which wants to create blockchain-based, community-owned funds to enable savings, loans and insurance for those working in the informal economy.
Ana was deeply disappointed with the traditional financial system after her experience at Lehman Brothers and sought to find a solution for the most at-risk population to find financial safety-net without relying on banks.
She and her team researched community funds across the globe and found the way they’re saving for old age and for emergency situations is very similar, and can be replicated and scaled with blockchain technology. She says that while DeFi usually focuses on trading and investing, it’s important to build a solutions for people living paycheck to paycheck.
Image source: Akropolis website
The interview was lightly edited for brevity and clarity, and I’ve highlighted the quotes I found to be the most interesting.
Camila Russo: Tell me about your background and what led you to create Akropolis.
Ana Andria: Pre crypto I spent most of my career in investment banking and asset management. I moved from investment banking to the hedge fund space and then private equity in Lehman brothers.
CR: Were you at Lehman during the financial crisis?
AA: Yes, I was. It was very much something that prompted me for a lot of the things that I'm working on right now. I was part of a private equity fund at Lehman, we had about $8.8 billion AUM. I stayed for about a year actually restructuring the fund after the the bankruptcy. What it demonstrated to me was how risk is managed, how important decisions are made in critical situations and ultimately how a lot of the things that we take for granted in finance are not what they seem in the surface at all.
CR: What do you mean by that exactly?
AA: It's a lot more fragile and almost entirely trust-base. Like literally four or five influential guys have to believe in another, even more influential guy to to do what has been agreed and that trickles down the financial system. To me, it really underlined that the only thing that matters in finance is confidence and expectations. Which ultimately means that if there is trust the whole merry-go-round continues like a game of musical chairs. If the game stops, it becomes a very fragile state and the people that actually suffer are the ordinary consumers.
Since then I spent some time in the technology pace, you know, worked with startups, I was on the investment side. It was when I was working as a principal for a PE fund where two of out potential LPs were pension funds and I was getting their feedback on how we can use technology to really improve the outcomes for a product for the end users. Pension funds are the largest asset management players in the ecosystem and they're typically being pushed into taking riskier and riskier investments to get more yield because otherwise they can't deliver on their mandate to their stakeholders and of course it's ordinary people the ones that suffer during crash crisis the most.
So what I really wanted to explore is how we can use technology to address trust-based inefficiencies and problems and remove unnecessary layers of costs that were taking a very big piece of pensioners’ pie. It's a different situation from when a high net-worth investor invests in a hedge fund, takes the risk, and let's say, loses the position from, a pensioner, where they'll lose the pension because the pension fund took inordinate amount of risk. Or because the fees of the intermediaries have eaten away into the net distribution. It's a disproportionately bad situation.
It's similar to what drove Mona from Melon Port, but the difference with them is that I saw the potential to use blockchain for asset management for a more at-risk investor group that really can't afford to lose money as opposed to asset managers.
CR: So how exactly does it work?
AA: The original vision of Acropolis if different from what it is now. The original product vision was to work with pension funds that the team is close to and essentially develop a very lean consortium for them that would remove unnecessary fees and procedures on the fund administration side, or custodian side, or audit side. We had quite a bit of initial traction, however when the crypto market tanked it affected the enthusiasm of institutional partners. We had multiple offers to build PoCs for pension funds and insurers but building PoCs is not really a business model and it's not really scalable. It's just topical solution that would stay in the confines of one clients.
We really wanted to build something that would empower individuals, and be very much peer-to-peer based, even if initially it excludes large institutions. So we asked, how did people use to save money, plan for financial emergencies, plan for their retirement or old age, and how did they arrange insurance, before banks existed. If we know that it's important to remove complete dependence on the banking system and it's important to remove dependency on institutions, which are very often not nearly as solvent as they are portrayed to be, in order to build an alternative, we need to look at how people used to meet the same basic financial goals for themselves before the financial institutions were in place.
Because ultimately what is a pension fund, a pension fund is just a pot of money that gets topped up by your employee and by your state. The idea is that it's being very conservatively invested so that it's available to you when you reach your retirement age and in exchange for long term commitments, the government gives you a tax advantage. So saving in a pension fund is almost the same as saving in a savings account. The difference is the tax treatment that you get.
However, because pension funds have performed so poorly over time, really right now from an individual perspective in many cases, not all cases, there's very little difference between long-term saving and saving into a pension fund. So we looked into what were the financial primitives that formed the current financial institutions and that was very, very exciting.
CR: What were your main findings?
One of our advisors is Ian Grigg, he is one of the well known financial cryptographers. He mentioned to us how groups of typically women have saved historically in Africa, which is something he was studying on his own. We started to do deeper on a global basis, and it was very exciting, almost like being a palaeontologist in economics.
We saw how people used to save in Latin America, in North America, in Europe, in Eastern Europe, in Asia was actually predominantly the same, which is, they found ways to create pools of capital, where everybody in the group had skin in the game, typically each new member would have to be under-written from a reputational perspective by existing members, and each member would make regular contributions into the common pool. And because the membership was typically part of a fairly tight-knit social circle with mutual social obligations, everybody knew each other, it s meant that the credit risk was very low. So when somebody needed a loan, if somebody needed a de-facto insurance payout, because let's say they'd been robbed or the raining season was poorer than expected and they didn't make as much money from the cops, the common pool would give them a payout.
In India, those groups are called chit funds, in Africa they're called chamas, and there are similar systems in Latin America, China, Korea, they exist in Russia and in Central Asia. And it was really fascinating the see that we can actually mimic these with a peer to peer, financial DAO [decentralized autonomous organization]. The key thing was to make sure that it is able to interact with existing financial ecosystem. That's number one. And it basically presents almost like a hybrid between a fintech play and a decentralized blockchain play. It has to be practical and pragmatic. It can't be sort of anarchist solution because if it is, it would affect the adoption. It also has to be mobile first and people should be able to connect their existing bank accounts to this solution.
Ultimately the product vision that we arrived at is a member-owned savings and investment organization, that does only three things: Savings, investments and insurance. It does not engage, like banks do, in fractional reserve lending. What we arrived at is essentially a model or community owned “unbank” that is mobile first, that is able to transcend our geographic limitations and can enable members to move small amounts of savings or wealth into stable coins or stable investments. But most importantly, where there is support in terms of let's say emergency credit or emergency insurance, which comes from a social reputation basis. And where members physically know each other.
CR: So how does blockchain technology come in, why is it needed?
AA: We built a solution that removes existing issues of trust, because where those chamas are working right now there are still many instances where the chama leader for example would basically run away with the money, or there are accounting irregularities. So there are issues are still in the trust in the shared ledger level, which is very nicely resolved natively by DLT or blockchain. And what we also wanted to be able to demonstrate is that the proposed solution can scale.
So currently member-owned community banks are very local and at the same time, because they don't engage in fractional reserve lending, they can't really grow as aggressively because you have no leverage. But if we are able to build a tool that enables those local communities to connect and form a network where they can enter into financial transactions with each other that becomes very interesting and it has the potential to develop into almost like a shadow banking system that doesn't depend on the central monetary policy body, but it's a community of pools of capital that act as banks and exchange between each other. But this network will be a lot more resilient than a bank-based solution in the event of a financial crisis, which absolutely will happen on a less than a five year timeframe.
You need a shared ledger, you need shared, open accounts. If you're going to join a group, you want to know that, if there is no central regulator that's going to be looking after my interests, how do we know that somebody's not spending our hard-earned money. The second order problem is how do you create trust, minimized exchanges of value between those DAOs, between other organizations. Again, you want to make sure that the ledger of one organization can be shared and used to negotiate with another one, so that they don't have to trust one another around the credit risk or the repayment of the loan.
CR: How do you make sure the right incentives are in place so that it works and nobody takes advantage of the system?
AA: In Africa, this practice has been alive for at least for six, seven centuries. So imagine you and your group of friends, you meet once a month, and you agree on common goals, for example, let's all commit to saving one hundred dollars a month. So there's immediately an element of mutual accountability, which means you achieve your goal with a much greater percentage of probability than you would otherwise.
In our version, essentially it's a multi-sig of members that typically know each other, commit money, and form the common pool. Members get loans or they know that if they have an emergency, they can get a pay out, or if it's a savings goal and they put in the funds regularly, when the goal is reached, the funds are distributed, and the organization is dissolved or its purpose changes. The agenda depends on members and the social aspect plays a big part. I think, blockchain communities are now realizing that you cannot build trustless solutions by excluding humanity from it.
CR: So how would someone join one of these DAOs?
AA: This is how people have done it for centuries. If you say, I want to bring in a friend of mine, the group will say fine, if your friend takes loan and defaults on it you will have to underwrite it. So then you really think about it, maybe you really like your friend but maybe he's not very diligent.
CR: So whenever somebody recommends somebody else, that person is on the line with whoever they recommend.
AA: Yes. So skin in the game is important because otherwise room for abuse is there. This works only in reasonably small organization. As you grow that chain of social trust becomes very hard to scale unless you use technology to help it scale.
When we interviewed those organizations in the U.S., in Africa, and I worked with them in Asia, the models differ, but ultimately, the ones that use that member-based vouching system for new members, they're typically on a small to medium size. As you get more successful, as you grow, those methods change and they become more robust and more similar to assessing credit risk.
So a large, immigrant organization in the U.S. that we researched, has a very large member base and they say you can take a loan that equals only up to three times your contributions into the common pool. So because it's so big, there's potential to use more banking-like risk metrics to make sure that the system continues to work. But it's a lot more flexible than the bank because it's still community based and because the common goal of this organization is to support people that are immigrants from particular countries. It's more relatable than a bank and it’s genuinely remember-owned, so the profits are distributed among members of the organization.
CR: Are you building this on Ethereum?
AA: We've been building on Ethereum and we're also building an implementation on Polkadot, simply because we want to be able to be blockchain agnostic and be exchanging the value between multiple assets and multiple chains. We will have these two implementations but anybody can build implementation on whatever blockchain they want.
CR: When people deposit their money into this multi-sig, will it get exchanged for ether or DAI or how will it work?
AA: When the DAO is created members choose from the range of stable coins that we offer what stable coin they want their money automatically converted to. Right now we have automatic conversion to DAI. As the range of stable coins or multi-collateral stablecoin expands so will the options of converting deposits to. It can be USDC if you're happy with a more centralized solution.
CR: And then I guess it depends on each particular DAO what they do with that money? Like if they want to put it into like some thing that gets interest?
AA: Yeah, absolutely. We'll have DeFi integrations, one of them is with Compound. So if you're in Europe you can actually send money from your bank account into the multi-sig. Funds will automatically get converted into a stable coin and put into Compund to get high interest rates. In the future, one of the functions that we want to offer is to optimize for yield to make sure that you get the highest rate possible from the solutions available in the market.
CR: What are some of the legal considerations around this?
AA: This is really important and I'd like to give a shutout to the work that's being done to the Nexus team and Open Law teams because the next step will be to ensure that these DAOs have an option to integrate legal personalities around them, which means as a group you can own assets. You can acquire real-world assets that don't even have to be tokenized, but there would be a legal, group ownership of those assets.
There's a lot of work that's already been done so that a massive amount of cost and time and friction can be removed from a situation where a group of people that know each other, can pull together their resources, without dependency on the banking system, grow resources jointly, acquire assets, have legally enforceable property rights, as well as hold digital and tokenized assets together. They can equally delegate the management of the multi-sig to let's say a Melon Port fund manager, or essentially any noncustodial solution. But I think what's also important, and this is what we're exploring is they should also be able to allocate to a federal solution if they choose to do so, because the ecosystem will take time to evolve and we're very much pragmatists.
CR: And when members want to take out a loan, how are interest rates calculated?
AA: So initially when members join they can decide collectively in the same way as as when you go to a co-op bank the rates are always very low because the mandate of the community bank is not to make money off its members, but the one mandate is to provide a friendly service to the members. Because it's member owned and it's member capitalized, you don't have an external shareholder base that expects a certain return on equity. Equally, you don't have regulatory limitations on how much capital you need to have because you don't engage in the fractional reserve lending. You don't lend more money than you have on deposit. You just don't. So that means that it's a less aggressive financial institution. But if it's a more stable financial institution.
CR: So that means that rates should be, should be hopefully lower.
AA: Exactly. And the interest rates between DAOs are private treaty agreements, that's just negotiated between two parties. Of course, there's always going to be a common reference point. So for example, a benchmark rate like Libor, that could eventually be used for blockchain-based loans. It can be set by private treaty between two parties or as the network grows, it can be set through an auction. Because the reality is that it's actually beneficial for third parties, so let's say for financial lenders to lend money to this organization because the default rate is low.
CR: What’s your timeline? When do you expect to, to have a live version?
AA: A alive version certainly before the end of the year.
CR: Do you have investors or how are you funded?
AA: We've done a presale and right now we have an exchange offering on Huobi on July 16th.
CR: What does your token do?
AA: It's a protocol and governance token.
CR: Are there like prototypes? Are people already using this system or in what stage are you in?
AA: We shipped an Alpha, which you can have a look at and play with. We have identified a group of Beta testers in Europe. So existing groups that have very similar models to the ones that I described and we're very much looking forward to working with them and finding the solution. Because it's in Europe it means that thanks to the PSD2 banking directive we'll be able to have a much easier fiat-to-crypto on ramp, than is possible in perhaps than in other jurisdictions. And the plan is to work with several Beta testers to refine the solution, onboard them and start providing a service.
CR: How big is the market you’re targeting?
AA: It's actually one of those lesser known markets that most people don't know about. So just in Africa alone, informal groups like this control over $100 billion. In Europe, the the potential market is 200 to 300 billion euros. Because it's not something that is deemed to be sexy, not many people know that it’s actually a large market.
CR: How is this measured? Is it like people saving outside of the banking system?
AA: Correct. And it's not just saving, for example in northern Europe groups are set up just specifically to provide insurance to freelances.
CR: So it's like all these different markets that are operating outside of the financial system and it's a pretty large untapped group.
AA: Yes, exactly. And it's much, much larger than you would originally expect. This is the true, real economy where, you know, it's not corporations entering M&A transaction that they'll get the headlines. But these are people using community-based solutions to live, to grow their wealth.
The whole DeFi thing is about investing and money trading but let's just get more pragmatic. Before anybody can even even think of investing you need to escape the trap or living paycheck to paycheck. You need to be able to accumulate savings.