A New Era of Global Capital: How Blockchains Can Fix Broken Finance

This episode dissects the fundamental flaws of the current siloed financial system and introduces the "Internet Financial System"—a blockchain-powered paradigm shift poised to unlock unprecedented global capital efficiency, access, and stronger property rights for billions.

The Case for the "Internet Financial System"

• Felipe Montilgre, co-founder of Thea Capital, argues for adopting the term "Internet Financial System" over narrower labels like DeFi or broader ones like blockchain/crypto. He contends that "DeFi" (Decentralized Finance) is too restrictive, excluding efficient centralized applications on blockchains (like Circle's USDC), while "blockchain" and "crypto" carry baggage beyond the core focus: creating lower-cost, efficient financial services accessible globally. The goal is replacing legacy financial rails with unified, permissionless servers to improve capital flow and reduce fees.
• Strategic Insight: Framing the technology as the "Internet Financial System" can aid broader adoption by focusing on the functional benefits (efficiency, access) rather than potentially polarizing or misunderstood technical terms. Investors should consider this framing when communicating value propositions.

Debunking "Existing" Internet Finance

• David challenges the novelty, suggesting current online banking already constitutes internet finance. Felipe refutes this, drawing an analogy: legacy online banking is like ordering pizza via Grubhub – the internet is merely a communication layer to an analog system. True Internet Finance involves ledgers and assets residing on the open internet, accessible to anyone.
• Felipe emphasizes, "we don't have internet finance we have finance in silo databases that communicate over the internet occasionally."
• Key Concept: The core difference lies in where ownership and transaction logic reside – fragmented, permissioned databases versus open, unified digital ledgers.

The Problem with Siloed Servers and Fragmented Ownership

• Felipe illustrates the current system's inefficiency through examples: startup equity existing only on a team's spreadsheet (perhaps replicated on Carta or with lawyers), or Robin Hood stock ownership living solely within Robin Hood's database, unknown to Apple directly. Even advanced systems require intermediaries like the DTC (Depository Trust Company – a central entity holding and clearing securities) to bridge these silos. In less developed regions, ownership might be tied to physical documents (like a Guatemalan land map), creating immense friction.
• Actionable Insight: Understanding this "patchwork of siloed databases" highlights the fundamental value proposition of blockchains: creating a single source of truth for asset ownership, drastically reducing reconciliation costs and complexity. This is crucial for evaluating the potential ROI of blockchain integrations.

Why Siloed Systems Stifle Growth and Innovation

• High Transaction Costs: Communicating and transferring assets across different siloed servers (e.g., moving stock from Robin Hood to Fidelity, or buying land in Guatemala) involves multiple layers, approvals, intermediaries, and manual processes, making it slow and expensive. Unified servers, like blockchains, reduce transfers to simple, low-cost database updates.
• Permissioned Barriers to Entry: Innovating requires permission from incumbents. Felipe points to the dramatic drop-off in new FDIC-insured banks post-2009 as evidence of high barriers, stifling competition and new financial product development. In contrast, the permissionless nature of the Internet Financial System fosters rapid experimentation.
• Local Banking Oligopolies: Banking exhibits strong economies of scale. Within permissioned national systems, this leads to market concentration where typically five banks control over 50% of the market (illustrated with data from emerging markets). These oligopolies ("oligopolies") tend to underprovide services (like loans) and overprice them.
• Strategic Consideration: The permissionless nature of blockchains directly challenges these entrenched oligopolies and high barriers. Investors should look for opportunities where blockchain-based solutions can disrupt incumbents by offering lower costs, greater access, or novel financial products previously impossible due to regulatory or structural hurdles.

The Pernicious Impact of High Net Interest Margins (NIMs)

• Felipe explains Net Interest Margin (NIM) – the spread between what banks pay for deposits and what they charge for loans – as the cleanest proxy for bank pricing power, as it nets out country and currency risk. Less developed, less globally integrated financial systems exhibit significantly higher NIMs (often 5-10 points higher, sometimes exceeding 20 points) compared to developed ones.
• NIM Defined: Net Interest Margin is the difference between the interest income a bank generates and the interest it pays out to its lenders (e.g., depositors), relative to the amount of their interest-earning assets. It's a core measure of bank profitability and efficiency.
• High NIMs act as a tax on the entire economy: higher mortgage rates reduce home ownership and construction; higher business loan rates stifle entrepreneurship and employment; higher auto loan rates impact job accessibility. This directly hinders GDP growth and development.
• Investor Takeaway: High NIMs in traditional finance represent a significant inefficiency and potential profit pool that blockchain-based lending and capital markets can target. Projects aiming to compress these margins by facilitating direct, cross-border capital flows offer substantial disruptive potential.

The Solution: Servers with Laws

• Blockchains represent a fundamental shift: "servers with laws." These are scalable servers governed by immutable rules (smart contract code) that ensure predictable execution and prevent arbitrary changes or censorship (like double spending or unauthorized ledger alterations). This technological breakthrough, starting with Satoshi Nakamoto solving the double-spend problem, enables the creation of trusted, unified servers for global assets, something previously impossible because no single entity could be trusted.
• Credible Commitments: This concept is central. Blockchains provide credible commitments – technologically enforced guarantees about how the system will operate (e.g., Bitcoin's 21 million supply cap, smart contracts executing as written). This trust layer is foundational to the Internet Financial System.
• AI Researcher Relevance: The concept of "servers with laws" and credible commitments is highly relevant to zkML (Zero-Knowledge Machine Learning) and other privacy-preserving AI techniques on-chain, enabling verifiable yet private computations essential for secure AI model execution and data handling in decentralized environments.

Unlocking New Financial Possibilities

• Smart contracts operating on these servers enable novel financial instruments and efficiencies impossible in the legacy system due to high transaction costs and siloed infrastructure. Examples include:
• Streaming royalty payments to artists or dividends to shareholders.
• Bespoke capital-raising instruments (e.g., revenue-share tokens for specific business units).
• Efficient automated market makers (AMMs) and complex derivatives.
• The CowSwap example (implementing Eric Budish's batch auction idea, rejected by TradFi exchanges) demonstrates the power of permissionless innovation, achieving over $90 billion in volume.

Servers with Laws vs. Nation-State Laws

• The discussion explores the nature of "laws" on these servers – they are rules the server strictly adheres to (e.g., preventing double spends, executing code as written). This system must interact with existing nation-state legal frameworks. Felipe argues against an extreme cyber-libertarian view, acknowledging that while the technology allows many actions, users remain subject to local jurisdictions. Illicit activities on-chain can still lead to real-world legal consequences.
• The car analogy: Cars enabled new possibilities but also required new laws (traffic rules, DUI penalties). Similarly, internet finance requires adapting legal frameworks.
• Key Tension: Blockchains can create rules ("laws") with stronger enforcement guarantees than some nation-state legal systems, particularly regarding immutability. This creates friction but also opportunity.

Stronger Property Rights for the Underserved

• A major impact lies in extending strong property rights globally. Felipe highlights that most of the world lives under weak property rights regimes (average Heritage Foundation score of 43 vs. 95 in developed nations). Weak rights hinder capital formation and investment. Hernando de Soto's work ("The Mystery of Capital") estimates $9.3 trillion in "dead capital" locked in assets without clear, enforceable title.
• Blockchain's Role:
1. Initial Step (Bitcoin): Provided access to a seizure-resistant asset with a guaranteed supply, potentially the first strong property right for many.
2. Current/Next Step (Stablecoins, RWAs): Allows global access to assets governed by stronger legal systems (e.g., USD-backed stablecoins, tokenized US stocks like Apple or Nvidia via platforms like Ethereum). This shift from local currency depreciation (-6.5% avg. vs USD over 15 yrs) to potential US market appreciation (+8-10% avg.) is profound for global savers.
3. Future Step (Local Strengthening): Enables countries with weak rule of law to potentially adopt blockchain for land registries (NFTs) or corporate governance, making expropriation or manipulation harder and more transparent, thereby attracting capital.
• Investor/Researcher Focus: The tokenization of Real-World Assets (RWAs) under strong legal frameworks (initially likely the US) represents a massive growth vector. Monitoring regulatory developments (like US stablecoin bills) and technological solutions for RWA integration is critical.

Civilizational Impact: A Unified Global Financial System

• Felipe argues the Internet Financial System is a step forward for civilization, comparable to the printing press or the internet. A single, efficient global financial system with strong property rights promises to significantly boost global GDP, accelerate development in underserved regions, and unlock new forms of financial coordination and innovation.

Addressing the Gap: Why Hasn't Crypto Achieved More Yet?

• Despite the potential, progress has seemed slow, marked by speculation (memecoins), failures (FTX), and grift. Felipe attributes this to several factors:
• Technology Immaturity: Scalability and usability were insufficient until recently. He notes significant improvements over the last 5 years (lower transaction fees, better fund tooling).
• Zero Interest Rate Policy (ZIRP) Era: Abundant cheap capital combined with the technology's speculative potential fostered a "ZIRP DNA" focused on narrative and speculation over fundamentals, leading to capital misallocation (funding unwanted products, excessive spending). Higher interest rates are now forcing a necessary shift towards real value creation.
• Regulatory Uncertainty: Lack of clear regulations deterred mainstream adoption and institutional capital. The current positive shift, especially in the US, is crucial.
• Underserved Market Focus: Like early PCs (gamers/hobbyists) or Square (small businesses), crypto initially served speculators and those operating outside traditional systems due to high fees or lack of access. As UX improves and regulations clarify, the user base will broaden.
• Strategic Shift: Investors need to recognize the transition away from ZIRP-driven speculation towards sustainable, cash-flow-generating businesses built on blockchain rails. The "fundamentals matter" paradigm is becoming increasingly relevant.

The US Opportunity and Getting on the S-Curve

• Felipe sees the US embracing stablecoins and potentially RWAs as a pivotal moment. It aligns with US interests (exporting dollar dominance, increasing demand for US assets) and provides the regulatory clarity needed for mainstream adoption. This could finally push crypto onto the "S-curve" of adoption, moving from <0.1% of global financial assets towards a potential 70% over decades, shifting the industry from cyclical speculation to secular growth.
• Key Catalyst: US regulatory clarity on stablecoins and RWAs is viewed as the primary trigger for unlocking institutional capital and broad adoption.

Investing in the Internet Financial System: Protocols vs. Businesses

• Shifting focus to investors, Felipe, drawing on his private equity background at Thea Capital, emphasizes a fundamentals-driven approach based on discounted cash flows (DCF). He contrasts this with the "greater fool" theory driving speculative assets like memecoins. The key differentiator: would you buy the entire asset if the market shut down, based purely on its future cash generation potential?
• The Protocol Thesis Revisited: The early crypto ideal of creating immutable, "set-it-and-forget-it" protocols has largely failed in practice. Successful projects (MakerDAO, Uniswap, Aave) operate more like actively managed businesses, continuously iterating, upgrading (V2, V3, new chains), and adapting to the rapidly evolving market.
• Investor Demand: The market, especially funds facing high return expectations, now demands that protocols function like businesses, focusing on growth, product expansion, and ensuring value accrues back to the core token holders (highlighted by the community reaction to Aave potentially launching a new token for a new protocol). Investing in "inert" protocols is currently seen as unattractive due to the rapid pace of innovation and the risk of obsolescence or exploits.
• Actionable Takeaway: When evaluating crypto investments, assess them as businesses. Analyze the team, product roadmap, competitive positioning, cash flow generation (or clear path to it), and mechanisms for value accrual to the token. The era of purely "inert protocol" investing seems largely over for now.

Felipe's Current Focus: Futarchy and Token Holder Protection

• Felipe expresses excitement about "Futarchy" – using prediction markets for governance decisions. By creating conditional tokens (e.g., "UNI token if fee switch passes" vs. "UNI token if fee switch fails"), the market can price the expected impact of a decision, and the higher-priced outcome is automatically implemented. This offers a potential solution to DAO governance issues like voter apathy, bribery, or decisions not aligned with token holder value, enforcing better governance through credible commitments embedded in code.
• Relevance: This explores advanced governance mechanisms potentially crucial for the long-term health and value accrual of decentralized networks, relevant for both investors assessing governance risk and researchers developing DAO tooling.

The conversation highlights the profound shift from inefficient, siloed finance to a unified, blockchain-based Internet Financial System. For Crypto AI investors and researchers, the key takeaway is the maturation towards fundamental value, driven by technological readiness and regulatory clarity, particularly in the US regarding stablecoins and RWAs—monitor these developments closely.