Pongo Points:
• Banks and blockchains serve very similar purposes in that they both maintain transaction records and provide means to grow wealth. However, a critical component of today's financial infrastructure that is lacking in the digital space is that of digital cash.
• Federated finance is a more natural evolution for the traditional system, as it will depend on trusted bodies that appeal to both regulators and customers. Fees might be lower than today and would align incentives between the federated institutions and customers of all check sizes.
• Because efficiency drives competition, a speedier and more transparent federated blockchain system would accrue savings for all users. If users are able to switch providers more easily than today, there is pressure on financial system providers to provide better benefits to customers. 
First Forays
Bitcoin and crypto were born out of distrust for a financial ecosystem that disenfranchises the financially distressed. Overdraft fees, credit card interest rates, and denial of service are all methods used by the traditional finance system (“TradFi”) to protect and boost their earnings. Unfortunately, it has the added effect of limiting the lower class from accessing tools to improve their financial health. It’s not impossible to “pick yourself up from your bootstraps” (at least in many Western countries), but that uphill battle certainly gets steeper when paying $35 overdraft fees and 25% interest on credit card bills on a budget.
Banks and blockchains are basic economic infrastructure that keep records of customer deposits and withdrawals, as well as providing tools to grow wealth. Unlike banks, however, blockchains cannot delete customer accounts or prohibit someone from engaging with its economy. Due to growing pressure from regulators and law enforcement, financial institutions find themselves in the increasingly difficult position of juggling customer interests with regulatory penalties, often resorting to anti-consumer behavior in order to protect their own interests.
Incentives are clearly misaligned if a customer is accused of suspicious activity and a bank closes their account without much warning or contest to protect themselves from a fine or legal action. Thankfully, blockchains keep perfect records of a user’s activity, so “Suspicious Activity Reports” can be easily verified by checking blockchain records. The missing piece of the puzzle is the development of the single unifying layer infrastructure to support an economy of disparate blockchains.
This ape believes in the idea of the federated blockchain system, where anyone can participate with limited functionality on the base layer and more robust features are available on sublayers (or a “layer 2”). This system is already in use today with physical bank notes and financial institutions providing additional features like online banking and credit cards, but there is no totally digital parallel to cash. Blockchain might be the tool that enables that system.
Fraud Finder
If the thought of the government tracking every transaction you make sounds invasive, that’s the case against Central Bank Digital Currencies (“CBDCs”). Many in the crypto industry decry central bank research of CBDCs, as a CBDC becomes a temptation for governments to abuse their constituency’s right to privacy and due process. A more elegant solution would involve a federated system, whereby users can maintain their wealth on a “base layer” and delegate funds to layer 2s in order to engage with more specific features of the economy.
A good parallel to this federated system is physical cash. The government and financial institutions despise circulating physical notes because they’re tools for money laundering, provide cover for illegal transactions, and are difficult to trace. Thanks to the growth of credit cards and electronic banking, their concerns are diminishing quickly. Unfortunately, this leaves users with fewer options to engage in the economy if they find themselves accused of fraud or suspicious activity. A federated base layer blockchain could be the solution.
For example, a user holds 10 BTC on the Bitcoin network, but can delegate 2 BTC to JP Morgan’s layer 2 blockchain in order to access its services. What does JP Morgan’s layer 2 offer? Credit services so you can leverage your wealth, as well as investment products so you can grow your wealth. How does this differ from our current system? The “federator layer” (in this case the Bitcoin network), where any user can hold and exchange wealth, or participate in the economy without depending on a financial institution to maintain their account.
Should JP Morgan drop you as a client, your funds would return to you on the base layer network - not in the form of a cashier’s check that you can’t deposit because no bank wants you as their customer. Certain sectors of the economy may remain closed off due to your transaction history, but at least you have ability to move your funds peer-to-peer. Of course, the more you break the law, the fewer layer 2s will want to engage with you. Eventually, you may find yourself siloed from the world due to your bad behavior, but at the very least you can interact with others in the same position. (Although, what good is your stolen wealth if you can only trade it with other pirates?)
Fixing Foolery
Beyond the ability to use digital cash without fear of having your account closed, the improvements to transparency should drive down costs for the benefit of the public over time via competition theory. Overdraft fees could be dropped, as a layer 2 would query the base layer to see if a user has sufficient funds to cover the charges. Yes? Then issue a line of credit and ask the user to “top up” their layer 2 funds from the base layer. No? Reject the charge outright. The terms can vary between layer 2 providers, just as they do between financial institutions today.
Credit interest rates would also be compressed, as users could easily swap between layer 2 providers in search of the cheapest credit. In order to get a credit card today, one must have a sufficient credit score and provide a litany of personal information. If your information and credit history are stored on a blockchain, a credit application could be approved in seconds rather than days, meaning users can switch credit providers much more easily to find better offers. Today’s 25%+ interest rates on credit cards would find incredible downward pressure if you could switch credit card providers in minutes without negatively affecting your credit.
This ape has written on the idea of a federated blockchain system before, but left out a critical component: The federation of layer 2 blockchains will be privately owned, or public and operated like publicly traded companies are today. In other words, governance structures will mimic typical business structures today instead of operating like decentralized finance protocols (or “DeFi”). To the crypto enthusiasts that will ask why can’t this be achieved with DeFi? Simply put, it’s the ability for a regulated layer 2 provider to enforce local laws.
A decentralized organization might not comply with law enforcement requests, as it would necessitate a vote among DAO governance holders. Further, every law enforcement request for every single user account must be publicized to go to vote for DAO governance - an undesirable byproduct of decentralization. A federated layer 2 system would enable greater privacy, even if it’s at the expense of total freedom.