As much as we might deny it, we always trust the bank

Nichola Cooper‘s third post in our Emerging Fellows program explores trust, blockchain technology, and banks. The views expressed are those of the author and not necessarily those of the APF or its other members.

The future of trust is topical. A sustained spate of political and financial calamities has accelerated the decline of global trust levels and enhanced interest and development in decentralised technologies and peer-to-peer networks. This blog post marks the first in a series regarding how that trust is expressed in discernible changes in social organising patterns, engagement with technology and financial markets.

We begin with Bitcoin. You might have heard of it? It is commonly thought that its creation was a reaction to the global financial calamity; from a desire to obviate unscrupulous bankers and prevent bad lending practices. This is not quite true.

In fact, the Bitcoin protocol was designed to resolve the double-spend problem of digital currencies. Unlike physical money which is reasonably difficult to counterfeit, digital currencies can be replicated quite easily – they are basically like a file on your computer that you can email to a friend. There is nothing stopping you and your friend both copying (counterfeiting) the file and sending it multiple times across the network. The Bitcoin blockchain prevents double-spending by verifying each transaction with a proof-of-work algorithm which made digital currencies as a medium of exchange all the more viable. The proof-of-work is why a common refrain has become that the blockchain negates or even creates trust.

This also is not wholly true. There is an increasingly prevalent inverse relationship between trust in institutions and peers. For, unlike Bitcoin, decreased trust in centralised institutions can be attributed to corporate malfeasance and bankers’ chicanery. Whilst transactions on decentralised networks skirt institutions, they are not inherently trustworthy for this reason alone.

Despite excited claims that we evidently trust technology more than institutions, I suggest that blockchains are simply an artefact of greater trust in peers. In the cloud of blockchain and cryptocurrency confusion, we have forgotten Bitcoin’s famous integrity is designed and maintained by a community of users – people just like us. In other words, social trust is not shifting to technology, but ourselves.

In financial transactions, we deal with three particular kinds of trust: institution-based, character-based and process-based. Institution-based trust is self-explanatory: we trust the authority in the transaction, usually a bank or government. Characteristic-based trust is awarded to someone that reminds us of ourselves. Process-based trust occurs when precedent indicates reciprocity in an exchange. For example, if I go to shake your hand, I trust you will reach out to take my hand and return my handshake.

It naturally follows that trust in our peers would increase when we lose trust in central institutions and we don’t understand technology. Part of our fascination with cryptocurrencies is a yearning to be able to stick it to the man while making a quick buck. The dominant, practical part of ourselves, however, simultaneously wants to be protected from risk.

It’s all fun and games as long as the price of Bitcoin keeps going up. But it isn’t. Bitcoin’s price has lost 27% during the time it took to write this post, commentators blaming volatility in the markets on banks’ demands for regulatory intervention. Academics have observed banks’ demands are motivated by challenges to their power and legitimacy; technology that disintermediates them suggests lack of relevance.

Yet, the evolution of money has consistently shown approval by a central authority to always have been necessary. Gold has been valued by a jeweller, money dispensed by a bank, tax paid and refunded by a government agency. As much as we might wish the success of digital currency its use as a medium of exchange is probably dependent on support by governments or central banks; as seen in movements towards cashless societies in Denmark, Sweden, Norway, India, and Venezuela.

As much as we might yearn otherwise, we always trust the bank.

© Nichola Cooper 2018