In my previous post, I discussed Bitcoin’s desire to remove trust from the payments process. I now want to look at the nature of financial trust: What does it mean to say we “trust” a third party? Is trust of third parties undesirable for reasons other than cost or inefficiency? If so, can there be financial activity without it?
Without getting too metaphysical, trust is how we manage the human fallibility of others. Whenever I need to rely on other humans and other human institutions in order to do something – like pay or be paid – I am exposed to their fallibility. To minimise this risk, people choose financial advisers, assistants and counterparties based on a complex web of human factors including direct personal reliance (“I know and like her”), organisational brand and reputation (“these guys are big, safe and friendly”), recommendations from others (“everyone at work banks with them”) and so on – all ”trust” in the broad sense.
If we don’t systemically need it any more, maybe the nature of finance changes.
Let’s unpack trust in payments a little. For payment networks it seems to me we are talking about two specific types of trust:
- the user’s trust in their own service provider, such as a bank, that it will keep their assets safe and deal with them as instructed, including that they will only participate in “safe” payment networks
- the user’s trust in one or more central third parties who vouch for the enduring integrity of available payments networks
The glittering prize dangled by Bitcoin and other digital currencies is that you can free yourself of dependence on this web of trust. But frankly, I wonder if this isn’t a bit of a mirage.
Realistically, intermediaries will not disappear, so much as change in purpose and function. Most holders of Bitcoin use a third party wallet or client to manage their keys and access the shared ledger; they use exchanges to convert value into and out of the Bitcoin universe. For any mass market application this seems like a necessary part of the solution. This can be highly automated, but the automation is still supplied by a third party, and you have to decide whether to trust them or not. When my bank offers me a mobile banking app, whether I take it up or not depends in part on whether I trust my bank. I wonder whether digital wallets aren’t conceptually the same.
There is still, I think, trust in the choice of service provider, not so much to keep your assets safe, but to write good, reliable code that won’t crash, to resist malware that will defraud you, to add functionality so the product gets more convenient and functional over time, and so on.
How you develop and exercise trust may change quite a lot, of course. When I was a young man, I began a trusted banking relationship by making an appointment with the branch manager of my boss’s bank– yes, I’m that old. I imagine “trust” in the future will look more like Uber or airBnB – real-time community ratings of reliability and service quality. But it’s still essentially trust: the belief that a service provider will in the future do the right thing, including not making off with your money.
I struggle to see a scenario where ordinary people feel no need of trusted advisers and service providers – whether they actually hold your assets or merely provide you with the tools to hold and direct them does not seem to me to make a fundamental difference. Trust is still needed. In the Bitcoin universe, we have seen this already: the failure of Mt. Gox was a failure of trust in a classic sense, much like a bank failure.
So for me, the promise of no-trust payments is overblown – third parties will still perform useful, valued functions, will still earn fees for doing so, and will still need to be trusted. Of course, they may not look much like a traditional bank!
The full story:
Part 1: We need to talk about Bitcoin’s trust issues: the founding principle of Bitcoin and why trust is a bad thing
Part 2: Why Shared Ledger Technology won’t free us from human fallibility: does a shared ledger really remove trust from the equation?
Part 3: The ‘Snapshot Problem’: how does a shared ledger react to a changing environment?
Part 4: Conclusion: the irony of bitcoin and the future of shared ledger technology
