In remarks earlier this month, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler argued the crypto economy “will not take off unless you have some trust." Then, last week, in a report issued in response to the White House Executive Order on crypto, the U.S. Department of the Treasury noted that one benefit of a potential Federal Reserve-created central bank digital currency (CBDC) is that it would be issued by a “trusted source.”
Implicit in both statements is a belief that trust is automatically achieved via the involvement of a government entity.
As someone who has worked at the Federal Deposit Insurance Corporation, the USAID and New York State Department of Financial Services (NYDFS) – often with the goal of supporting responsible innovation – I’ve observed first-hand how government intervention, including through regulation, can help ensure the integrity of financial markets, prevent bad actors from harming consumers and incentivize entrepreneurship and innovation in financial services.
Matthew Homer, a CoinDesk columnist, is executive in residence at Nyca Partners. He previously served as executive deputy superintendent at New York State Department of Financial Services.
Still, I’ve become increasingly concerned by statements like the ones quoted above that assume that public trust in government can always be taken for granted. In my experience, trust in government-imposed solutions is not a natural endowment but a privilege that government regulators must earn and actively maintain.
One of the most intellectually exciting aspects of crypto is the opportunity to revisit the foundational principles regarding money, including the source of our trust: Why, for example, do we trust that a piece of paper with a president’s face printed on it has value? Ask most people, and those who have an answer at all will likely say it’s because our money is issued by the government, and the banks and intermediaries that manage it are subject to strict laws and oversight.
See also: If Money Is Speech, CBDCs Should Be Tools for Freedom | Opinion
But that sort of trust in the government can’t be taken for granted, a fact that has been documented by the Edelman Trust Barometer, an annual report on a regular survey of societal indicators of trust. According to the most recent edition, 48% of people globally say that government is a dividing force in society, compared to only 36% who say it is a unifying force. Government is also ranked behind business, non-governmental organizations (NGO) and the media in the perceived ability to solve societal problems. And “government leaders,” in particular, are trusted the least of any type of societal leader. In the United States, specifically, only 39% of people express trust in government.
What happens if public trust in the government continues to decline, as the Pew Research Center says it has done for the past 60 years? Will peoples’ trust in financial products or services still be as heavily influenced by whether or not the provider of those products or services is regulated by the government?
As a former financial services regulator, I’ve become convinced that the public’s trust in our traditional financial system is coming under significant threat as a result of the loss of public confidence in government writ-large and in government-regulated institutions like banks.
The striking successes of cryptocurrency illustrate the fact that this threat is not illusory: If people don’t trust their government or government-supervised private institutions to look out for them, they can, and will, vote with their feet and turn to alternative products and services that they believe are more deserving of their trust – and money.
Historian Yuval Harari has said that money is “a system of mutual trust, and not just any system of mutual trust: Money is the most universal and most efficient system of mutual trust ever devised.” This innovation has allowed us to move beyond the limitations of a barter society, permitting things like urbanization, specialization of labor and commerce at a distance. It has thus made possible the co-mingling of different peoples – unconnected by familial, religious, or other bonds that might normally engender trust – giving rise to the complex, mobile civilization we know today.
If trust is key to determining the success of a financial or economic system, and we are seeing an enduring deterioration of public trust in governments both in the U.S. and abroad, how can crypto help fill the void? I believe there are at least four key considerations that will determine whether or not crypto is an ephemeral experiment or the next great system of mutual trust in financial services:
First is the reliability and security of the crypto products themselves. Do the products, whether centralized or decentralized in their design, promote trust through transparency and resilience? Are they reliable and predictable? What safeguards are in place to give the public confidence that they won’t lose their money to a rug pull or a governance hack? While bleeding-edge crypto enthusiasts may have been happy to undertake their own due diligence (giving rise to the term DYOR), cryptocurrency is not going to fill the trust void if everyday users have to audit lines of computer code or peruse Discord or Telegram threads to understand whether a product is secure and reliable.
Second is the public’s faith in the competence and honesty of those who build and maintain the ecosystem, whether they are developers, infrastructure providers, virtual asset service providers (VASP), decentralized autonomous organizations (DAO), investors or others. Even if it is a goal to automate as much of the system as possible and distribute ownership and control across as many people as possible through smart contracts, recent experience has shown us that crypto remains subject to the fallibility of human beings. What can be done to objectively monitor those participating in the ecosystem and shed light on those actors who exercise a disproportionately large amount of influence over it?
Third is the reaction to crypto by government policymakers and regulators. Will government view crypto as a threat to the centrally controlled monetary system and use statutes designed for a bygone era, and often ill-suited to the realities of cryptocurrency markets, to stifle innovation? Will it focus only on crypto’s shortcomings, ignoring its promise, to justify draconian rules that scare away entrepreneurs and venture capital? Or will policymakers take a holistic, forward-looking approach, recognizing that crypto may have a very constructive role to play particularly if trust in the government continues to erode?
See also: The Infuriating Patchwork of Crypto Regulations Is Good for Crypto | Opinion
The fourth factor determining whether crypto emerges as a lasting system of mutual trust may depend on how society is changing and the preferences of the next generations of consumers. This is undoubtedly the most important part of the equation, even if it is the one least frequently discussed. America’s population is changing. Gen Z, or those born after 1996, is the most racially and ethnically diverse generation in American history. And the first to grow up in an entirely digital age. It may also be the generation most consistently failed by the dominant institutions of its time.
Just consider what this generation has lived through: 9/11, the Great Recession, the alarm bells of climate change, the scourge of opioids, school shootings, COVID-19, record-high inflation, the bifurcation of society into red and blue communities and the rolling back of women’s rights. Not surprisingly, this generation is also one of the least trusting in institutions generally – including but not limited to the government.
Years from now, it would not be surprising to look back at the early 2020s as the time when consumers started to place more trust in decentralized software to manage their money than in government-regulated financial intermediaries.
Based on this framing of the issues, two realities are clear: Money is inherently a social construct built on trust, and public confidence in the institutions that historically have provided that trust is at a monumental low, and continues to decline.
Will crypto be the solution that overcomes this gap and becomes a trusted provider of everyday financial products and services? While it is likely still too early to answer this question, it seems clear the financial services system of 2030 and 2050 will look different from what exists today, and that trust in that system may be motivated by very different factors.