- As technology evolves, so do thorny questions of trust
- As Warren Buffett famously said: it takes 20 years to build a reputation and five minutes to ruin it
Last year Denmark recorded its first year without a single bank robbery, as the chart below shows. According to business association Finans Danmark, there are 800 bank branches in Denmark, but only 20 of them still house workers handling cash deposits and withdrawals. When spending turns cashless, banks have less loot to steal.
But this doesn’t necessarily mean that our financial institutions are any safer. As the Danish finance workers union Finansforbundet points out, technology allows would-be criminals to steal from a greater distance while avoiding the risk of physical harm. They also have access to far more money in a bank’s holdings than an individual branch might have in cash. As banking transactions move online, so do financial crimes.
For a long time, banking was a physical business. A government research paper produced in the aftermath of the financial crisis notes that from the 1800s to the 1970s, banking relied on reputation, good judgment and local insight into who to lend money to. But financial liberalisation, computerisation and increasingly complex financial modelling saw these trust-based relationships break down. Trust in banking crumbled with it: the paper concludes that “regrettably, but naturally, greater use of computers, and IT more generally, has been partly instrumental in the erosion of trust in the financial system by the general public”.
And since 2012, technology has marched forward again. Today, financial services rely on a whole host of underlying technologies to secure transactions – as do crypto assets. But unlike traditional financial services, cryptocurrencies don’t have the institutional backing of a central authority. This makes the question of trust a whole lot thornier.
A 2019 paper by academics from Aalto University looked in more depth at how trust was created in the case of bitcoin. The researchers found evidence that “failures in accountability and transparency” in traditional banking had led to events like the collapse of Lehman Brothers. These failures “significantly reduced people’s trust in traditional financial institutions and their instruments”, which sent people in search of alternatives. Enter crypto.
The paper sets out some of the reasons for its appeal. The lack of a central authority means that cryptocurrencies can claim to be immune to government interference and manipulation – a draw in countries with volatile currencies and unstable economies. They use blockchain technology, which means that transactions should be tamper-proof – and the requirement of a trusted third party is eliminated. Where traditional financial institutions have legal, monetary and institutional backing, cryptocurrencies look to provide “trust through technology” instead.
But after a series of high-profile scandals, trust in cryptocurrencies has plummeted: it is clear that technological promise alone is not enough. In November, a European Central Bank (ECB) blog argued that bitcoin was on the “road to irrelevance”, and warned banks against promoting Bitcoin, arguing that “the negative impact on customer relations and the reputational damage to the entire industry could be enormous”.
These concerns were recently echoed across the pond. In a joint statement on January 3, US regulators warned banks against the risks associated with the cryptocurrency market, cautioning that issuing and holding crypto tokens was “highly likely to be inconsistent with safe and sound banking practices”. In the UK, the Financial Services and Markets Bill is working its way through the House of Lords, and lays the foundation for bolstered crypto asset regulation. But will regulation be sufficient to rebuild trust in the cryptoasset market? The ECB warned that “regulation can be misunderstood as approval” and the UK’s FCA has long worried about giving crypto assets a ‘halo’ effect.
The same government research paper concluded that tighter regulation could only be a “partial substitute” for trust. Its final recommendation was old-fashioned: in the face of advancing technology, financial intermediaries should “take every care to retain and sustain their good reputation by their deeds as well as their words”. As Warren Buffett famously said, it takes 20 years to build a reputation and five minutes to ruin it. Cryptocurrency has only had 14 years to build a reputation. It is already severely dented.
