Billy Joel says, “It’s always been a matter of trust.” That’s what it was today that could not have been more relevant in terms of money. Trust is an intangible factor that allows money to move and the economy to succeed. When erosion occurs like in 2008, the balance sheet can melt right in front of you.
So why are we trying to create an unreliable financial system?
The growth of digital assets, passing the Genius Act, and the series of government and Wall Street actions show that cryptocurrency welcomes traditional markets and drives money to make investments in a new era of finance built on blockchain rather than traditional institutions. But is anyone really thinking about the meaning of such a “rezone” in a country’s financial channels like this?
Credit cards, check processing, wire transfers, security transactions and real estate transactions usually rely on trustworthy intermediaries such as commercial banks, broker dealers, payment system pipelines, and FDICs. To some extent these claims may be true, but it makes no sense to throw away your baby in the bath water.
Trustworthy intermediaries add intangible trust factors to financial transactions, and often take considerable risks as things move south. Despite the benefits of new systems that are digitally powerful, eliminating traditional intermediaries shifts responsibility to build trust on faceless parties, mystical software and unregulated processors. What’s not going well?
But don’t be afraid. Blockchain technology is characterized as a general purpose messiah that can offset the loss of trustworthy intermediaries. They are often said to be immutable and inexplicable (neither of which has been proven to be true). And who knows how blockchain technology freights in a quantum environment?
Before embracing traditional financial intermediaries and shiny new technology products that avoid pipelines, we need to understand the brave new world we are in.
A friend recently told me he was using the Killer Online Cryptographic Arbitrage app. He had no idea how the deal was made or cleared, but he had earned an annual return of 50-100% on his first crypto investment. It was a clear indication that something was wrong, but he ignored those “check engine” lights.
Making money and getting it in cyberspace is two different things. When he tried to liquidate his position and get money, he was told he had to invest another substantial amount before it happened. That’s when he knew he had been scam. He searched for someone to complain on the site, but gave up when it drove him into a digital rabbit hole.
The story continues
Compared to digital technology, how clumsy today’s systems seem, but when you write a check from an FDIC insurance bank, it is then processed through a trusted intermediary (other FIDC insurance banks and the Federal Reserve). An ACH wire transaction also has the ability to stop or reverse a transaction. If you experience fraudulent credit card transactions on your account, we will not be liable for any fees. A trusted intermediary in these systems is necessary to mediate and/or monitor transactions, resolve problems and absorb losses.
Certainly, we hope that traditional intermediaries and online bank payment systems will work better and process them faster. However, cyberspace turns out to be a much more dangerous place than the real world, encouraging all potential Bonnie and Clyde with a scheme of foolish people who can save their lives. Therefore, when dumping trustworthy intermediaries, you’d be better off being prepared to rely on the integrity of your application and the reliability of third parties that may not be known, identifiable, unregulated, or even human.
There is a stark contrast between the history of the financial crisis and the shameless cheerleading that technology advocates and politicians do for digital technology today. The cryptocurrency and stubcoin phenomenon is very similar to the personal money day of the 19th century, when everyone from banks to bridges issued their own money, which is often valuable based on a variety of economic and geographical factors. The difference was that at the time, parties usually relied on meeting each other face to face, gathering their own integrity and knuckles.
Unlike the criticism currently laying at the feet of the current traditional financial system, these systems ultimately disrupt their own weight as commerce expanded due to the need for a faster and more widely accepted form of payment. However, in an effort to upgrade the current system to something more sensitive to current financial needs, we should not ignore the factors that all worked. Trust is one of the most powerful of these factors.
Whether it’s JP Morgan Chase, Fidelity, Goldman Sachs, or FDIC, trusted intermediaries add trust. Eliminating that type of trust in favor of algorithms and applications can lead to systems that operate faster but collapse more frequently.
Thomas P. Vartanian is executive director of Financial Technology and Cybersecurity Center and is the author of The Hackable Internet and 200 Years of American Financial Panic.
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