Crypto was started to address a collapse of trust. Can it be trusted?

Cryptocurrency emerged from the ashes of the 2007-2009 financial crisis to solve a problem of trust. Not to renew faith in a collapsed banking system or to reverse decades of plummeting trust in government and other institutions. 

It promised an end to the need for trust at all. 

No longer would regular people have to rely on banks or intermediaries in order to spend their money online. Cryptocurrency offered a new system based on “cryptographic proof instead of trust,” as Satoshi Nakamoto, the pseudonymous inventor of bitcoin, announced in a white paper presenting the concept. Rather than trusting fallible human institutions, private citizens could put their faith in mathematical code alone. 

And why should people do that? Because of the blockchain, a digital chain of uneditable information that is verified by every participant in a decentralized way, with no single governing power. Transactions are anonymous and difficult to track. 

Fifteen years later, cryptocurrency has swelled into a $1.71 trillion global market, up from its crash in 2022. A quarter of Americans own bitcoin. And blockchains are being explored as solutions in areas from cybersecurity to voting and corruption prevention. 

Yet the crypto world has its own trust problem. The underlying code is largely sound. But recent years have shown that crypto is vulnerable to the same kinds of foibles that first gave it momentum during the financial crisis. It can be a Wild West where volatility, scams, and illicit activity thrive. 

With tens of thousands of cryptocurrencies on the market – some purely speculative, some offering real value – the question now is whether crypto can build the legitimacy it needs to deliver on its promises. And in a curious irony, the old-school banking system might offer clues.

“If crypto really wants to make good on this promise of a more just system, that also needs to include the things that make a society trustworthy,” from deposit insurance to human rights protections, says Nathan Schneider, assistant professor of media studies at the University of Colorado Boulder.

At the same time, he is cautiously hopeful about the possibilities for using blockchains to make processes more transparent and reliable, from banking to democracy. The people working in that realm are “not really trying to eliminate trust,” he says. “They’re trying to create systems that can facilitate people building decentrally governed entities and actually trusting each other more.”

Two views of cryptocurrency

Cryptocurrency means a lot of things to a lot of people. Most crypto buyers in recent years aren’t in it to liberate the world from the prying eyes of government. Instead, they see a chance to make – though many lose – large sums of money. Hype cycles are quick to form around new coins whose main purpose is speculation, opening the door to scams and fraud. 

“A lot of the same problems that led to that original crisis have really been replicated in the crypto world,” says Molly White, who tracks crypto-related scandals on her website, Web3 Is Going Just Great. 

She points to dubious financial products and a lack of awareness about how money is being used. One of the biggest cryptocurrency traders, FTX, collapsed in late 2022 after news of the founder’s misuse of customer funds came to light. 

The space has become a “giant, unregulated casino,” that “preys on people’s mistrust of institutions,” adds Ethan Zuckerman, a media scholar at the University of Massachusetts Amherst.

For some crypto enthusiasts, that might be fine. They might prefer that it be a rogue system on the fringe. For them, “the lack of trust is sort of a feature, not a bug,” says Lana Swartz, an associate professor of media studies at the University of Virginia.  

For others, however, that’s all froth on the surface of a powerful innovation still in its early days. Ethereum, the second-most-valuable cryptocurrency behind bitcoin, has a large and loyal following of people excited about how blockchains can transform the ways society governs itself in the future.

The United Nations World Food Program saved $3.5 million in fees by sending humanitarian aid via a private version of ethereum to more than a million refugees in Bangladesh, Jordan, Lebanon, and Ukraine. And researchers funded by the European Union are exploring ways blockchain can “restore confidence” in public and private institutions. 

Boring may be good

So far, cryptocurrencies have gained the most ground in places where the existing alternative is even less trustworthy. 

Gabriel Álvarez was a teenager during the 2001 financial crisis in Argentina and has watched the country’s currency plummet in value during the past decade. Following the 2019 presidential election, he stood in line for hours at three banks across Buenos Aires before finding one with enough money to give him his life savings. He took the wads of cash and invested in bitcoin, ethereum, and anything besides the Argentine peso itself.  

Cryptocurrency offered relative stability and, at first, the promise of earning something. But “over time, I’ve lost confidence in crypto as an investment,” says the software developer.  

Today he keeps one-fifth of his savings in cryptocurrency, which he uses to pay rent to his landlord, who lives in Brazil. 

Even El Salvador, which adopted bitcoin as legal tender in 2021, has had a hard time getting its citizens on board. To earn trust worldwide, cryptocurrency may need to become more boring. 

That’s the idea behind stablecoins, a type of cryptocurrency whose value is pegged to real currency, typically the U.S. dollar. Together these coins make up the third-largest share of the cryptocurrency market. 

An early mistake was to assume crypto entrepreneurs could go without “the same levels of self- and government regulation that traditional financial services have come to understand is vital,” says Josh Burek, senior director of strategic positioning for Circle, which issues a stablecoin called USDC.

While regulation in the United States is still lagging, there are signs that cryptocurrency is institutionalizing. The Securities and Exchange Commission hesitantly approved the first exchange-traded funds to hold bitcoin last month.

Few believe cryptocurrency will ever replace the basic building blocks of a stable economy, such as governance and a reliable legal system.

But the technology may still open interesting doors, says Eric Budish, an economist at the University of Chicago. While he doesn’t think cryptocurrency is a viable economic solution at a global scale, “there’s a lot of scope for innovation and how to marry some of the intellectual ideas that have been bubbling up with crypto to traditional sources of trust.”