


Billy Joel says “it’s always been a matter of trust.” That could not be more relevant today when it comes to money. Trust is the intangible factor that allows money to move and economies to succeed. When it erodes, as it did in 2008, balance sheets can melt before our very eyes.
So why are we now trying to create a financial systems with less trust?
The growth of digital assets, the passage of the GENIUS Act, and an array of government and Wall Street actions have welcomed cryptocurrencies into traditional markets and signaled a new age in finance built on blockchains, rather than traditional institutions, to move money and execute investments. But has anyone really thought through the implications of such a “redistricting” of the country’s monetary channels?
Credit cards, check processing, wire transfers, security trades and real estate transactions have typically relied on trusted intermediaries — commercial banks, broker-dealers, payments system pipelines, the FDIC, etc. Tech advocates see these processes as archaic and their trusted intermediaries as luddite interlopers that interpose themselves simply to take a piece of the action. To some extent, these assertions may be true, but throwing the baby out with the bath water makes no sense.
Trusted intermediaries add the intangible trust factor into financial transactions and often take on substantial risk when things go south. Notwithstanding the benefits of new, digitally empowered systems, eliminating traditional intermediaries transfers the responsibility of building trust to faceless parties, mysterious software and unregulated processors. What could go wrong?
But fear not. Blockchain technologies have been characterized as all-purpose messiahs that can offset the loss of trusted intermediaries. They are often described as immutable and impenetrable (neither of which has proven to be true). And who knows how blockchain technologies will fare in the quantum environment, where they may be even more easily penetrated?
Before we rush to embrace shiny new technological products that shun traditional financial intermediaries and pipelines, we should understand the brave new world we are entering.
A friend recently told me that he was using a killer online crypto arbitrage app. He never spoke to a person nor knew how the trades were being made or cleared, but he was netting an annual return of between 50 and 100 percent on his initial crypto investment. That was a clear sign that something was amiss, but he ignored those “check engine” lights.
Making money and getting your hands on it in cyberspace can be two different things. When he tried to liquidate his position and get his money, he was told that he had to invest another significant amount before that could happen. That is when he knew he had been scammed. He looked for someone to complain to on the site but gave up when it ran him into digital rabbit holes.
No matter how clumsy systems seem to be today in comparison to digital technologies, when you write a check from an FDIC-insured bank that is then processed through trusted intermediaries — other FIDC-insured banks and the Federal Reserve — you have total confidence in the parties and can stop payment if needed. In an ACH wire transaction, you also have the ability to stop or reverse the transaction. When a fraudulent credit card transaction occurs on your account, you are not responsible for any of the charges. The trusted intermediaries in those systems mediate and/or monitor the transactions and are often required to fix any problem or absorb the loss.
Sure, we want traditional intermediaries and online bank payment systems to work better and process quicker. But cyberspace has turned out to be a much more dangerous place than the real world, encouraging every potential Bonnie and Clyde with a scheme to fleece gullible people of their life savings. So, if we are going to jettison trusted intermediaries, we had better be ready to rely on the integrity of applications and the trustworthiness of third parties we don’t know, can’t identify, aren’t regulated and may not even be human.
There is a stark contrast between the history of financial crises and the unabashed cheerleading that tech advocates and politicians are doing for digital technologies today. The cryptocurrency and stablecoin phenomena closely resemble the private money days of the 19th century, when everyone from banks to bridges issued their own forms of money that were often valued-based on variant economic and geographic factors. The difference is, back then, parties usually dealt with each other face to face and relied on their respective honesty or knuckles to collect.
Those systems eventually collapsed of their own weight as commerce expanded because of the need for speedier, more broadly accepted forms of payment — not unlike the criticism now laid at the feet of today’s traditional financial systems. But in our effort to upgrade current systems to something more responsive to current financial needs, we should not ignore the elements that made everything work. Trust is one of the most powerful of those elements.
Whether it be J.P. Morgan Chase, Fidelity, Goldman Sachs or the FDIC, trusted intermediaries add trust. Eliminating that type of trust in favor of algorithms and applications may lead to a system that works faster but collapses more often.
Thomas P. Vartanian is the executive director of the Financial Technology and Cybersecurity Center, and author of “The Unhackable Internet,” and “200 Years of American Financial Panics.”