A new kind of trust is transforming our lives

Tuesday, 05 December 2017, 05:29:38 AM. Currencies like bitcoin demonstrate a fundamental transformation taking place in capitalism today: the nature of trust is changing. Many mistakenly cite dismal polling data to argue that trust is d…

Ten years ago, the cryptocurrency bitcoin did not exist.

Which makes it stunning that today, the value of a bitcoin now hovers around $10,000, or eight ounces of gold. While bitcoin may have momentarily entered into the price-mania of Dutch tulips or the late-1990s dot-com bubble, with values likely to retreat, cryptocurrencies are as here to stay as the Internet was in the late ’90s.

Currencies like bitcoin demonstrate a fundamental transformation taking place in capitalism today: the nature of trust is changing. Many mistakenly cite dismal polling data to argue that trust is dead. But they’re wrong. Even if you have no idea what cryptocurrency is, you’re experiencing this new paradigm of trust when you get in a Lyft or Uber, or let a stranger into your house through Airnbnb or TaskRabbit.

It is not news that trust in Wall Street and Washington has been on the decline for years. But the decline in trust tracked by social scientists and pollsters is not the decline of all forms of trust. Rather, we are witnessing the death of centralized forms of trust particular to the last century, specifically those built around the experts, processes and institutions that sought to verify identity, guarantee good character and provide the reliable information necessary to have a functional marketplace.

But trust did not always rely on centralized verifiers. At the time of the American Revolution, trusting relationships were largely built around social status and reputation. Well-known agents and the intense consumption of news lubricated long-distance trade, but for the most part trusting relationships were localized and personal.

Nineteenth-century globalization and state-building changed all this. In the United States, the influence of eastern commercial interests stretched across North America and eventually the Pacific. The British and French empires reached into new markets using new technologies. The populations of major cities exploded.

It was during this period, sociologist Richard Sennett has noted, that the stranger was born: that particular creature of modernity whose appearance and conduct is not merely foreign, but also unknown, and impossible to place.

Anxiety around the disruption of trust was palpable and captured by the period’s greatest novelists. “TRUST NO ONE,” reads the sign at the barbershop in Herman Melville’s aptly named 1857 novel, “The Confidence Man.” Fine for the barber — he held the scissors. But insurance agents, commodity traders and financiers who found themselves at the forefront of new markets and trading patterns, such as the futures market, had to develop new mechanisms for trust.

Amid these changes, the importance of reputation held steady. Court cases from the mid-19th century show that reputational networks were increasingly considered a judicious and responsible way to evaluate trustworthiness. By crowdsourcing background knowledge, reputation networks provided a degree of security, while not limiting economic or social opportunity to an individual’s personal connections.

But financial fraud continued to increase anyway. New methods, more formal ones, were needed for evaluating trustworthiness.

In response, much of the verified world we know today came into being in the late 19th and early 20th centuries: the professionalized medical exam for insurance purposes, the passport, modern accounting requirements and financial reporting, and, soon, credit rating scores. These instruments took the responsibility for assessing trustworthiness out of the hands of the individual, relying instead on experts, professionals and processes of verification.

And over the last hundred years, shifts in the speed of communication, the scale, breadth and complexity of commerce and the anchoring institutions of the nation-state have all favored the construction of centralized processes controlled by large institutions that encourage trust.

We interact with this world every day be it by using a passport or driver’s license to get into a bar or onto a plane, applying for a credit card using a social security number, verifying our immigration status to begin a new job or relying on a good credit score and documentation of our incomes to obtain a mortgage or an apartment lease.

Yet it is this historical era of trust that is dying.

As bitcoin-mania illustrates, a number of natural experiments taking place in the marketplace may well provide new models for trust-building in the future. While some aim to build upon the old bedrocks of trust, the future of trust is likely going to require a more radical transformation. Instead of a reformed present, it will look more like a bigger, superpowered version of the past — decentralized, atomized and, while reliant on large data sets and computing power, localized in terms of interests, sector and geography.

As in the 19th century, the disrupters forcing this transition are the same: globalization, new technologies and urbanization.

Consider Uber and Airbnb. Who would let a stranger stay in their house, early (regretful) skeptics once asked, or get into a stranger’s car? Early scandals surrounding these companies involved trashed houses and mistreated riders. But such challenges were overcome, and, as the author Brad Stone observed, these companies ushered in “a new trust economy.” Trust between riders and drivers, renters and rentees is not based on a centrally-distributed permit, medallion or license, but rather on digital reputations.

Perhaps the most radical experiments in the future of trust involve no intermediary or platform at all — this is, of course, the development and deployment of blockchain technology. A blockchain is a series of records, maintained on a ledger available to all. While most commonly associated with cryptocurrency, a blockchain in fact provides far more than the monetary basis of an exchange.

Let’s say, for example, you rent “Catch Me if You Can” online using a blockchain-based currency. The history of that transaction — including the delivery of payment and of the movie itself — will be recorded in the relevant blockchain. No longer will the clerk, human resources department or even the servers of eBay and Amazon hold the records of exchange or activity. Instead, the information about the exchange will be distributed and available to all, rather than being centralized and proprietary, something that will have huge ramifications for institutions like credit-rating agencies.

And what about fraud? History suggests someone always finds a way to scam any system, but a block, once recorded, is almost impossible to alter. Asymmetries of information, long the source of profit for brokers and dealers, but also of fraud and mistrust, will be dramatically decreased.

The promise, at least, is of something creative capitalists and markets have been attempting for centuries: radically reduced risk and uncertainty.

The questions remain the same: Who are you, is your information reliable and will you do what you say? For over a century, centralized processes and institutions have helped us answer those questions and enter into trusting relationships with customers and clients alike. Now comes a new period, one that favors networks and reputations and that, if the price of bitcoin is any indicator, is already here.

Ian Klaus is the author of “Forging Capitalism: Swindlers, Frauds, and the Rise of Modern Finance.”

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