Cryptocurrency and the Myth of the Trustless Transaction

Abstract

True cryptocurrency believers posit a world with virtually limitless applications for the block chain. They tout the prospect of a globally accepted currency that works with lightning speed, costs virtually nothing, and guarantees 100% security and anonymity while eliminating the need to trust third parties. So far, the reality of cryptocurrency has not lived up to its hype. It turns out that cryptocurrency transactions can be slow, and expensive, because the blockchain, scales poorly. However, the really interesting divergence between pitch and reality has to do with the purported consequences of decentralization — the claim that bitcoin obviates the need for trust. This article interrogates the claim that trust can be replaced with blockchain technology. It tests the claims that Bitcoin eliminates the need for trust against real world experiences of Bitcoin holders and markets. It documents the many points at which cryptocurrencies shifts the locus of embedded trust, rather than eliminating the need for such trust. Finally, the article concludes that rather than replacing trust, cryptocurrencies instead require users to repose their trust in less transparent, less reliable and less accountable parties.

Keywords: bitcoin, smart contract, ico, fraud, legitimacy, regulatory trust, blockchain, regulation, trust, cryptocurrency, technology

JEL Classification: A12, K00, K20, K22, O32, O33, O35, O38