Since the inception of money, financial institutions have always existed as gatekeepers, managing the flow of capital across economies. For centuries, these banks and institutions have operated as for-profit centers, driven by a relentless pursuit of financial gain. As Charlie Munger aptly put it, “Show me the incentive, I’ll show you the behavior.” This profit motive has led to a series of misaligned incentives, where the protection of customer assets often takes a backseat to maximizing returns.

This misalignment has had devastating consequences. From the infamous collapse of Enron in 2001, where executives concealed massive debt through fraudulent accounting practices, to the 2008 financial crisis, driven by the greed-fueled perpetuation of toxic mortgage-backed securities (MBS), history is littered with examples of financial institutions prioritizing their bottom line over the well-being of their client hoping the government won’t let them fail.

Today, we find ourselves at another crossroads. Despite countless opportunities to change, the financial industry has resisted, maintaining its opacity and clearing the way for the rise of cryptocurrencies. These digital assets presented a new path — a decentralized financial system built on trustless infrastructure, public ledgers, and full transparency on-chain. Bitcoin and the broader cryptocurrency movement have grown spectacularly, capturing the imagination of millions. Yet, despite their promise, the crypto industry faces similar challenges, with fraud and deception often occurring off-chain — most recently with the collapse of FTX — proving that the transparency problem persists across both sectors.

The Financial Industry: An Opaque Giant

Traditional financial institutions have long been criticized for their lack of transparency. The 2008 financial crisis was a stark reminder of how these institutions, driven by profit, engaged in risky behaviors that were not fully disclosed to their clients or regulators. Despite efforts to increase transparency through regulations like the Dodd-Frank Act, consumers still struggle to access clear and honest information about the financial products they rely on.

This opacity erodes trust and leaves consumers in the dark, unable to make informed decisions about their financial futures. The “too big to fail” mentality and the complacency of legacy institutions create a false sense of security, where innovation and customer interests are often sidelined in favor of maintaining the status quo.

The Crypto Industry: Transparency in Theory, Not Yet in Practice

Cryptocurrencies were born out of a vision for a decentralized, transparent financial system. At the heart of this vision lies blockchain technology, which is designed to be inherently transparent, recording every transaction on a public ledger accessible to anyone. In theory, this innovation should eliminate the need for trust in intermediaries and mark the beginning of a new era in financial transparency.

If everything were on-chain and cryptocurrency adoption were universal, the issues of fraud and opacity would be greatly reduced. A world where every transaction is recorded on a public ledger would significantly limit the opportunities for deception that have long plagued both traditional finance and certain areas of the crypto industry. But the reality is, cryptocurrency isn’t ubiquitous yet. Until we achieve mass adoption in crypto, many activities will continue to occur off-chain — where transparency is lacking and vulnerabilities persist.

The path forward has proven to be more complex. The crypto industry has seen its share of scandals and fraud, with high-profile failures like Mt. Gox and FTX exposing serious off-chain weaknesses. While blockchain technology itself offers transparency, the industry still faces significant challenges, lacking the necessary safeguards and regulatory frameworks to effectively protect consumers. These gaps leave room for bad actors to exploit, underscoring the need for continued innovation and broader adoption to fulfill the original promise of cryptocurrency.

How do Consumers Choose Who to Trust: the Biggest or the Oldest?

In today’s financial landscape, consumers often find themselves in a precarious position, forced to place blind trust in institutions that have repeatedly failed them. Whether it’s the largest banks, resting on their size and the “too big to fail” mentality, or the oldest institutions, relying on their long-standing reputation, the issue is the same: a lack of true innovation and a failure to prioritize customer interests.

These institutions often create a false sense of security, assuming that their legacy or sheer scale is enough to maintain customer trust. But this mindset stifles innovation and discourages efforts to enhance the user experience or add real value. Misaligned incentives exacerbate the problem. Financial corporations, driven primarily by profit motives, tend to focus on short-term gains and shareholder value at the expense of long-term customer protection.

This troubling dynamic leaves consumers at the mercy of institutions that are neither motivated to improve nor incentivized to safeguard their interests. It highlights the urgent need for a paradigm shift toward a more customer-centric approach in the financial industry — one that emphasizes transparency, accountability, and a genuine commitment to serving the long-term needs of their clients.

The Path Forward: Embracing Transparency

Looking back, I believe that transparency isn’t just a regulatory checkbox — it has the potential to be the foundation of trust and the future of finance. The question is:

1. Can a company truly innovate and challenge the status quo by prioritizing clear communication, regulatory compliance, and technological advancement?
2. Can complete transparency compel financial institutions to adopt more conservative practices, while empowering customers to hold them accountable for risky behavior?

I don’t believe complete transparency is right for every company, but when it comes to the institutions I trust with my money, I absolutely want them to be more conservative. As a consumer, I don’t benefit when a bank takes on more risk to increase its profits — so why should I be exposed to that risk? It’s like entrusting your valuables to a security company that decides to cut corners on safety measures just to save costs. You’re the one left vulnerable, while they pocket the difference.

The financial and crypto industries are at a critical juncture. The erosion of transparency has led to a deep mistrust among consumers. But as we look toward the future, the question remains: How can companies shift their self-perception and redefine their roles in a more transparent financial landscape? Will they even want to? And what can consumers do to change things and what can they actually expect from these institutions?

Stay tuned for Part 2 as we continue exploring the evolution of trust in finance and how transparency can reshape the industry.

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