Abstract
Cryptocurrencies emerged with Bitcoin as a decentralized currency bringing freedom from institutions as well as uncertainty. Since then, lots of new cryptocurrencies have emerged. However, their diffusion among investors or among users as payment methods has been uneven. Several reasons could explain this discrepancy. This chapter will focus on the role of institutional base trust and present the potential role of four different institutions behind cryptocurrencies. To do so, it will describe four types of cryptocurrencies: Bitcoin as an independent cryptocurrency, JP Morgan Coin as a cryptocurrency backed by a reputable investment bank, Diem as a cryptocurrency managed by a famous brand, and Japanese-listed cryptocurrencies.
TopTheoretical Background
Cognitive base trust refers to the idea that when an individual has no prior information about something, he will develop his trust based on information available in the environment. In many cases, individuals will focus on the reputational image developed by peers (Barber, 1983; Dasgupta, 1988). Institutional trust refers to the legal or formal safeguards provided by or expected from an organization. In this situation, trustors will develop trust based on the reputation or the organization’s ability to keep its promise (Shapiro, 1998). For consumers, who would use cryptocurrencies to purchase goods or services, and for investors, who would use cryptocurrencies as an investment, the analogy about credit cards could be replicated, however, some limitations apply.
First of all, consumers would be influenced by peers when using or not cryptocurrencies. The more it is used by peers, the more it will be accepted. In addition, consumers will also be influenced by the institution or organization behind the cryptocurrency. Then, for investors, it is comparable. They need to develop similar dimensions of trust before deciding whether to invest in cryptocurrencies. Their investment will be influenced by their peers (Taghipour and Frayret, 2010). This is manifested through the supply and demand dynamic around an investment opportunity. If peers are invested massively, the investors will perceive the opportunity. If peers are neglecting an investment opportunity, investors will evaluate the investment negatively. Also, investments could be audited and overseen by financial institutions such as rating agencies, financial institutions or governments (Taghipour, 2014). Their evaluation will provide a level of guarantee on the investment.
However, nowadays, the use of cryptocurrencies is still marginal compared to fiat currencies and other investment possibilities. Therefore, the role of cognitive base trust becomes limited. If few people are using or investing in cryptocurrency, there will be less opportunity to observe peers using them. Regarding institutional base trust, the situation is evolving. At first, with Bitcoin, cryptocurrencies were represented as an independent form of currency, meaning that no institution or organization was behind it. it created advantages as well as uncertainties and risks. Then, several types of organizations decided to develop cryptocurrencies. Corporations such as Meta (formerly Facebook) created Diem. JP Morgan, an international and reputable investment bank created its JP Morgan Coin. And in another level, the Japanese government created a regulated environment where cryptocurrencies could be listed and exchanged under strict regulations.
Key Terms in this Chapter
Trust: It is a psychological predisposition to believe and accept as true the information from a source. The sources could be people, organizations, or any dynamic concepts.
Blockchain: It is a technological method that allows primary data or information packs to be carried, protected, and accessed. It is based on peer-controlled network system that protects alterations. If a user decides to change the primary information, it will require authorization from an aces key or from the majority of peer users who stored the data within a ledger.
Institutional Trust: It refers to the legal or formal safeguards provided by or expected from an organization.
Fiat Currency: It is a currency backed by a financial organization. Its creation, value and availability are controlled by such organizations such central banks, banks, or governments.
Cognitive-Based Trust: It refers to the idea that when an individual has no prior information about something, he will develop his trust based on information available in the environment.
Cryptocurrency: It is a digital currency. Its creation (or mining) and exchange are performed under blockchain technology. Cryptocurrencies could be considered independent if they are mined by a network of independent users.