What is a trustless system?

Isn’t trust a good thing? In your relationships, sure. But in your banks, not really. It's not exactly the trust itself that’s the issue, it’s the potential for your bank and anyone involved in the banking system to abuse that trust, and the benefits that come from not needing to put your trust in another entity.

Your current circle of trust … includes both your bank and the government. When you’re using a traditional bank, it plays the role of a trusted third-party in every transaction you make. You keep your money in their accounts, use their credit cards or take out loans and they in return they send money you’ve directed to various people and businesses. Your bank facilitates every move you make with your money and oversees everything from when you take out cash to how much you deposit and is legally obligated to report on you to the IRS or US government if you make certain moves that they deem suspicious (more on this below).

Assuming your money is held in a traditional U.S. bank and not a local credit union, you’re also trusting the U.S. government with your money since most banks in the U.S. are insured by the FDIC.

The U.S. government and your money … may have a somewhat rocky relationship. Using fiat (government-backed currency) means the government can intervene to help or harm you depending on your relationship with the feds. While you might think that since you’re not a criminal (I’m assuming you’re not a criminal), this doesn’t affect you and it might never make an impact on you. But you never know what’s going to happen, when your identity will get stolen, or when something you do doesn’t come across as squeaky clean.

Why would my bank close or freeze my account? The bank can stop payments coming out of your account if there’s unusual account activity that triggers them, like if someone steals your identity or credit card. But they can also freeze (or even close) your account for other reasons that you might not appreciate. Such as for:

• Your security. This can include stolen account numbers, unusual transactions (like if you spend more than usual) or account activity at unusual locations (ever had your card stop working when you forgot to tell your bank you went on vacation?).

• Unpaid debts. If there are any debts you haven’t paid your accounts can be frozen. Yes, you should pay your debts, but there are many situations where this can come back to bite you. Like it you’re short on cash and need the money you have for childcare or rent — even if you’re not making your student loan payments.

• Suspicious activity. If you’re making large cash deposits or withdrawals, transferring large quantities of money overseas, having multiple accounts and moving money between them frequently and so many other reasons.

The Bank Secrecy Act requires FDIC-backed banks to file a suspicious-activity report within 30-days of a “suspicious act.” This rule was put into place primarily to prevent money laundering but can cause trouble if you do anything on their trigger-list, from being involved in cash transactions over $10,000 in a single-day to some international transactions. While having a suspicious-activity report filed on you won’t necessarily cause the bank to freeze or close your account, it will trigger some investigation and potential trouble or hurdles for you.

A trustless system doesn’t mean the system isn’t trustworthy ... it means you don’t have to trust anyone else in the system to be trustworthy. In fact, you are by default trusting in the system of Bitcoin, although it’s an easy system to trust because of its implicit accuracy, transparency and the blockchain system that ensures consensus. By removing the trusted third-party … Bitcoin is removing intermediaries who can create and enforce terms and conditions on your transactions. There’s no one who can stop payments to or from your account or penalize you for any sized transactions to any location or account. That also means you don’t need to abide by any bank-related rules, like not worrying about bank holidays (of which there are roughly ten per year plus Sundays and the hours after 5 p.m.). You also aren’t subject to international restrictions nor are you held to any legal agreements, so no one can force you to make any payments with your funds. And your identity will remain close to anonymous (pseudonymous). So ... who can you trust? Yourself. It can feel intimidating to hold the burden of trust and sole responsibility for your money, but it’s also relieving to know that funds on the blockchain can never be taken from you or used against your will. One more thing to note is that there are completely private exchanges where you can ensure a trustless system. But if you’re using major exchanges like Coinbase, there is some interference and thus required third-party trust of the exchange you’re using since they facilitate your trading.

If you’re set on being a part of a completely trustless system, you can learn to host your own wallet or find an exchange that allows for direct peer-to-peer transactions, called a decentralized exchange, or a “dex.” These are relatively limited compared to traditional exchanges and are only open for certain cryptocurrencies, but they’re growing in popularity and becoming more advanced over time.