Rebuilding Trust in DeFi: Why Blockchain Alone Can’t Secure the Future of Finance

Farhad Reyazat – PhD in Risk Management

London Institution of Banking and Finance

Citation: Reyazat, F. (2025d, July 26). Rebuilding trust in a trustless system: Why decentralization alone will not define the future of finance. London Institute of Banking and Finance. https://www.reyazat.com/2025/07/26/rebuilding-trust-in-a-trustless-system-why-decentralization-alone-will-not-define-the-future-of-finance/

When Bitcoin was launched in 2009, it carried with it a revolutionary promise: to eliminate the need for centralized authorities in the financial system. Its pseudonymous creator, Satoshi Nakamoto, envisioned a trustless, peer-to-peer alternative to traditional banking, one that incorruptible code rather than fallible institutions would govern. This vision gained traction during the post-2008 financial crisis era, when public confidence in banks and regulators had reached a historic low. Cryptocurrencies and blockchain technology were heralded as catalysts of a decentralized future—one where individuals could self-custody assets, execute contracts without intermediaries, and transact with mathematical certainty.

More than a decade later, however, the crypto revolution finds itself at a philosophical crossroads. While decentralized finance (DeFi) platforms, blockchain ecosystems, and tokenized assets have proliferated, the broader public has not embraced the ideal of a purely trustless system. Instead, what has emerged is a phenomenon increasingly referred to as re-intermediation: the return of trusted institutions—particularly banks, custodians, and fintech platforms—as necessary facilitators within the crypto asset ecosystem.

This article examines what we might term the Institutional Legitimacy Paradox: the intriguing reality that cryptocurrencies, designed initially to circumvent institutional power, now rely on that very power for public trust, usability, and growth. Drawing on recent empirical studies, including a 2024 quantitative analysis published in the Electronic Markets journal and key insights from sociotechnical and regulatory literature, this article examines how trust has evolved, why complete decentralization remains elusive, and what this shift means for the future of finance.

The Myth of Decentralization: Trustless Systems in Practice

Bitcoin’s inception in 2008 heralded a seismic vision: an entirely “trustless” financial system that bypassed banks altogether. Satoshi Nakamoto’s white paper proposed transactions authenticated via cryptographic consensus rather than by bankers or regulators. The blockchain architecture—an immutable ledger maintained by decentralized nodes—and smart contracts promised self-executing, incorruptible logic, promising radical disintermediation in finance.

In the following years, this vision inspired a surge in platforms and protocols—from Ethereum and DeFi to token economies—each premised on the idea that code could replace authority. Code was expected to grant self-sovereignty: users could custody their funds, transact directly, and automate trust.

Yet empirical adoption patterns tell a different story. A 2024 study of the DACH region—comprising Germany, Austria, and Switzerland—revealed that public adoption of self-custodied crypto assets remains stubbornly limited, not due to ignorance of the technology, but rather to practical distrust of its risks. Even among informed audiences, concerns over losing private keys, experience with scams, and the technical complexity of wallets and interfaces inhibited their willingness to invest or manage assets manually.

Further surveys reinforce this chasm between theory and practice. A recent U.S. report found that nearly 90% of non-users cited a lack of understanding as the primary barrier to cryptocurrency adoption, with half admitting confusion over the concept of decentralization itself.

Meanwhile, critics argue that blockchain doesn’t eliminate trust; it relocates it. Bruce Schneier notes that blockchain systems still depend on trusting software, protocols, node operators, and custodial intermediaries—all of which are susceptible to failure or manipulation.

Even as crypto platforms promote a vision of full autonomy, most users default to trusting intermediaries—such as centralized exchanges, custodial wallets, and regulated platforms—to manage complexity and limit risk. What has emerged is a hybrid landscape, where decentralization serves as an ideological beacon, but institutional trust remains the foundation of practical adoption.

As such, the myth of pure decentralization gives way to the reality of re-intermediation: although code may bear the promise of a trustless world, human trust—especially in institutions—continues to be a decisive factor.

Re-intermediation: The Rise of Bank-Backed Crypto Services

Despite its founding ethos of disintermediation, the cryptocurrency ecosystem is undergoing a visible trend of re-intermediation—the reintroduction of trusted third-party institutions into a system that was initially designed to eliminate them. Traditional banks, fintech platforms, and asset managers are now reclaiming space in the crypto landscape, not by disrupting it but by acting as intermediaries between the public and the underlying decentralized infrastructure. This movement reflects a fundamental shift in how trust is allocated in the financial system—from pure reliance on cryptographic protocols back toward established institutions that offer familiarity, consumer protections, and regulatory oversight.

A key piece of empirical evidence comes from the 2024 study published in Electronic Markets by Reusch et al., which analyzed investor sentiment across Germany, Austria, and Switzerland (the DACH region). The study found that while public awareness of cryptocurrencies is high, actual investment remains limited among the general populace—mainly due to concerns over risk, technical barriers, and lack of recourse in case of failure or fraud. However, when banks enter the space offering crypto services, that hesitancy significantly declines. The data showed that trust in traditional financial institutions is a major predictor of willingness to invest in digital assets, with users more comfortable when familiar entities mediate services.

These findings are consistent with broader behavioral finance literature, which highlights how familiarity and perceived safety shape consumer financial decisions. Reusch et al. (2024) identify a strong preference among investors for regulated environments and interfaces they are already familiar with, such as mobile banking apps or brokerage dashboards, as opposed to anonymous, self-custodied wallets or decentralized exchanges.

Consequently, traditional financial institutions are reshaping the crypto market by offering structured, compliant, and accessible services. Swissquote, a prominent Swiss online bank, was one of the first in Europe to offer direct cryptocurrency trading and custody. JP Morgan, once a vocal skeptic of Bitcoin, now offers institutional-grade crypto services, including exposure via structured products and digital asset custody. German neobank N26 began offering crypto investment services through a partnership with Bitpanda, integrating token investment directly into users’ banking apps. These developments mark a growing convergence between legacy finance and digital asset markets.

This evolution introduces a new hybrid model. Cryptocurrencies are no longer confined to anarcho-libertarian ideals or fringe techno-utopianism. Instead, they now exist within a dual structure: an open-source backbone governed by decentralized code, and a front-end interface governed by centralized intermediaries. Users engage with crypto through bank-issued custody wallets, crypto ETFs, and fintech dashboards—interfaces embedded in trusted, regulated environments.

The implications of re-intermediation are profound. On one hand, it accelerates adoption by lowering technical barriers and assuaging risk. On the other hand, it raises questions about the future of decentralization. As more users enter the ecosystem through bank-owned portals, the ideological edge of crypto may soften, giving way to a more pragmatic framework—where security, usability, and institutional legitimacy take precedence over the original promise of sovereignty through code.

In this light, re-intermediation is not merely a commercial trend; it represents a reconfiguration of trust. The balance is shifting from trust in algorithmic systems alone to a symbiosis between technology and human institutions—redefining what it means to be part of a decentralized ecosystem.

The Role of Institutions in Crypto’s Legitimacy: Algorithmic Authority and the Persistence of Human Trust

Cryptocurrency was born from a revolutionary promise: that cryptographic protocols could remove the need for institutions. In theory, trust could be placed in mathematics, not banks; in consensus algorithms, not central authorities. Yet, in practice, trust in cryptocurrency is far from absent—it is simply redirected. Caitlin Lustig, in her influential research on “algorithmic authority,” challenges the narrative that decentralized systems operate free of human mediation. According to Lustig (2022), algorithmic authority refers to the perceived legitimacy attributed to decisions made by algorithms, rather than by human leaders. However, this authority is not absolute; it is constantly negotiated, validated, and contextualized by social actors.

Empirical studies of Bitcoin and other crypto communities reveal that users do not engage with these technologies as purely technical systems. Instead, they treat them as socio-technical ecosystems—complex entanglements of software code, reputational hierarchies, community norms, and trusted intermediaries (Lustig, 2022; Allen et al., 2020). While blockchain promises “trustless” interaction, most users still rely on reputational anchors—such as developers, YouTube influencers, forum moderators, and major exchanges like Coinbase or Binance—for guidance and interpretation (Barrett et al., 2022).

Indeed, decisions such as which crypto wallet to use, which project to invest in, or even whether a protocol update is safe, are often shaped not by reading the source code but by consulting trusted community figures. Reddit threads, GitHub comments, Twitter debates, and Discord channels serve not only as information sources but also as trust infrastructures. This dynamic reflects what scholars refer to as the social mediation of algorithmic systems—the idea that technological authority is reinforced or diminished by human interactions and cultural norms (Gillespie, 2014; Geiger, 2017).

This layered trust becomes particularly evident in times of crisis. When crypto platforms are hacked, or when smart contracts are exploited—as in the infamous DAO hack of 2016—users do not rely solely on code to resolve disputes. They look to developers, community votes, or forking strategies that reintroduce a form of social contract. Even Ethereum’s rollback of the blockchain following the DAO breach required community consensus, not just algorithmic triggers, highlighting how human actors ultimately shape governance in blockchain-based systems.

Thus, while crypto purports to remove the need for trust, it paradoxically reconfigures it. The old model of institutional trust—vested in banks, regulators, and fiduciaries—is being supplanted by a new model of networked trust, rooted in social reputation and informal authority. As Lustig’s work shows, the algorithm is robust, but it is rarely trusted in isolation. Instead, algorithmic decisions gain legitimacy only through layers of human validation—whether from developers’ explanations, community signals, or platform assurances.

Ultimately, crypto’s legitimacy does not arise from eliminating human institutions but from transforming them. It introduces a new kind of governance that still requires coordination, belief, and trust—but in different forms. This evolution helps explain why re-intermediation by banks and custodians is not a regression but an organic response to the enduring human need for trusted anchors in complex systems.

The Respectability Paradox and Institutional Infiltration

The original vision of cryptocurrency, as articulated in Satoshi Nakamoto’s 2008 whitepaper, was to create a decentralized financial system free from the influence of governments and traditional financial intermediaries. Bitcoin, and the broader ecosystem of cryptocurrencies it helped spawn, emerged as a form of resistance—an ideological challenge to what was seen as a corrupt and fragile financial system exposed during the 2008 global financial crisis. However, more than a decade later, this ideological purity is being challenged by the very institutions it sought to displace.

Today, some of the most prominent players in the cryptocurrency space are not anarchist coders or decentralized collectives, but legacy institutions—pension funds, asset managers, investment banks, and even national governments. This phenomenon has come to be known as the “respectability paradox”: the more crypto is embraced by respectable, mainstream financial entities, the more it gains legitimacy—but the less it resembles the decentralized system it aspired to be.

Nowhere is this more apparent than in the wave of institutional infiltration that has occurred over the past five years. Prominent asset managers, such as BlackRock, have launched Bitcoin exchange-traded funds (ETFs), including the iShares Spot Bitcoin ETF, which was approved in 2024. This ETF has seen record inflows from institutional investors seeking exposure to crypto without the complications of private key management or self-custody. In the UK, pension funds have begun allocating modest portions of their portfolios to digital assets, viewing them as uncorrelated assets that can help diversify risk in a high-inflation, low-yield environment (Financial Times, 2024). Similarly, Swiss banks such as Julius Baer and PostFinance now offer direct crypto trading and custody services, further blurring the boundary between centralized finance (CeFi) and decentralized finance (DeFi).

This shift is not merely symbolic—it has material consequences. As institutions enter the space, they bring with them demands for compliance, regulation, and return on investment that fundamentally reshape the ecosystem’s contours. Token offerings are designed to comply with regulatory guidelines. Infrastructure is developed to interface seamlessly with institutional custodians. Crypto-native firms, once anti-establishment, are now partnering with banks or seeking public listings themselves. The original peer-to-peer ethos is gradually being replaced by institutional logic, characterized by risk-adjusted returns, fiduciary duties, and quarterly earnings reports.

What is particularly ironic is that this transformation has been welcomed by many within the crypto community. As discussed in the Electronic Markets study of the DACH region, most retail investors do not view institutional involvement as a betrayal, but rather as a mark of maturity and a safety net. Users report greater willingness to engage with crypto assets when offered by trusted banks or regulated platforms—entities historically associated with the very system crypto sought to upend (Barrett et al., 2024).

This underscores the tension at the heart of the respectability paradox. The involvement of institutions validates crypto as a legitimate asset class, expanding its reach and deepening market liquidity. However, it simultaneously strips away the radical potential that made cryptocurrency revolutionary in the first place.

In this new reality, decentralization is not eliminated—but strategically compartmentalized. The backend infrastructure may still rely on blockchain protocols, but the user-facing experience is mediated through institutions. Moreover, rather than a disruption of finance, what we observe is its absorption: crypto as one more asset class in the institutional toolkit, regulated by the same bodies, offered by the same platforms, and driven by the same economic incentives.

As crypto gains respectability, it loses its edge. However, paradoxically, that respectability may be what ensures its survival.

Regulatory Ambiguities and Systemic Risk

As cryptocurrencies transition from a fringe innovation to a mainstream asset class, the regulatory framework intended to support this shift remains conspicuously fragile. Global financial authorities have struggled to keep pace with the breakneck evolution of blockchain technologies and crypto-based financial instruments. The result is a fragmented and reactive regulatory landscape—one in which jurisdictions diverge dramatically in their classification, taxation, and oversight of digital assets. For instance, while the European Union passed the Markets in Crypto-Assets Regulation (MiCA) in 2023 to harmonize crypto standards, enforcement across member states remains inconsistent. In the United States, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) continue to battle over jurisdiction, resulting in patchwork rules and delayed enforcement.

This regulatory ambiguity has not deterred institutional interest. It may have emboldened it. A recent Financial Times report (2024) highlights how major financial institutions, including BlackRock, Fidelity, and UK pension funds, have entered the crypto arena through regulated vehicles such as spot Bitcoin ETFs and structured crypto products. These offerings grant clients exposure to the volatility and speculative gains of cryptocurrencies, while benefiting from the veneer of institutional legitimacy. However, the depth of regulatory due diligence behind these products is often shallow, raising questions about investor protection and systemic risk.

The core dilemma is what might be called the respectability paradox: crypto assets are now sanctioned by the very institutions they were designed to bypass, yet without a corresponding transformation in the oversight mechanisms that protect financial systems. In traditional finance, instruments carrying systemic risk—such as mortgage-backed securities—are subject to intense scrutiny following the 2008 financial crisis. Crypto instruments, despite their complexity and speculative nature, often enjoy a lighter regulatory touch, especially in jurisdictions seeking to attract fintech innovation.

This opens the door to serious vulnerabilities. As retirement funds and retail portfolios increase their exposure to crypto, the risk is no longer isolated to early adopters and tech enthusiasts. A sharp devaluation in key cryptocurrencies, or a high-profile custodial failure, could have knock-on effects within mainstream financial markets. Without robust, globally aligned regulation, the line between decentralized experimentation and systemic fragility continues to blur.

Ultimately, the embrace of crypto by banks and asset managers should have triggered a corresponding maturation of regulatory infrastructure. Instead, adoption has raced ahead of reform—leaving markets exposed, trust misaligned, and the promise of financial democratization precariously dependent on legacy institutions and patchwork governance.

The Hybrid Future of Finance: Trust, Technology, and Transformation

The original vision of cryptocurrency, as outlined in Satoshi Nakamoto’s 2008 whitepaper, was radical in its simplicity: a decentralized, peer-to-peer system for transferring value without the need for banks, governments, or other trusted intermediaries. Over a decade later, that vision has evolved into something far more complex—and arguably more practical. The emergent model shaping the future of finance is not one of absolute decentralization, but of integration: a hybrid architecture that fuses the transparency and efficiency of algorithmic systems with the credibility, security, and legitimacy of traditional institutions.

At the core of this transformation lies an equation: algorithmic infrastructure + institutional trust = sustainable adoption. Distributed ledger technologies, smart contracts, and decentralized finance (DeFi) protocols offer unparalleled programmability and efficiency. However, in practice, these systems gain proper traction only when embedded within frameworks that users trust—frameworks often provided by banks, regulated custodians, or financial platforms. This convergence is evident in the rise of regulated crypto ETFs, custodial wallets, and institutionally backed tokenized assets. BlackRock’s spot Bitcoin ETF, for example, signals not only mainstream adoption but also the increasing marriage of code and compliance (Financial Times, 2024).

This hybrid finance model offers tangible benefits. From a technological standpoint, it allows scalable transaction systems with built-in programmability. From a regulatory and consumer standpoint, it enables enhanced due diligence, KYC/AML compliance, and the reassurance of legal recourse—qualities often absent in raw DeFi environments. Furthermore, central bank digital currencies (CBDCs) and tokenized real-world assets represent the next step in this evolution, promising the liquidity and efficiency of crypto with the monetary stability of fiat regimes.

However, the shift towards integration also raises significant questions. What happens to decentralization when dominant custodians, such as Coinbase or Binance, control user access points? Mission drift—a gradual move away from crypto’s founding ideals—is no longer speculative. It is unfolding in real time. As financial institutions embed themselves deeper into blockchain systems, critics warn of a slow but steady re-centralization—where the benefits of blockchain (transparency, censorship-resistance) may be sacrificed in favor of convenience and regulation. Caitlin Lustig’s concept of algorithmic authority (2022) illustrates that while algorithms may mediate action, the socio-technical trust infrastructure still revolves around human-led institutions and gatekeepers. In this light, the very architecture of hybrid finance risks replicating the same power asymmetries it initially sought to disrupt.

Looking ahead, the hybridization of finance is likely to define the coming decade. CBDCs are in advanced pilot stages in over 100 countries, including the digital yuan, eNaira, and the European Central Bank’s digital euro initiative. Meanwhile, platforms like MakerDAO and Aave are exploring models for “regulated DeFi”, enabling innovative contract-based lending and liquidity provision within compliant, know-your-customer frameworks.

The future of finance, then, is not a replacement of old by new, but a transformation through collaboration. As users, regulators, technologists, and institutions converge on a shared financial infrastructure, the central question becomes not whether to trust—but who and what to trust, and under what conditions. The answer, increasingly, is a system where trust is not eliminated, but re-distributed across both human and algorithmic actors.

Conclusion: The Irony and Imperative of Trust in Crypto’s Institutional Turn

Cryptocurrency emerged with a promise to disrupt finance—to dismantle gatekeeping institutions, decentralize power, and empower individuals through trustless, cryptographic systems. Bitcoin’s founding message in the wake of the 2008 financial crisis was a clarion call for a financial paradigm free from opaque intermediaries and centralized authority. However, more than a decade later, we find ourselves entangled in what can only be described as a paradox of institutional legitimacy. The very system that crypto set out to displace has reasserted itself, not as an obstacle but as a necessary bridge to mass adoption.

At the heart of this reversal lies a truth that technical design alone cannot dissolve: human trust remains indispensable. The Electronic Markets study across the DACH region makes this point quantitatively clear. Investors, even those drawn to the innovation of cryptocurrency, still gravitate toward banks and custodians—institutions that offer regulatory clarity, familiar interfaces, and customer protection. The irony is stark: in the ecosystem built on self-custody and decentralization, it is re-intermediation—banks re-entering the crypto space—that is shaping real-world adoption.

The concept of algorithmic authority, as explored by Caitlin Lustig, further illustrates this human-machine entanglement. While users may trust code to some extent, they continue to rely on social cues, community leaders, developer teams, and institutional reputation to interpret and validate that code. Cryptographic integrity may underpin the infrastructure, but social infrastructure mediates legitimacy.

This return of institutional power is visible not only in custody solutions and banking services but also in the financialization of crypto through ETFs, pension fund allocations, and integration into traditional asset portfolios. However, this growing legitimacy has outpaced regulatory maturity. As highlighted by the Financial Times, systemic risks—such as opaque tokenization, under-regulated exchanges, and complex derivatives—loom large. The respectability paradox has emerged: institutions are embracing crypto for performance and innovation, but often without the regulatory reform needed to prevent the next financial disruption.

Looking forward, what we see is not a complete victory of decentralization, nor a full return to centralized orthodoxy. Instead, a hybrid financial model is forming—an ecosystem where cryptographic technologies coexist with legacy trust institutions. Central bank digital currencies (CBDCs), regulated decentralized finance (DeFi), and tokenized real-world assets all point to this blended architecture.

However, this hybridization is not without its tensions. Mission drift, recentralization, and the dilution of crypto’s foundational ethos are legitimate concerns. The task ahead is to redefine trust in a world where both code and human institutions play essential roles. This means building systems that are not only technically robust but also socially accountable—where algorithms are auditable, institutions are transparent, and users are empowered without being overwhelmed.

Ultimately, the future of crypto will not be determined by ideological purity, but by its ability to adapt. To succeed, it must strike a balance between autonomy and assurance, decentralization and oversight, and innovation and inclusion. The path forward is neither a revolution nor a retreat—it is a transformation.