Introduction
Dr. Chern Lu
- Guest Associate Professor at HKU ICB
- Former Chief Risk Officer at Ping An Panhai Capital
- Ex-Vice President at Wall Street investment banks (Merrill Lynch, Bear Stearns)
- Ph.D. from New York University
- HKU SPACE Outstanding Teacher Award 2018/19
"An investor's fate depends not on the stock market or individual companies, but on the investor themselves."
— Peter Lynch
A Thought-Provoking Tale from an Economics Legend
Nobel laureate Milton Friedman once shared a fascinating story about the island of Yap in the Pacific, where the currency was massive stone wheels called "fei." These limestone discs, quarried from an island 400 miles away, were rarely moved after being transported to Yap.
Remarkably, when one family’s fei sank into the ocean during transport, the islanders continued to recognize its value—proving that trust, not physical possession, underpins money.
This echoes a modern anecdote:
A child drops his father’s phone into the sea but argues it’s not "lost" because he knows its location. The punchline? Trust and perception define value.
The Essence of Trust
Trust in Modern Finance
Financial markets rely on three pillars:
- Credit (borrowing/lending)
- Trust (institutions’ credibility)
- Faith (long-term societal confidence)
Each reinforces the next.
Historical Perspectives
- Venetian Banks (11th century): The term "bank" originates from Italian banco (long bench), where money changers operated.
- China’s Silver Notes (1856): Early banks like Sheng Yuan Bank (1897) emerged, focusing on institutional lending versus Western retail banking.
"Trust, but verify."
— Ronald Reagan
The Evolution of Currency
From Metal to Fiat
- Metal Money: Gold/silver’s intrinsic value required minimal trust.
- Fiat Currency: Relies entirely on issuer credibility (e.g., taxation power, national productivity).
Industrial 4.0 links manufacturing to monetary trust—a nation’s factories defend its currency’s integrity.
2020: A Year of Shattered Assumptions
The "Crude Oil Treasure" incident saw WTI futures hit -$37.63, upending the belief that asset prices can’t go negative. Risk models failed because they assumed zero was the floor.
"What doesn’t kill me makes me stronger."
— Friedrich Nietzsche
Trust in Traditional Finance
Crises and Reforms
- 1929 Stock Crash: Brought SEC regulations and FDIC insurance.
- Bank Runs: A timeless test of trust—solved not by technology but by calming panicked depositors.
Modern Exchanges (e.g., NYSE, NASDAQ) survived hacks and evolved, proving resilience rebuilds trust.
Digital Cryptocurrencies: Trustless Trust
The Bitcoin Paradox
- Decentralization: Eliminates human intermediaries via blockchain.
- Reality Check: Traded on centralized exchanges (CEX) for speed, reintroducing human risks (hacks, fraud).
Notable Hacks:
| Year | Exchange | Loss |
|------|----------|------|
| 2014 | Mt. Gox | 850K BTC |
| 2018 | Coincheck | $400M |
Decentralized Exchanges (DEX)
- Pros: No single point of failure; hacker-proof (requires 51% node control).
- Cons: Slower transactions (vs. CEX), liquidity challenges.
👉 Explore secure crypto trading
FAQs
Q1: Can trust in money be quantified?
A: Indirectly—via interest rates, inflation control, and institutional transparency.
Q2: Why did fiat currencies replace gold?
A: Flexibility in monetary policy and scalability for growing economies.
Q3: Are cryptocurrencies truly "trustless"?
A: Yes, but only if used peer-to-peer. CEX trading reintroduces trust risks.
Q4: How can DEX overcome CEX dominance?
A: By improving transaction speed and liquidity pools—key hurdles today.
Conclusion
Money’s value hinges on trust, whether in stones, paper, or code. From Yap’s fei to Bitcoin’s blockchain, the journey reflects humanity’s quest to balance efficiency with security.
As digital finance evolves, the challenge remains: Can we design systems that transcend human frailties while serving human needs?
(Views expressed are the author’s own.)
👉 Discover the future of finance
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### Formatting Notes:
- Structured with **hierarchical headings** (`#` to `######`).
- **Markdown tables** for hack summaries.
- **Anchor texts** placed strategically (2 instances).
- **FAQs** integrated naturally.