Abstract
The rapidly growing field of Blockchain and Decentralised Finance (DeFi) has the potential to transform many aspects of the financial world. It offers an abundance of opportunities to reduce costs, increase transparency and reduce the need for middlemen in financial services. While this promise of automation and decentralization is attractive, it is important to consider the potential for inadvertent or deliberate automation of unethical conduct at scale. Ethical questions involve the consideration of conflicting moral choices and dilemmas. Blockchain creates ethical dilemmas for developers, investors, consumers, and regulators at the technology, application, and societal levels. This chapter provides a perspective on the emerging field of DeFi and Blockchain in financial services, a reflection on the ethical questions that arise, how they are being addressed, the key issues, and further research needed in this growing field of Blockchain ethics. The objective of the chapter is for students, developers, CEO's and governments to appreciate the moral and ethical issues being uncovered in the course of the development and deployment of Blockchain technology. Blockchain, as with all technology, is a tool and is as beneficial and useful as the care that is taken to make it. There remains a need to ensure that Blockchains are built and deployed with due concern for ethics.
TopIntroduction
Blockchains are characterized by (1) a transparent and publicly auditable database; (2) cryptographically secured data; (3) immutability, the record of the transaction in the database cannot be changed; (4) a decentralized network, thousands of computers validating each record of the ledger; and (5) timestamped transactions (Thomason et al., 2019, p. 25). The powerful combination of automation and Blockchain decentralization is reshaping the financial system in multiple ways, including the storage of digital records (identities, assets, voting rights, etc); the exchange of digital assets (via direct peer-to-peer transactions), and the recording and execution of smart contracts.
Blockchain has a key role in fintech innovation and has driven significant and wide-reaching innovation throughout the finance industry, from the latest innovations in crypto-assets to DeFi and Non Fungible Tokens (NFTs). To illustrate the rapid growth, Novum Insights (2021) reported that in 2021 crypto market capitalization peaked at $2 trillion, and the Total Value Locked (TVL) in DeFi was $54 billion in June 2021.
Despite being traditionally cautious, banks have been some of the earliest adopters of Blockchain technology, and over 200 banks (Joshua, 2020) and over 40 central banks are experimenting with Blockchain to varying degrees of depth, interest, and progress (World Economic Forum, 2019). Blockchain proof of concepts and deployments are underway for; the establishment of syndicated loan joint ventures (Keirns, 2017); provision of utility settlement coins1; settled high-value securities transactions; mutualized KYC servicing; efficient cross-border transaction and verification; internal foreign exchange balance sheet reconciliation (Gonçalves, 2019); back-office business management; secure interbank letters of credit; trade finance transactions; and bond issue and settlement.
The benefits of Blockchain for process and transaction management include; wide-ranging oversight of trades from trade to settlement, transparency and real-time access to a shared ledger, automation and reduced reliance on external settlement networks, efficiency gains, and reduced counterparty, market, and credit risk (Gonçalves, 2019; Costello, 2017). Accenture estimates that utilizing Blockchains could enable investment banks to save US$8 billion on a cost base of US$30 billion - a 27% cost-saving.
The implementation of institutional measures of transparency and automation are likely to reshape key financial, operational risk and finance systems from manual systems on cloud platforms to automated systems on shared data platforms. Currently, despite the importance of data reconciliation and accuracy, the majority of institutions maintain their own data, creating inefficiencies: duplication, input failures, repeated and ineffective consultation. Blockchain can transform today’s multiple and sequential data reconciliation models to one where reconciliation is an integral part of the transactional process. However with the potent mix of automation and financial technologies powering faster transactions and accumulating masses of consumer data surfaces a plethora of ethical questions and demands new approaches and frameworks to ensure that ethics are baked into the design of these new and powerful technologies.
Key Terms in this Chapter
Defi: The opening of the traditional, closed, financial system, to one that is modular, interoperable, and programmable.
Know Your Customer (KYC): This process refers to a project’s or financial institution’s obligations to verify the identity of a customer in line with global anti-money laundering laws.
Cloud Computing: Cloud computing is the delivery of different services through the Internet, including data storage, servers, databases, networking, and software.
Algorithm: A process or set of rules to be followed in calculations or other problem-solving operations, especially by a computer.
Consensus Algorithm: A process used in computer science to achieve agreement on a single data value across distributed networks. A consensus algorithm is designed to solve a consensus problem to achieve network reliability across multiple nodes.
Blockchain: One form of distributed ledger technology. A peer-to-peer method of secure data transmission using grouped “blocks” of encrypted data.
Distributed Autonomous Organisation: Are non-hierarchical organizations that perform and record routine tasks on a peer-to-peer, cryptographically secure, public network, and rely on the voluntary contributions of their internal stakeholders to operate, manage, and evolve the organization through a democratic consultation process.