Blockchain Ethics

Class 4 Readings [Money Ethics]

The Libra reading written by The Verge really hit home with me this week. As someone that is extremely passionate about financial inclusion, the “banking the unbanked” mission has always struck a cord – what IS the best way to achieve this? Through my professional and academic experience I have actually vetted investments in many companies that were making the same claim as Libra, and the same arguments came up in the boardroom…So if someone doesn’t have a bank account how do they get initial access to the system? Also is crypto a better alternative to other mobile banking solutions that exist on the ground today? Taking these points into consideration, I have thought about how might we circumvent this? There might be a business idea here; a platform that would allow an individual to turn time worked (time share, volunteer based work) into crypto stablecoins. These coins could then be transferred to platforms like Libra OR existing mobile banking platforms like Mercado Libre where they can be transferred to the currency of choice. This platform would only support stablecoins because then the transfer to Libra or other fiat based mobile banking currencies would be easy to calculate. Would love to get general thoughts on this idea…especially considering stablecoins are likely to be the first successful use case globally with all the noise around central bank projects in different countries today.

The other reading that stood out to me was coindesk’s coverage of PoolTogether. Something that I wrote about in my applications to grad school was a concept of bringing community based financial solutions such as savings circles/ROSCAs to the digital currency world. Something that would still rely on community trust and savings, but also provide a way to increase the buffer that the circle has by increasing return on savings and putting the money to “work”. The concept of savings is nice until a member faces a financial shock that sets them back so far, that it is difficult to make up the difference. A proposed business idea could look like the following:

  1. Identity management and asset protection​: Blockchain technology could be leveraged to create a self-sovereign identity that is fully controlled and maintained personally by the individual. It is difficult to steal such an identity from an individual, which could prevent significant identity fraud, and users would not have to rely on anyone else for access to these rights.

  2. Secure digital transfer of funds​: in traditional ROSCAs, funds are distributed in person using cash, which often means that ROSCA members are at the mercy of the ROSCA leader and are often required to meet in person. Leveraging online payment rails (similar to what Rosca Finance and Tanda are doing) increases efficiency and ensures that funds are transferred securely, preventing potential theft of cash that is often held at the ROSCA leader’s home

  3. Credit building capabilities​: Traditional ROSCA systems do to not help users build credit. We envision creating a platform that enables users to build their credit scores based on historical transactions within the ROSCA. Being able to attach a formal score to the infrastructure that already exists will give users a path to the financial, labor and housing markets. This score will also be detached from any unjust financial records that may count against middle class individuals

  4. Wealth creation​: The platform would allow users to grow their wealth overtime by having a checking / savings account feature along with the ability to invest in an ETF portfolio. Leveraging tax-efficient ETF/index portfolios through robo-advisor technology, assets from the blockchain can be transferred into savings and investment accounts for the group, which can help boost the amount of disposable income over time. This will solve the problem of funding immediacy for middle class families when a large financial emergency arises.

Hi yall,

There was quite the slew of topics in this week’s readings. I would like to first give a brief comment about the environment. 60-80% of the blockchain reward goes back into running the mining operation, which I think is interesting, but not necessarily concerning. To compare directly pure fiat backed financial systems with cryptocurrencies isn’t exactly fair without first taking into account the freedoms cryptocurrency provides at the cost of inefficiency. Furthermore, as the Cambridge Bitcoin Electricity Consumption Index (CBECI) FAQ states, energy consumption is not directly proportional to the carbon footprint. In fact, we should be looking more at the “energy mix” or composition of energy sources to determine environmental impact. Moreover, even if we assume the worst case where all mining operations use fossil fuels the total output would not exceed 58 million tons of Co2 (according to CBECI FAQ), which would only account for 0.17% of the world’s total emissions.

In addition to misconceptions about the environmental impact of cryptocurrencies, further confusion arises from this lack of technical knowledge, which in turn creates unfounded social norms, the opportunity for schemes, and usability barriers, thus affecting the adoption of cryptocurrencies. For instance, Nigerians prefer cash because they are afraid that if they lose their phone, then they will lose their money, but in reality bitcoin and other cryptocurrency isn’t situated anywhere, but everywhere at once. In regards to schemes, I immediately think of Libra. In order to back the popular Libra stablecoin, Facebook has introduced their Libra Investment Token (LIT), which essentially takes the interest off of Libra Coin deposits (see This Ethereum Lottery Perfectly Explains How Facebook Corporate Backers will profit from Libra). In other words, corporate backers buy LIT and when people buy the stable coin the reserve grows giving interest to the LIT owners which will have continuous return. Facebook says that it is targeting the unbanked, but as we learned, the world bank data suggests that 2/3 simply do not have money and 1/3 feel they don’t need it, thus targeting distance issues or fee issues appears to be an edge case. Also you cannot ignore the prospect of bans (e.g. China and Bangladesh bans Facebook, India and Pakistan have strict regulations against all cryptocurrencies). Even if you disagree, there is also the subtle caveat of having to buy the Libra coin in the first place, especially if you only have cash, which makes the conversion process that much worse and sometimes inaccessible depending on where you live if you cannot make it to a physical exchange. In other words it is deceiving to say you will bank the unbanked by closing distances and reducing fees, if they first need to cross an initial distance or pay a hefty initial fee. This type of lack of transparency about access and corporate backers I think are fundamental to a scheme and being transparent with long terms of issuance with price equality set good terms on a fair launch of a cryptocurrency. A fair launch not a fair coin. Coin effectiveness is orthogonal to the former. People need to understand that a fair launch is dependent on a high length of issuance (meaning people have time to find out about it) and price equality (meaning investors don’t get kickbacks or initial coins ahead of others). As a result, it is crucial in order to maintain a pure blockchain, to be transparent about these points otherwise we would be instating a sudo central authority.

In regards to usability barriers, the Venezuelan piece shed light on the hyperinflation of the bolivars and the disparity between uses of the cryptocurrency (buying food or buying shampoo). However, in both cases alternative banking methods were used as a means to retrieve fiat currency rather than holding cryptocurrency itself. In short, more research is needed to see if cryptocurrency can even work in a place like venezuela with hyperinflation.

In my humble opinion, much of the issues beforehand (e.g. misconceptions about the environment, schemes, detrimental social norms) arise from some education gap. Therefore, I am only more grateful for this course. Another synthesis I made, on the other hand, is much more pessimistic. In regards to balancing democratized investing with protection, it is important to realize that SEC regulations apply to transactions identified by the Howey test, but cryptography fundamentally breaks the third party/promoter and it can be argued that a common enterprise is broken by the idea of decentralization (a node can go down and not affect the network) and expectation of profit can be broken (an extensive mining operation is no guarantee of profit especially when returns go back to supporting the system). In other words, protecting consumers in this realm is currently nonexistent from what I can glean. Also a lack of a taxation system is also a pertinent issue if blockchain is to be the financial world’s successor. I believe the SEC and other litigation should treat cryptocurrencies as the unique entities that they are and start working with cryptocurrencies to develop smart contracts that properly allocate funds for taxes respective to an international standard and exchanges that perhaps provide a degree of insurance at the cost of higher rates? Or maybe in the case of stablecoins like Libra, divert some reserve interest from LIT holders to provide a degree of insurance to consumers? These are just ideas and this whole post has been a hodgepodge of comments, but I hope you liked it (even in the slightest way possible).

In response to natalya-thakur about the Libra reading by The Verge:

I also found this piece compelling, but had a much different read of it!
In my opinion this piece points to the sham of a reason Facebook provides for Libra - to help bank the unbanked. The question then is, other than building a money system for people with money, what motivates Facebook to invest so much in Libra? I think a major, and concerning, motivator is digital identities, which the piece touches upon at the end.
Building a system for digital identity is a prerequisite for a system like Libra. Yet building a platform for digital identity is as compelling, and possibly competitive, as building a platform for digital currency (as you note in your business plan). Both have “network effects”, and the ability to lock users into the system once engagement is high enough. Moreover, there is a race to build that platform for digital identity, and be the platform to manage digital identities for the potential billions of users that Facebook or another large company can reach. In my opinion, this platform for digital identity should concern regulators more than a platform for money. Users can move their money between different monetary ecosystems, and money is just a part of what individuals have. A platform for digital identity could encapsulate that system and then more of what a person “has” (e.g. right to vote, privacy, accounts and permissions to different websites or platforms, drivers license), and lock individuals into a system that is difficult to leave, controlled by a private company.
This could be particularly concerning if Libra does actually penetrate the countries that Facebook purports to target as underbanked, because people in those countries may have less education, and fewer options, to leave a problematic platform that (controls?) manages their identify.

Week 4 post
The Division of Banks (DOB) is the chartering authority and primary regulator for financial service providers in Massachusetts. DOB’s primary mission is to ensure a sound, competitive, and accessible financial services environment throughout the Commonwealth.

Bitcoin and Banking the Unbanked
As a banking regulator, one of our goals is to ensure that financial services are as widely distributed as possible. Therefore, the invention of Bitcoin is welcome in the sense that it provides a new platform that could potentially make the world a more equitable place with increased opportunities for those that have been excluded by the fiat banking system. However, the article on the use of cryptocurrency in Venezuela argues that cryptocurrency may not really be the solution that we thought or hoped it would. I have learned over the years that poverty is a complex issue that involves many contributing, interrelated factors that tend to amplify the overall impact of the underlying lack of funds. For example, it is often the case that a person isn’t just poor. Being poor may mean not having the ability to get to school, or go visit the doctor when the individual is sick. Not being educated makes the person susceptible to being manipulated by unscrupulous people who can feed them falsehoods that an educated person would immediately reject. Not being able to go to the doctor increases the likelihood that a person will be too injured or sick to work, which causes their financial situation to deteriorate even more. The following quote from the article about cryptocurrency use in Venezuela puts this issue in perspective:

Machado, of the Open Money Initiative, told CoinDesk that daily crypto usage is “not a widespread phenomena” on the ground. Waltman agreed, saying:
“There’s a sad irony. The poorer you are, the less you can actually use cryptocurrency.”
The sad fact is that there are some people who will always be too poor to help themselves, even though there are many people who are trying to help them. Hopefully, over time, we can find ways to make cryptocurrencies more accessible so that it can be used by as many people as possible, in the ways that are best for them. As a regulator, my goals will be to foster inclusion by attempting to promote cryptocurrencies with user-friendly interfaces, low fees, and low-cost devices. To accomplish these goals, it may be necessary to limit the choice of cryptocurrencies on certain types of devices, or make compromises in the areas of the degree of centralization, consensus mechanisms, speed of confirmations, or other areas. However, it is intended that there be a variety of cryptocurrencies with increasing degrees of sophistication that can be made available to more advanced users when they are ready to use more complex products. It will be interesting to see how the market develops. Hopefully cryptocurrency can someday deliver on its promise to be a viable alternative to fiat currencies to the people who need it the

Responding to balancing democratized investing with consumer protections:

A lot of the issues discussed in the readings this week could boil down to issues of transparency and issues of interface. The Venezuela article highlighted the challenges of interface on a technical side: people leaving the country and wanting to divest fiat currency for crypto sought a guide to using these technologies. One perspective on this is that the UI and technology itself is too arcane and intentional inaccessible for the average person, particularly in places where technological literacy may not be as high. This is part of the story, but my perspective is that the consumer protection challenges are more apparent than with traditional financial institutions; there is less ambiguity or negotiating with crypto, so anxieties over the deal may feel relatively absolute.

But some of the larger questions here surround the investment and whether an ICO is a security. The recent news about kink-messaging app Kik shutting down to lawyer up and fight the SEC over its ICO brings this news to the forefront, and may challenge some fundamental aspects of how new coins are introduced. From a techno-solutionist perspective, these ICOs enable small and large scale investors to really get in on the ground floor, and from a critical perspective many are basically pyramid schemes. The question to ask – and the one for which I do not have an answer – is who are these coins for? Is this a thought experiment for tech bros and drug dealers? Is this a fantasy football league for day traders? Whatever consumer protections are needed – and how loose the investing can be – depends heavily on who this technology is useful for.

Another line of thinking to explore is what the extreme volatility means for these different audiences. Traders short-selling BTC ahead of the halving-event are doing great as the price plummets, but what of folks traveling from Venezuela? Are there similar markets to which we can compare the volatility of crypto values? The articles this week, clearly, raised a lot more questions than answers for me, but I think that is representative of the period of uncertainty (in use, for audience, etc) for blockchain and crypto right now.

It appears that the income inequality in cryptocurrency comes down to a disparity in education. This disparity in education is abused either explicitly or implicitly. It is nobody’s fault if they found out about Bitcoin early on when it was worth fractions of a penny, mined out of curiosity using CPU power, and reaped the rewards of that when Bitcoin’s market cap exploded. Other people knew about Ethereum before their initial coin offering and also reaped the rewards of its successful run as the second largest crypto currency. Those are not explicit abuses of their knowledge, just implicit benefits of being the first adopters. However, the bull runs these experienced encouraged other copy cats to create initial coin offerings without a community and dedicated group of developers that truly believed in their work. When Bitcoin was worthless, the developers of Bitcoin core worked on it with the belief that they were revolutionizing the financial world. When Bitconnect Coin came it, the founders wanted to get rich. They abused their knowledge and the desire of people to get rich through crypto to explicitly exploit their lack of education.

Sometimes this lack of knowledge doesn’t get abused to the same degree as Bitconnect, but it gets abused regardless. For example, Facebook’s new Libra Coin claims to want to help bank the unbanked, but only an elite group of people get to actually profit from the stable coin. If someone buys a Libra Coin, that coin will retain its value without any interest but the wealthy few who invested in the basket that underpins the coin “earn interest off other people’s deposits.” Those few will get richer, and the unbanked will help them get richer.

There could be more regulation in place, but with internet money that doesn’t have boarders, how can it jump through all the hoops different regulations might have? Will the world follow the SEC’s or CFTC’s lead? At the moment it seems like the world is leaving it behind. If they ever set clear guidelines, will the rest of the world follow even after they’ve set in place rules of their own? To me it doesn’t seem like regulation can actually prevent the spread of shitcoins, but it is educating the masses that will help prevent that.