The distributed ledger technology initially meant to provide financial inclusion for everyone and expand access to financial services. But China is currently considering using blockchain in its social credit system that can limit people’s access to financial services, while the central bank digital currency (CBDC) has made the issue of transaction privacy all the more relevant. Participants in the national blockchain conference, Blockchain/Finance 2021, organized by the Distributed Ledger Technologies Center of St Petersburg State University, discussed financial and social risks associated with blockchain. Here are the most important topics of the discussion.
Blockchain and the new inequality
Only several years ago, experts and journalists vied to announce that blockchain would make e-wallets available to people who do not have a bank account, provide access to cryptocurrencies to those without access to fiat money, and drastically reduce expenses on money transfers, especially international ones, says Artem Genkin, Doctor of Economy, Professor, President of the NPO “Center for Protection of Bank Clients and Investors.” Let alone the opportunity to attract investments for business through ICO.
“Today, blockchain is not considered a cure-all anymore and the question is, would this technology be on the side of good or evil, financial inclusion or digital inequality,” Artem Genkin notes.
It seems that the distributed ledger technology can increase digital divide and make it more difficult to overcome. The social credit system in China is an example: the system becomes a means of control over access to financial services. Plans call for improving it with blockchain, which will make it possible to access social credit data and monitor it at the national level.
Depending on the social score, there could be at least four kinds of restrictions, such as ban on deals with certain contractors, including the state; ban on deals with certain kinds of assets; restricted access to financial resources and even employment. A powerful tool of financial pressure on low-ranking individuals and organizations is being formed.
Transaction privacy remains open to question
The ability to make anonymous transactions has fueled interest in blockchain and cryptocurrencies for a long time. Today, it is becoming clearer that blockchain will rather allow for controlling transactions, at least as relates to central bank digital currencies. The concern over the privacy of payments was expressed by both market professionals and the public in the European Union (following the discussion of the concept of a CBDC by the European Central Bank), says Dmitry Kochergin, Professor at the St Petersburg State University Department of Economics. To customers, privacy is more important than security.
According to the expert, the digital currency technology implies enhanced control over cash turnover due to its programmability and traceability, and gives the state power to control over money that citizens spend. It is difficult to control cash turnover, but it would be possible with central bank digital currencies; in China, the digital yuan is supposed to replace cash. As to the digital ruble, the regulator’s concept does not imply cash substitution. Yet, the Central Bank makes it clear that the involved agencies will receive full information on payment sender, recipient and purpose, with independence and anonymity of transactions secured for their participants, HSE Banking Institute Director Vasily Solodkov says.
Payment privacy can be maintained during offline settlements in central banks’ digital currencies. However, China has once again mentioned restrictions on the number of such transactions as well as their volume, Dmitry Kochergin notes.
Pandemic acceleration
Obviously, blockchain technology can generate a plenty of private social ratings that assess a certain activity of participants, reputation score of internet users based on their activity, and others.
The coronavirus pandemic has provided a sort of an impetus for the development of such ratings, or evaluation systems, including those that utilize blockchain technology. They include the so-called immune passports with vaccination records, whose holders will be provided with a greater scope of certain services or easier access to them. Examples include the Digital Health Pass project by IBM, as well as the COVI-PASS system of digital health passports which utilizes blockchain and is proposed for introduction in fifteen countries, including six EU countries and the United States, and others.
Such ‘passport of immunity’ can become a driver for accumulation of expansive personal biomedical data, along with information on a person’s financial transactions and social activity. At the same time, a person will be a full-fledged citizen only after agreeing to be a source of big data. The idea of Covid passports has already caused concerns, such as from certain staff members of the World Health Organization (WHO): according to WHO Representative to Russia Melita Vujnovic, introduction of Covid passports could result in increased divide.
Ethics as top priority
According to Viktor Dostov, Board Chairman of the Russian Electronic Money and Remittance Association (REMA), we cannot state categorically that the control over people’s actions has become easier since blockchain emerged. China’s social credit system did not include it initially — yet, implementation of blockchain could make it more efficient; what comes first is a social task, not technology, Dostov says. China’s national digital currency project seems to be driven by social and political motivations as well; technology has only provided opportunity for its implementation, Dmitry Kochergin adds.
On the other hand, we see an obvious and immense growth in personal information gathered, with technologies actually providing plenty of opportunities for monitoring and control, which range from analyzing social media profiles to examining cash receipts information, Dostov agrees.
In this context, making sure that such efforts to collect personal data have no discriminatory goals or purposes is of particular importance, as is the ethical assessment of any technological solutions that imply restrictions or benefits for their users. After all, the blockchain technology is neutral in itself, which means it can be used both to increase and reduce the divide, Artem Genkin emphasizes.
“What matters is the purpose: if used improperly, the technology will increase the digital divide rather than reduce it. We have to be very careful here, with ethics being top priority,” the expert concludes.
By Olga Blinova