Blockchains, Legitimacy and Digital Financial Inclusion: De-Risking by Re-Risking in the Eastern Caribbean and Eastern Europe

Malcolm Campbell-Verduyn (University of Groningen), Moritz Hütten (Darmstadt Business School), Daivi Rodima-Taylor (Boston University)

Blockchain applications have attracted widespread attention for the novel opportunities they present to overcome obstacles facing global development. While banks have been reducing their engagement with global markets that are perceived as risky, blockchains have been slated to help overcome some of these challenges. This calculus is at the heart of the so-called problem of de-risking or de-banking, which has been spurred by fears of fines from money laundering and terrorism financing operations. This is a calculus that blockchain applications may change. By bringing transparency, speed and efficiency to cross-border financial transactions, blockchain applications may reinforce rather than undermine anti-money laundering and counter-terrorism financing (AML/CFT) regulations.

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Yet, the legitimacy of blockchain-based de-risking efforts can be threatened by the potential of this technology to overly re-risk. As studies of blockchains in finance have shown, the application of these technologies can ‘re-risk in realtime,’ as anthropologist Bill Maurer (2016) has succinctly put it. We extend this claim in arguing that the legitimacy of blockchain-based de-risking projects specifically, and ‘digital development’ more generally, can be threatened by a set of technologies that facilitate the inclusion of poor and often vulnerable citizens into volatile and scam-ridden corners of global finance. De-risking through blockchain applications, we maintain, can re-risk the legitimacy of global development efforts that, since the establishment of the G20 Principles for Innovative Financial Inclusion in 2010, have become increasingly centred on enhanced access to credit for poverty reduction. The sole reliance on blockchains for de-risking can exacerbate socio-economic inequalities by leading a relatively small set of stakeholders. Without accompanying efforts to widen stakeholder input and extend benefits and empowerment, existing structural issues, such as the ‘digital gaps,’ are likely to be perpetuated.

We ground our analysis of the promises and perils of ‘de-risking by re-risking’ in a comparison of blockchain-based financial inclusion initiatives, which are unfolding in two sub-regions of small countries: the Baltic states of Eastern Europe and members of the Organization of Eastern Caribbean States. We find that while the latter are advancing high-risk blockchain-based de-risking efforts, the former are much less risky due to the greater involvement of publics beyond financiers, technologists and central bankers.

Re-Risking Through Blockchain-based De-Risking in the Eastern Caribbean

A growing number of blockchain-based financial inclusion projects are being advanced across a sub-region that spans from Puerto Rico in the north-west to Trinidad and Tobago in the south-east. The main types of blockchain-based initiatives mirror the evolution of the technology from open, permissionless networks to more closed, permissioned networks. A first set of initiatives involves cryptocurrencies at the national and regional levels, while the second includes permissioned blockchains, the most prominent of which is a pilot plan coordinated by the Eastern Caribbean Central Bank (ECCB) initiated in March 2018 to test how data is managed for compliance with AML/CFT procedures. While seemingly distinct, there are several overlaps between the two types of blockchain projects. For instance, similar actors are involved in both market- and central-bank based de-risking projects. Despite their potential promises, both sets of projects include input from, benefit from, and enable deliberation by a narrow set of publics. They combat de-risking by re-risking the legitimacy of not only the specific project but technology- and finance-led global development efforts more generally.

We find few cryptocurrency-related projects in the Caribbean region to be local, bottom-up initiatives. Backed by Bitt, a Barbados start-up firm, Caribcoin is a firm funded by a large American online retailer, Caricoin meanwhile is UK-based with development offices in Kingston, Jamaica. Cryptocurrency projects have a top-down flavour; they tend to be foreign-led projects and seek little to no local input.

The islands of the Eastern Caribbean tend to serve as a low-tax and low-regulation locations for escapism by firms based in the Global North keen to undertake libertarian experiments. The ‘public’ included here are largely foreign investors rather than a local public. The sub-region appears to suffer from a race to the bottom regarding the regulation of ICOs and other blockchain-based financial experiments. These experiments are perpetuating rather than resolving the perception of the sub-region as a haven for offshore finance. Raising funds with zero filing requirements, no common securities rules, and no required public disclosures contributed to de-risking.

The array of actors included in the sub-regional blockchain pilot scheme coordinated by the ECCB are similarly narrow. At the center of the project is a small, local start-up (Bitt) that has been supported by investment and the injection of technology from US-based firms. It remains unclear how the wider public can hold ECCB, Bitt and its partners accountable. The complexity of this pilot scheme renders it difficult to identify who is ultimately responsible for its design and re-design. The narrow public accountability enabled by permissioned blockchain schemes in the Eastern Caribbean therefore risks the legitimacy of de-risking efforts centered around this technology.

De-Risking Through More Moderate Blockchain-Based Re-Risking in the Baltics

The three Baltic states of Estonia, Latvia, and Lithuania have also experienced financial exclusion in large part due to their unique position in the sub-region between Russia and the wider European Union. Following the liberalization of their financial sectors when they re-gained independence in the 1990s, the Baltics became host to branches of West European banks, some catering less to the needs of local residents than those from former Soviet states seeking to shift capital to offshore jurisdictions. Their role as corresponding intermediaries was recently exposed in several money laundering schemes. It is within this wider context that blockchains are being harnessed in regional and national digital development strategies in the Baltics.  While the three Baltic countries have signed a memorandum to support the development of blockchain for sub-regional capital market development, blockchain initiatives have tended to develop nationally. Baltic states were among the first in the world to launch ICOs and have led internationally in terms of funds raised per capita. The growth of technology startups in the Baltics has been fuelled by input from the public sector at both the national and regional levels. Since independence in 1991, large investments have been made in ICT education and digital infrastructure. The governments have not only encouraged blockchain innovation but have also been closely involved in developing blockchain-based governance schemes. We argue that this approach—greater involvement by national governments in digital development schemes that link blockchains to wider digital infrastructures and education projects—avoids the more extreme approach to de-risking by re-risking which has been taken up by quasi-public and largely private initiatives in the Eastern Caribbean. What the Baltic initiatives reveal is the necessity of having multiple publics participate, benefit, and hold digital financial inclusion projects to account.

Despite some obvious risks to legitimacy, blockchain initiatives in the Baltic states appear to temper re-risking by integrating digital financial inclusion within systematic attempts to protect consumers, give them control over their information and the ability to overcome the possible effects of dataveillance. These attempts are most pronounced in Estonian e-Governance initiatives, such as e-Residency with its blockchain-powered identity verification and other services, including registering and managing businesses, opening bank accounts, and trading goods and services from anywhere in the world. These should be seen as resulting less from an intentional design of a blockchain initiative, and rather as an outcome of protensive efforts to develop multi-layered data security systems that empower citizens through more systematic digital education initiatives. The greater presence of governments in the Baltics may therefore contribute to tempering the risk involved with unfolding digital financial inclusion schemes. At the same time, state-based blockchain approaches that merely re-centralize in a narrow clique of government-linked officials can equally re-risk legitimacy.

De-Risking, Re-Risking and blockchain technology

Combatting global problems like de-risking will always require some risk-taking. Our study traces the re-risking potential of a technology that is emblematic of far longer standing and wider efforts to harness risk management technologies for ‘taming’ market uncertainty. Blockchain applications are not free of the perils that typically accompany technological solutionism, particularly given the narrow range of expert stakeholders that may be included in and able to hold to account complex and evolving technology-based decision-making.

While both sub-regions we examine—the Eastern Caribbean and the Baltic states of Eastern Europe—are characterized by rapid expansion in cryptocurrencies and blockchain-based activities, the involvement of wider ‘publics’ in the latter region is re-risking the legitimacy of digital financial inclusion in more moderate and ultimately more socially productively manners. In the Eastern Caribbean we find that blockchain-based financial inclusion projects are being led primarily by quasi-public and supranational organizations in ways that may be insufficient to actively include and engage as well as benefit a wide range of stakeholders. Such narrow range of ‘publics’ may de-risk by overly re-risking the legitimacy of digital financial inclusion projects. In pointing to how democratic states may be more productively involved in a wider range of publics, which are involved in, benefit from, and hold to account blockchain-based de-risking projects, our second case study examined unfolding digital development efforts in the Baltic states of Eastern Europe. While by no means perfect, these projects highlight the importance of where digital financial inclusion efforts originate from, as well as whom they involve, benefit and ultimately empower.

In examining these and other cases of blockchains and development, it is crucial to recall that risks can at best be shifted and at worst be increased through technologies designed to manage them. It is unlikely that money-laundering, terrorist financing, and other aspects of what can broadly be referred to as the ‘shadow economy’ will ever entirely disappear. A continual stress on legitimacy and the roles of multiple publics in technology-led financial inclusion schemes is important in countering the widespread techno-euphoric accounts of ‘magic bullet’ solutions. Doing so can also open the possibilities for de facto inclusion of a wider range of stakeholders in global development projects centered around novel technologies like blockchains.

Synopsis of paper prepared for Workshop “De-risking, Financial Exclusion & Resiliency in the Caribbean: Scoping out the problem, searching for solutions”. Federal Reserve Bank of Atlanta, USA, November 29-30 2018.


Malcolm Campbell-Verduyn is assistant professor at the University of Groningen. His research combines a general focus on ideas and materiality with a specific interest in the roles of non-state actors, technologies and technical artefacts in contemporary global governance. He is the author of Professional Authority After the Global Financial Crisis (2017, Palgrave MacMillan) and editor of volume Bitcoin and Beyond: Cryptocurrencies, Blockchains and Global Governance (2018, Routledge).

Moritz Hütten is a researcher at Darmstadt Business School and a fellow at the Center for Sustainable Economic and Corporate Policy (SECP). His research focuses on the normative and social implications of blockchain technology. He has also conducted research in the field of banking regulation in Europe, and financial literacy. He is involved in several research projects at Goethe University Frankfurt and Darmstadt Business School, as well as the research center “Sustainable Architecture for Finance in Europe” (SAFE).

Daivi Rodima-Taylor is researcher and lecturer at the Pardee School of Global Studies, Boston University. Her research focuses on financial inclusion and fiduciary culture, migration and remittances, payments infrastructures, grassroots economies, and human security. Daivi has taught sustainable development, international relations, and anthropology, conducted research in Africa and Europe, and published in academic and policy-oriented journals.

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