What Are The Ethical Issues of Blockchain Technologies?

Blockchain technologies have been around for some years now and have enabled the advancement of digitalisation and the creation of a whole new world: the world of Metaverse and Web3.

In a previous article, we have covered the social impact of blockchain, which turned out to be quite positive. Blockchain, as a key driver of the fourth industrial revolution, is one of the new technologies transforming society by enabling the creation and management of digital assets and other assets. However, while Blockchain Technologies have not been adopted unanimously, there are some essential elements that one needs to bear in mind, such as the ethical issues that the use of blockchain raises.

What is Blockchain technology?

Blockchain technology is comparable to a digital ledger where transactions are recorded. The blockchain or distributed ledger is a network of blocks. The concept itself makes changing, hacking, or cheating the system difficult. The ledger where the transactions are recorded is duplicated and distributed across the whole blockchain network of computer systems. You can learn more about blockchain technologies, mining, and cryptocurrencies in our previous article

Blockchain and digital assets are being adopted around the world, with crypto adoption influencing development and societal change in many regions. This global uptake highlights the significant impact of these technologies on society and the evolution of financial and legal systems.

Blockchain ethics in organisations stem from the following blockchain technologies’ goals: immutability, disintermediation, and automation. Immutability refers to the invulnerability of blockchain transactions to tampering. When the authority that is supposed to validate a transaction is decentralised, disintermediation occurs. Finally, automation refers to self-executing coded processes via smart contracts.

Due to the unique nature of blockchain and digital assets, a range of ethical risks and ethical dimensions arise, including concerns about transparency, trust, and the broader effects on society and development. As with any nascent technology, the more we can understand about its potential upsides and downsides earlier in the process, the better prepared we will be in managing our use of it. And, as our sense of self-identity, as well as our legal liability, becomes ever more rooted in the digital world, the following points are important to take into account when harnessing the potential of blockchain.

Transparency is divisive when it comes to ethical considerations: people want it, yet do not wish to be victims of it

Transparency was something that everyone desired, the pleasure of having complete knowledge of processes and access to any information, at any time, and from any location.

It is true that it is a revolution, but one that also means everyone can now have access to your transactions and, in the future, to the digitalised files including all of your personal information. This is a contentious issue, and the question of which implications weigh heavier in the balance, transparency, or lack thereof, remains unanswered.

To remedy the challenges mentioned above, e-wallet providers preserve the identities of participants through their credentials, making it nearly impossible to determine the identity of the person behind the wallet unless the blockchain is eventually shut down. Moreover, for user protection purposes, the Blockchain and the General Data Protection Regulation allow, under certain situations, the erasure of one’s data. Laws and regulatory oversight play a crucial role in shaping how blockchain records are managed and protected, ensuring compliance and addressing the evolving legal landscape.

The obstacle that remains is the very nature of the blockchain prevents the full exercise of this right: all data are accessible to all parties. Reduced information availability on-chain, on the other side, means less information to employ in smart contracts, and hence less usefulness from the blockchain. Informed consent becomes essential when users interact with blockchain systems, as individuals must be fully aware of how their data and transactions are handled.

Finally, while the concept of a private blockchain could assist in minimising complete data exposure, it is not completely decentralised; the data shared with the public are managed by a private administrator who can control who can join as a node, therefore affecting public trust in the service, among other reasons. Concerns about the tension between transparency and privacy continue to arise, and legal professionals must address these challenges to ensure ethical and compliant use of blockchain technology.

Accountability and responsibility: who is to blame for a potential breach?

The second aspect of blockchain governance is responsibility: specifically, whose fault would it be if something were to happen to a user or if the system were compromised? Would it be everyone’s fault or nobody’s? This is precisely why the blockchain differs from, say, regular financial services, or any centralised organisation; there is no ownership and thus no responsibility. The decentralized nature of blockchain technology eliminates the need for third party intermediaries, which is a key difference from traditional financial institutions that typically oversee and verify transactions.

What if a cyberattack were to happen?

An attack on a blockchain only requires hackers to take control of 51% of the mining power, and such attacks have been recorded during the last few years. Another recent example is the recent cyber-attack reported by CNBC on the blockchain bridge Horizon developed by crypto startup Harmony, where $ 100 million in crypto was stolen.

Effective risk management is crucial in preventing illegal activities and criminal activities on blockchain networks. Implementing robust anti money laundering measures helps address these risks by ensuring compliance with regulatory standards and detecting suspicious transactions.

NFTs: one of many more ethical challenges of blockchain

Ethical considerations are not limited to crypto ethical issues. In the case of NFTs, as a buyer, you cannot be certain that the person selling it to you is not a fraud or impersonating someone else - unless the marketplace itself verifies the transaction. NFTs are a type of crypto asset, and their emergence highlights the broader rise of crypto assets and blockchain-enabled innovations such as initial coin offerings (ICOs). ICOs, like NFTs, raise important ethical and regulatory questions regarding security, regulation, and the evolving legal landscape.

Finally, from a regulatory standpoint there is no one to report to if an individual is hacked, if there is an issue with the server where the NFT is located, or if the same seller decides to produce a similar NFT and sell it again as a unique item.

Ownership: would it still be a viable concept?

Personal data are supposed to be the user’s property, but what if all interested persons or organisations have equal access to all data in the blockchain? What if they could create value-added services based on the open data? The concept of owning one’s own data would be affected. One can even question if the concept of ownership itself would still be meaningful.

In blockchain systems, secure management and verification of cryptocurrency ownership is crucial, as safeguarding private keys and implementing control measures are essential to ensure true ownership and prevent fraud.

Decentralisation versus reality: are blockchains decentralised?

Recent research indicates that blockchain is not as decentralised as was previously believed. In the year 2020, 85% of Bitcoin was held by 4.5 percent of Bitcoin holders. The decentralized nature of blockchain has significantly influenced the development of the crypto market and cryptocurrency market as new asset classes within global financial markets, introducing unique challenges and opportunities for investors. A June 2022 report published by Trail of Bits Inc., Are Blockchains Decentralized? Unintended Centralities in Distributed Ledgers, studies the reality of blockchain technology decentralisation. These are the points mentioned in the report that can allow us to question the decentralisation of a Distributed Ledger Technology, or DLT :

1. The authoritative centrality: the minimum number of entities necessary to disrupt the system. The Nakamoto coefficient measures this central authority, and the closer this value is to one (1), the more centralised the system. In January of 2021, the Nakamoto coefficient for Ethereum was only two, and reached three in April 2022. For Bitcoin, however, “the Nakamoto coefficient is four, because taking control of the four largest mining pools would provide a hash rate sufficient to execute a 51% attack.” Most cryptocurrencies, including other cryptocurrencies beyond Bitcoin, have contributed to the speculative nature of the market and attracted a diverse group of investors and crypto investors seeking new opportunities in this evolving landscape.
2. The consensus centrality: does a single entity (like a mining pool) control an excessive amount of the network’s hashing power?
3. The motivational centrality: how can players be discouraged from acting maliciously, if these actions are controlled and, moreover, if they can even be stopped?
4. Topological centrality: how resilient is the consensus network to rupture and whether there is a key structure holding the network together.
5. Network centrality: Are the nodes adequately, geographically spread, so that they are consistently distributed across the internet?
6. Software centrality: how much does the security provided by the blockchain depend on the core software on which it is running and what would be the consequences of an error or the use of an old version of that software?

Cryptocurrency investment is characterized by high volatility and ethical challenges, and interest in these markets can be measured by various indicators such as trading volume, social media activity, and search trends, reflecting the dynamic and rapidly changing nature of the crypto market and cryptocurrency market.

“21% of Bitcoin nodes are running an old version of the Bitcoin Core client that is known to be vulnerable.”

Frequently asked questions

1. What are the main ethical concerns associated with blockchain technologies?

Blockchain raises ethical concerns related to transparency, privacy, and environmental impact. Issues include the high energy consumption of Bitcoin mining, the environmental footprint of digital currencies, illicit activities such as money laundering, and the lack of clear legal and regulatory frameworks.

2. How does Bitcoin mining impact the environment?

Bitcoin mining requires significant computational power, leading to high energy consumption and increased carbon emissions. This environmental impact has become a major ethical concern, prompting debates on whether renewable energy adoption and improved efficiency can reduce blockchain’s footprint.

3. What legal and regulatory issues are linked to blockchain?

Blockchain challenges traditional legal systems due to its decentralised nature and exclusive jurisdiction issues. Questions arise about accountability in case of breaches, the role of privacy coins in illicit activities, and how different jurisdictions regulate or restrict blockchain applications.

4. How do governance practices affect blockchain’s ethical use?

Governance practices in blockchain determine how decentralisation, decision-making, and consensus are managed. Weak or centralised governance structures can lead to misuse, reduced transparency, and unethical control over network operations, impacting trust and compliance.

5. What role does environmental impact play in assessing blockchain as an asset class?

Environmental concerns, especially the energy consumption of proof-of-work cryptocurrencies, are increasingly factored into the assessment of blockchain as an asset class. Investors and regulators are now considering sustainability metrics when evaluating digital currencies and related technologies.

6. How can ethical measures improve the use of blockchain technologies?

Ethical measures such as implementing responsible mining practices, enhancing privacy protections, adopting renewable energy sources, and increasing transparency in smart contract use can help mitigate blockchain’s negative social, legal, and environmental effects.

7. What areas should future research on blockchain ethics focus on?

Future research should focus on reducing blockchain’s environmental footprint, developing balanced transparency and privacy frameworks, addressing anti-competitive practices, and creating legal standards for digital asset ownership and governance.

8. How does contract law apply to blockchain technologies?

Blockchain smart contracts operate under principles similar to traditional contract law but introduce new complexities. Their self-executing nature raises questions about enforceability, jurisdiction, and dispute resolution in a decentralised environment.

9. What role does virtual currency play in ethical debates around blockchain?

Virtual currencies like Bitcoin and Ethereum play a pivotal role in blockchain ethics discussions. While they offer benefits such as faster transactions and financial inclusion, they also raise concerns about volatility, illicit use, and environmental sustainability.

10. What are the main benefits of understanding blockchain ethics through previous research?

Previous research provides valuable insights into legal, environmental, and social challenges linked to blockchain. By reviewing academic findings, stakeholders can better measure interest in ethical practices, identify risks, and adopt responsible implementation strategies.