ETHICS & FINANCIAL REGULATION

VII

ECO 741B
Computer vision is an interdisciplinary scientific field that deals with how computers can
gain high-level understanding from digital images or videos. From the perspective of
engineering, it seeks to understand and automate tasks that the human visual system
can do
Big data is a field that
treats ways to analyze,
systematically extract
information from, or
otherwise deal with
data sets that are too
large or complex to be
dealt with by traditional
data-processing
application software
Robotic Process
Automation (RPA)

 - Like AI and Machine

Learning, Robotic Process
Automation, or RPA, is
another technology that is
automating jobs. RPA is the
use of software to automate
business processes such as
interpreting applications,
processing transactions,
dealing with data, and even
replying to emails. RPA
automates repetitive tasks
that people used to do.
 Edge Computing
Formerly a new
technology trend to
watch, cloud computing
has become mainstream,
with major players AWS
(Amazon Web Services),
Microsoft Azure and
Google Cloud Platform
dominating the market.
The adoption of cloud
computing is still
growing, as more and
more businesses migrate
to a cloud solution. But
it’s no longer the
emerging technology
trend. Edge is.

Edge computing is a distributed computing paradigm that brings computation and data storage closer to the location
where it is needed, to improve response times and save bandwidth.
Banking is undergoing a technological churn right now due to rising
competition from fin-tech startups and increasing concern for cyber-
security. Today, we are going to look at 10 technologies that are going to
impact the future of banking sector!

- Technology in Banking: Innovations That Will Impact Future of Banking

We have to ask ourselves: what is our attitude towards
responsible use of technology? What are we committing
ourselves to? Do we want to commit ourselves? We need
to set the framework ourselves and define principles

Manuela Mackert Chief Compliance Officer, Deutsche Telekom AG

Impact of digitalisation on standards of financial ethics (development & stability)
Interest in financial ethics is primarily related to the GFC of 2008. The weakness of
ethical standards was indicated as one of the reasons for its outbreak (Szulczewski).
The prevalence of negative role models in the pre-crisis period that promulgated a
personality structure based on unrestrained acquisitiveness was to blame.
Another problem was the lack of bottom-up ethical boundaries in financial activity
that would fill the regulatory gap. The size of the gap may vary, but in principle, it is
unavoidable due to the far-reaching innovation of finance, occurring mainly in capital
markets.
The use of advanced knowledge to create instruments with a diversified structure
and risk level created a situation in which the public regulator was not able to undertake
timely actions aimed at maintaining the balance on the market. It could only do so at
the cost of subjecting trading to such extreme bureaucracy that it would result in a
significant increase in operating costs, which would disrupt the functioning of the
market.
Impact of digitalisation of finance on related technologies – 3 main areas identified:

1) New communication medium that does not require personal contacts and occurs in
real time,

2) Significant increase in cognitive abilities of entities, primarily through the ability to

analyse a practically unlimited amount of data in a short time,

3) Significant increase in operational capabilities, mainly due to the ability to handle a

practically unlimited number of processes simultaneously.

Hence, the impact of digitalisation on finance requires a new look at its ethics; taking
into account these two areas of analysis:
1) impact of digitalisation on ethical standards

&

2) the forms of institutionalisation.

A new paradigm

In the twentieth century, a type of moral reflection developed that can be

described as the ethics of technology. The dynamic and uncontrolled
development of such technology led to a completely important functional
change; material reality change to social reality change (transformation).
This provides new instruments for dealing with natural objects, as well as
interpersonal and inter-institutional relations transformation (Goody).

This concept has gained a new dimension of shared responsibility of entities for
the use of knowledge to develop new technologies, their dissemination and
application in the infrastructure of other social institutions
Thus, it depends on whether:

▪ it increases the sense of security, creates opportunities for

development, improves distribution of other values, or

▪ just the opposite - increases the sense of menace, makes one

dependent on arbitrary decisions of others, or escalates inequalities.
A new paradigm

The postulated ethical response to this should be a stronger moral co-

responsibility of financial institutions and commitment to values manifested in
proposing institutional innovations designed through the use of the same tools.

Digitization facilitates how these innovations can be designed more effectively

but also implemented in the recommended paradigm of ethical self-regulation
defined as a bottom-up collective.

This has been necessitated due to the "self-execution" of ethical standards in

digital reality.
Ethics in digital finance: towards a new paradigm of self-regulation
(Skuczynski, Paweł, 2022)

Ethical implications of finance entering the digital age & the changes
entailed by the development of new technologies.

Ethics in digital finance constitute a coherent whole, where separation of

ethical standards/responsibility from institutionalization is analytical nature.

Understanding the fundamental values of finance and their normative

consequences influences the forms of their implementation by institutions

Conversely, technological change for expansion has elements of emerging

paradigm of digital finance ethics. Prompting an integration of these
elements with the use of new technologies in practice.
Digitalisation means the emergence of new technological possibilities
defined as the self-execution of standards (Teubner 2004: 47). It is the use of
digital technologies to change a business model for opportunities.
“Digitization is the process of changing from analog to digital form” –
Gartner’s IT Glossary. Digitalisation consists of three elements:

1) automatic enforcement of rules in the digital reality if they are found to

be violated,

2) integrating the control over compliance with other operational

processes in real time,

3) the use of artificial intelligence to identify and verify rule violations, and
to their possible sanctioning
Digitalisation supports fully effective self-regulation. This is an
unquestioned advantage of this model, as it creates opportunities to
eliminate violations of ethical standards, the limitation is the reach of the
digital form of operations.

It allows to significantly curb the "grey area" of dishonesty, abuse, and

simple unreliability. However, it also undoubtedly has disadvantages.

1) Lack of reflection and no direct responsibility of an individual for

identifying violations, their elimination and sanctioning.

2) While it is conceivable that compliance processes can be fully automatic,

intervention in other processes, as well as determining the consequences
of non-compliance with standards, are not so easily automated.
3) They require some feeling and the ability to assess circumstances that are
difficult to include in an algorithm. Hence, in settling specific cases, such as
legal disputes, new technologies should only be an auxiliary tool, but
ultimately their use should always be subject to human control.

4) The minimum condition is to create the possibility of appealing against a

digital decision. Nevertheless, it seems that with the spread of new
technologies as the basis of the infrastructure for financial activities, it is this
model that will be widely used.

It should be emphasized that, with regard to it, as well as forms of

institutionalization of ethics in general, the principle that the expansion of
the possibilities of institutions due to digitalization should also entail
expansion of their moral responsibility.
As regards institutionalization, digitization primarily provides a new model of
standards application, which is based on novel technological possibilities. It is
about institutionalization, and not the logic of standards application.

It is not an alternative to deductive, argumentative or hermeneutic models,

which focus on the issues of relating norms to facts and on methods of
resolving specific cases. The digital model can be opposed to previously
existing community and code models, which can be distinguished
professional and economic ethics.

New technologies provide a clear alternative here with their power to

transform institutions. It is highly probable that this model will not lead to
ousting of the previous ones, because the development of communication
media leads to the accumulation of methods of communication and action
rather than the elimination of some by the other.
models of
digital relations
Digitalisation transforms interpersonal relations and social institutions, and it
is no different in the case of financial institutions and their clients. The
characteristics of the changes taking place in this area require indicating the
existence of three (3) basic models of relations between these entities:

1) symmetric, 2) asymmetric, fiduciary, 3) asymmetric, consumer.

First model - Symmetric, both sides of the relationship are treated as fully
autonomous and equally capable of assessing their actions, for example, in
terms of risk. They benefit fully from contractual freedom and shape mutual
relations according to their needs.
Second model - asymmetric, fiduciary, assumes an asymmetry between
entities in the sphere of available information and the possibility of
understanding one’s actions, and of course, it is financial institutions that are
privileged in this respect.

This asymmetry is compensated for by basing mutual relations on a fiduciary

contract in which the client entrusts a financial institution with certain goods,
and the institution has a special obligation, resulting from the very essence of
the relationship, to act in the client’s interests. For this reason, we can talk in
this case about relations based on loyalty to the client and individualised trust
between entities.
Third model - asymmetric, consumer, assumes the existence of deficits of
information & understanding on the client's side but solves the resulting
problems differently. Instead of individualised relations of trust and special
loyalty, it propounds generalised information and guarantee obligations.

It assumes that it is neither possible nor desirable (due to costs) to build a

fiduciary relationship with each client. The client should rather be treated as an
anonymous consumer.
models of ethical
self-regulation
4 Models of ethical self-regulation:

1) individual,
2) diffused,
3) collective top-down,
4) collective bottom- up.

The first model is defined as individual. It is the simplest and proposes that
individual financial institutions or professionals accept ethical standards and
responsibility as voluntary obligations. Therefore, these standards may be
different for each entity and there is no coordination whatsoever.
The second model is distributed self-regulation. It involves accepting
ethical standards as voluntary obligations (for organisations of
entrepreneurs or professionals, associations or economic self-
governments).

It is possible that two professional or industry organisations will adopt

separate, very different self-regulations. Yet, undoubtedly, there is
coordination by organisations, which concerns the creation of norms, but
may apply to their compliance reporting, etc.
The third model is more complicated and is known as the collective top-
down model. “Collective” means here that self-regulation applies to an
entire industry, sector or profession. In contrast to individual and
distributed models, a uniform standard is adopted in all institutions
operating in a given area.

In the top-down variant, it is enforced by the regulator, who creates meta-

regulation, namely the regulation of self-regulation. This meta-regulation
is just a formal requirement that standards be adopted by organisations,
but the content of the self-regulation is not defined/defined to an
insignificant extent.
The fourth model, the most complex, can be described as a bottom-
up collective. Its core is the concept of self-constitution of social
subsystems (Teubner 2012: 54-93).

Like the distributed model, it is based on professional and industry

organisations. By contrast, their shaping of ethical self-regulation
standards is done collectively - for the entire profession or industry -
and not inside an organisation.
Financial Regulation is about Trust

If we want to win trust in society, responsible and ethical working are critical
success factors for digital transformations.

Digitalisation shapes our present and will determine our future.

Innovations such as artificial intelligence (AI), blockchain, algorithmic systems

have enormous economic potential and would significantly increase efficiency
and speed.

However, the rapid pace of digitalisation and the associated changes are
raising concerns globally like the unintentional access to private information
or creation of user profiles without proper authorisation.
The lack of transparency in such technologies leads to great uncertainty,
and there is a lack of accepted ethical rules to build trust in the digital
economy.

Taking an ethically guided approach to digitalisation shouldn’t be seen as

a chore or a liability; rather, it forms a sustainable basis for interaction
with customers, employees and other stakeholders.

Thus, use of appropriate financial regulatory toolkit is necessary to guide

the enormous innovative power of digitalisation, while keeping the
broader social consequences in mind.
Digital ethics concerns the values we want to live up to in a digital world,
to positively shape society through technological innovations.

Manuela Mackert Chief Compliance Officer, Deutsche Telekom AG

We have to ask ourselves: what is our attitude towards responsible use of

technology? What are we committing ourselves to? Do we want to commit
ourselves? We need to set the framework ourselves and define principles.

Manuela Mackert Chief Compliance Officer, Deutsche Telekom AG

What is digital ethics?
Digital ethics questions the standards of morally correct action under the
conditions of digitalisation. It examines the social, ecological and
economic compatibility of digital technology in its development and
application.

Loss of confidence in the digital economy as a whole is often caused by

just a few corporations engaging in irresponsible business practices.
Failure to apply digital ethics is often encouraged by the lack of
governmental regulatory instruments.
However, legal frameworks to govern the use of rapidly evolving
technologies are often created retrospectively. These frameworks can be
very restrictive, and sometimes affect market participants who are not
directly involved.

Without sensible and respectful interaction with people, business

partners, and society in general, technological change will not work.
- Stephan Engel Principal Corporate Responsibility, Otto Group Holding
Economic and social development without digitalisation as a driver is
unthinkable today. Digitalisation has huge economic potential, but also
brings challenges and creates uncertainty.

Development of the digital economy has been significantly slowed down

in recent years by data leaks, misuse of user data and breaches of
privacy, making it more difficult for companies to realise their digital
potential.

At the same time, this loss of trust has also become an obstacle to the
wide-ranging benefits that innovative technologies can provide to
people and society
A number of countries in Africa are leading the race when it comes to the global
adoption of crypto assets. Aside from places like Nigeria, Kenya and South Africa,
Ghana is one of the top countries in Africa with rising peer-to-peer crypto trade
volumes.

Ghana’s government has noticed the adoption and the SEC has witnessed
ostensible stories of citizens losing funds. The SEC official also took time to explain
why the regulator has undertaken to study cryptos further – Bitcoin.com

Ghana Regulator Labels Crypto Transactions Illegal— Urges People to 'Stay Away
From Them'
Ghana’s Securities and Exchange Commission (SEC) recently warned residents of the
West African country to avoid cryptocurrency transactions of any form. In the warning,
the regulator reiterated that “cryptocurrencies are illegal in the country and are not
regulated by the commission hence Ghanaians should stay away from them.”

Risks Associated With Crypto - In remarks made during an interview, Paul Ababio, the
Deputy Director-General of the (SEC) asserts that “there are risks associated with
cryptocurrencies and people have lost funds to such transactions.” However, despite
issuing the warning, Ababio does hint that his organisation might eventually decide to
regulate the crypto space.

The Bank of Ghana does not treat it as a form of payment, it is not a legal tender, but we
will be engaging further to come out with frameworks.

However, until that happens, the regulator urges Ghanaians to:

“desist from participating in cryptocurrency transactions”

Master Plan
In the meantime, Ababio reveals that “the commission is forming a fintech round table
as part of its master plan to look into some of these innovations and the approach to
take.” However, he cautions that this is still a work in progress

Global View:

• South Africa Working Group Releases New Position Paper Calling for Regulation of
Crypto Asset Providers

• Indian Government May Regulate Crypto as Asset Class: Report

• Thailand’s New Cryptocurrency Regulation Requires Users to Be Physically Present

to Open Accounts
 DISCUSSION - ARTICLE:

THE COLLAPSE OF THE FTX EXCHANGE

The collapse of the world’s third largest crypto exchange FTX (2023), and subsequent
plunge in the prices of Bitcoin, Ethereum, and other major crypto assets, is prompting
renewed calls for greater consumer protection and regulation of the crypto industry.

Regulating a highly volatile and decentralized system remains a challenge for most
governments, requiring a balance between minimizing risk and maximizing innovation.
Only one-quarter of countries in sub-Saharan Africa formally regulate crypto. However,
two-thirds have implemented some restrictions and six countries—Cameroon, Ethiopia,
Lesotho, Sierra Leone, Tanzania, and the Republic of Congo—have banned crypto.

Zimbabwe has ordered all banks to stop processing transactions and Liberia directed a
local crypto startup to cease operations (implicit bans)

– the IMF
What FTX allegedly did wrong

Moving user funds behind closed doors According to Reuters and other credible sources,
FTX was allegedly lending out billions of dollars’ worth of customer funds to its sister
trading company Alameda Research whenever it needed extra collateral for their long
positions13. This means that users’ funds were moved freely and willingly by FTX. Where
exactly these funds ended up might never be known, but it can be assumed that user funds
were in fact moved around behind closed doors, without knowledge or authorization from
their rightful owners.

According to the New York Times, Alameda’s CEO said that during the Luna crash, lenders
moved to recall the loans made to the company. However, as the funds that Alameda had
spent were no longer easily available, they allegedly used FTX customer funds to make
those payments
What FTX allegedly did wrong

• The entire FTX failure was in essence caused by unchecked counterparty credit risk, the lack of
strong corporate governance principles and a resultant loss of trust. It is not the result of intrinsic
deficiencies of blockchain technology or its use cases.

• The intrinsic values of digital assets and blockchain technology continue to be an important
cornerstone for the long-term growth of the industry.

• The collapse of FTX has proven, once again, that carefully chosen regulated partners are
essential gatekeepers of the entire ecosystem.

• An even global regulatory playing field is a key factor in ensuring that such incidents can be
effectively prevented in the future. Existing financial standards of the financial industry need to
be consistently applied at a global level and room for regulatory arbitrage needs to be minimized
at all costs.

• Digital assets are the financial instruments of tomorrow and should therefore be managed by
regulated financial intermediaries that have the required expertise and ethics required to
safekeep customer assets.
Digital ethics concerns the question of which values we
want to live up to in a digital world, in order to positively
shape society through technological innovations

Manuela Mackert Chief Compliance Officer, Deutsche Telekom AG