An in-depth look at how blockchain fosters transparency and ethical conduct in finance, highlighting real-world use cases and key considerations.
It’s interesting: not too long ago, the idea of a decentralized system that could track and verify transactions without a single, central authority sounded almost like science fiction. Yet here we are. Blockchain has moved from obscure tech circles to become a major focal point in finance. In earlier chapters, we explored issues of trust (Chapter 1), the importance of ethical standards (Chapters 2 and 3), and how new technologies challenge these standards in the global context (Chapters 6 and 7). Now, we’ll take a deep dive into how blockchain can bolster transparency, accountability, and, potentially, ethical innovation within the financial world.
Blockchain is essentially a distributed ledger: instead of storing transactional records in one centralized database, numerous nodes (computers) maintain copies of the ledger. Whenever a transaction occurs, the network reaches agreement (or consensus) on whether to add this record to the chain. And once a transaction is locked in, changing it or removing it becomes nearly impossible. This approach can revolutionize how we handle data integrity and verification.
Below is a simplified flow illustrating how transactions are typically managed on a blockchain network:
graph LR
A["Client <br/> Submits <br/> Transaction"]
B["Transaction <br/> Broadcast <br/> to Nodes"]
C["Nodes <br/> Validate <br/> Transaction"]
D["Block <br/> Is Created"]
E["Block <br/> Appended <br/> to Chain"]
A --> B
B --> C
C --> D
D --> E
• A user initiates a transaction, such as transferring digital tokens or lodging data statements.
• The transaction is broadcast to the network, where nodes see it.
• Nodes run consensus checks (e.g., Proof of Work, Proof of Stake) to confirm the transaction’s validity.
• Transactions are grouped into a “block,” which then gets appended to the existing chain.
• The ledger is updated, and the new block is effectively immutable once confirmed.
Blockchain’s tamper-resistant nature makes it trickier for individuals to manipulate or falsify records. You can’t just go in and “edit” a transaction. This immutability creates a strong foundation of trust. Auditors, compliance officers, and regulators can review an entire chain of transactions to see where money or assets originated, how they traveled through the system, and who authorized which steps.
• Reduced Fraud: Timestamped, immutable records can substantially cut down on potential double-spending or hidden trades.
• Streamlined Auditing: Audits become more efficient when your ledger is always verified by consensus, and no single party can erase a data trail.
• Strengthened Client Data Ownership: Clients—and not just large financial institutions—gain more control over their information, verifying that specific data remains accurate and unaltered over time.
From an ethics standpoint, the transparency gleaned through blockchain technology aligns well with many of the standards we covered in Chapter 2 and Chapter 3. However, the question of how much transparency is “just right” soon arises. After all, if every transaction is visible to everyone, do we risk sacrificing privacy? Herein lies the balance between accountability and the right to confidentiality.
Pseudonymity—where you see addresses but not real-world identities—helps preserve privacy, but regulators worry that it might also facilitate illicit activities. Some solutions are bridging this gap via “private blockchains” or “permissioned blockchains,” where only approved participants can operate nodes and view information. Even so, designers of these systems must tread carefully to meet Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Smart contracts execute automatically once preset conditions (coded into a blockchain protocol) are met. Let’s say a firm has an agreement to distribute dividends if certain quarterly profit thresholds are reached. A smart contract can be coded to automatically release payments to shareholders once the ledger verifies that the profit criterion is satisfied. Ethically, this can reduce disputes and ensure timely compliance. On the other hand, poorly coded terms or insufficient oversight can lead to an entirely different ethical tangle—like if a contract inadvertently triggers repeated payouts.
Traditionally, clearing and settling transactions in capital markets can be complex and slow. Sometimes it takes days (the so-called T+2 or T+3 settlement). With a blockchain-based system, verifying ownership and transferring assets could happen much closer to real-time. That might reduce costs, cut out middlemen, and lower the risk of settlement failure. Ethically, improved speed and trust can benefit all stakeholders, though existing intermediaries (like clearinghouses) face a shift in their roles and must reimagine business models that remain aligned with regulatory guidelines.
Remember the last time you had to sign 18 forms, provide proof of address, and maybe a half-dozen other documents just to open a trading account? Blockchain-based identity solutions can store verified identities on a secure ledger. Once your identity is validated by a trusted authority, all subsequent business partners can rely on this verified status, significantly reducing repetitive checks. Ethically, this means fewer chances for identity fraud and more streamlined compliance. But, of course, we also must guard private data meticulously, ensuring personal information isn’t compromised if any node is hacked.
Let’s say a portfolio manager invests in “green bonds” that fund renewable energy. Using blockchain to record key performance indicators—like the amount of carbon emissions saved, or the volume of renewable electricity produced—could help lenders, investors, and regulators confirm that the money truly goes to sustainable projects. Any tampering or “greenwashing” becomes evident in a cryptographically verified environment, which fosters trust. As discussed in Chapter 8 (Sustainability and Corporate Responsibility), verifying ESG data can be daunting. Adding blockchain into the mix can help, but it also raises new governance questions about who sets data standards and how updates are recorded.
One of the biggest draws of early blockchain applications—like Bitcoin—was this notion of pseudonymity. Transactions are public, but user identities can remain hidden behind alphanumeric addresses. This is a double-edged sword:
Alternative blockchain designs offer varying degrees of confidentiality. Zcash and Monero, for instance, focus on deeper privacy features. Meanwhile, major financial institutions might prefer permissioned ledgers, which let regulators, auditors, or designated nodes view the full chain of transactions.
Around the world, regulators are still navigating how to handle blockchains. Key concerns include AML, KYC, data protection, and investor protection. Ethical finance professionals must always ensure compliance with relevant guidelines in whichever jurisdiction(s) they operate. We saw in Chapter 6 that global regulatory frameworks can differ significantly among countries. With distributed systems, transactions can cross multiple borders in a matter of seconds, complicating compliance.
Decentralization is about distributing the power (and often the decision-making) away from a single entity. In finance, banks traditionally play the central role—holding custody of assets, verifying transactions, and guaranteeing trust. With blockchain, many of these functions could be replaced by network protocols. For instance:
From an ethics and professionalism view, as described in Standard I (Professionalism) and Standard III (Duties to Clients), this shift demands a deep commitment to educating clients about risks. If there’s no mediator, the end-user might bear more responsibility for securely managing their own assets. And, well, not everyone is prepared for that responsibility.
Consider cross-border remittances—a sector historically plagued with high fees and slow transaction times. With blockchain-based solutions, a worker in Country A can send funds to Country B quickly, requiring minimal transaction costs. It might sound magical, but there are pitfalls:
Ethically, it’s essential to ensure the user is well informed about these risks and that the systems set up to facilitate these transfers comply with relevant legal frameworks. While the lowered barriers can genuinely benefit underbanked or unbanked populations, finance professionals must apply strong ethical and regulatory oversight to mitigate misuse.
• Focus on Ethical Implications: Blockchain can be a powerful tool for transparency but can also challenge personal privacy. Candidates should balance these considerations in scenario-based exam questions.
• Understand Real-World Use Cases: Be ready for item sets that involve clearing, settlement, identity verification, or ESG tracking on a blockchain. Articulate the pros and cons from both an efficiency and ethics standpoint.
• Global Regulatory Context: Familiarize yourself with how different jurisdictions regulate or approach blockchain technology. Exam questions often require analyzing how to remain compliant across borders.
• Link to the Code and Standards: In an exam or real-life scenario, always align blockchain applications with the CFA Institute Code of Ethics and Standards of Professional Conduct. Emphasize investor protection, full disclosure, and integrity of capital markets.
• Blockchain: A decentralized, distributed ledger that records transactions in a way that is cryptographically secure and tamper-evident.
• Smart Contract: Self-executing contracts with the terms of the agreement directly written into lines of code on a blockchain.
• Immutable Ledger: A record-keeping system that cannot be altered once data is validated and added to the chain.
• Decentralization: A structure where operations and data storage are distributed across multiple nodes instead of a single central authority.
• Consensus Mechanism: A protocol (e.g., Proof of Work, Proof of Stake) that nodes on a blockchain use to validate transactions and maintain the ledger.
• Tokenization: Converting assets or rights into a digital token that can be traded on a blockchain platform.
• Cryptographic Hash: A mathematical function that transforms input data into a fixed-size output, used to secure blockchain records.
• Pseudonymity: Use of blockchain addresses without direct personal identifiers, offering a layer of privacy.
• Nakamoto, S. (2008). “Bitcoin: A Peer-to-Peer Electronic Cash System.”
• World Economic Forum. (2021). “Blockchain for Financial Services Toolkit.”
• The CFA Institute Research Foundation. (n.d.). “Blockchain and Investment Management.”
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