The Basel Committee on Banking Supervision (BCBS) recently highlighted its concerns regarding permissionless blockchains that are accessible to the public. The committee, responsible for setting global banking standards, expressed worries not about the public nature of these blockchains but rather their permissionless nature. This distinction raises various risks and challenges for financial institutions that use such blockchain networks.
Permissionless blockchains, also known as trustless or public blockchains, are open networks that allow anyone to access them. These networks lack restrictions and guidelines, making them easily accessible for all users. In a permissionless blockchain network, participants can read, submit, and validate transactions without any limitations. Examples of permissionless blockchains include Bitcoin, Ethereum, and BNB Smart Chains.
Risks Associated with Permissionless Blockchains
According to the BCBS, permissionless blockchains pose several risks to banking systems. The decentralized governance model of these blockchains raises concerns about addressing bugs, security vulnerabilities, and asset loss. Additionally, challenges in due diligence and oversight of third parties may arise due to the distributed nature of permissionless blockchains.
Legal and Compliance Risks
Another issue highlighted by the BCBS is the risk of technological attacks, legal and compliance risks, as well as potential exploitation for money laundering and financial terrorism. These risks can lead to lapses in processing settlements and disrupt the smooth operation of financial institutions.
Mitigating Risks with Business Continuity Planning
Business Continuity Planning (BCP) has been identified as a key mitigant to address issues related to permissionless blockchains. Establishing rules and protocols through BCP can help prevent and recover from system failures such as cyber-attacks or data losses. The BCBS recommends implementing technology-based controls to manage risks related to privacy, confidentiality, and consumer protection.
Managing Operational Risks
Permissionless blockchains introduce novel challenges in managing operational risks for banks. While banks have experience in handling operational, liquidity, and market risks, the unique characteristics of permissionless blockchains require new or additional risk management methods. The BCBS acknowledges that current risk mitigation practices for permissionless blockchains are still evolving and need to be tested under stress conditions.
The BCBS recognizes the need for further development and testing of technology-based solutions to address risks associated with permissionless blockchains. As the technology evolves rapidly, new solutions and risks may emerge, requiring continuous examination and adaptation by financial institutions. It is essential for banks to stay abreast of these developments and adjust their risk management strategies accordingly.
The challenges posed by permissionless blockchains in the banking sector require proactive risk management strategies and continuous monitoring of technological advancements. By implementing robust controls and staying informed about emerging risks, financial institutions can navigate the complexities of permissionless blockchains and ensure the security and integrity of their operations.
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