The Basel Committee on Banking Supervision (BCBS) has recently expressed concerns regarding permissionless blockchains that are accessible by the public. While the issue is not with the public nature of these blockchains, the permissionless aspect raises significant concerns for financial institutions. In an effort to address these issues, the BCBS has outlined potential risks and proposed solutions to mitigate them.
Permissionless blockchains, also known as trustless or public blockchains, are open networks that allow anyone to participate. These networks have minimal restrictions and are designed to promote transparency and accessibility in financial transactions. Participants in permissionless blockchains can access the network, process transactions, operate a node, and even engage in governance activities.
The BCBS has identified several key risks associated with permissionless blockchains in the banking sector. These risks include challenges related to distributed governance, technological vulnerabilities, legal and compliance issues, and the potential for money laundering and financial terrorism. Furthermore, the decentralized nature of permissionless blockchains can pose difficulties for banking institutions in terms of due diligence and oversight.
Business Continuity Planning (BCP) has been highlighted as a key mitigant for addressing risks associated with permissionless blockchains. By establishing rules and protocols to prevent and recover from system failures, such as cyber-attacks or data loss, financial institutions can better navigate the challenges posed by these blockchains. Technology-based controls can also be implemented to manage transaction oversight and address privacy, confidentiality, and consumer protection risks.
While banks have experience managing operational, liquidity, and market risks, permissionless blockchains present novel challenges that may require new approaches to risk management. The BCBS acknowledges that risk mitigation practices for permissionless blockchains are still evolving and will need to be tested under stress to ensure effectiveness. Technology-based solutions are still in development, and rapid advancements in this space may introduce new risks that require further examination.
The use of permissionless blockchains in the banking sector poses unique risks and challenges that demand careful consideration. While these blockchains offer benefits in terms of transparency and accessibility, their permissionless nature introduces complexities that require innovative risk management strategies. By implementing robust business continuity planning and technology-based controls, financial institutions can navigate the risks associated with permissionless blockchains and ensure the security and stability of their operations.
Leave a Reply