The Basel Committee on Banking Supervision (BCBS) has recently raised concerns regarding permissionless blockchains within the banking sector. This type of blockchain, also known as trustless or public blockchain, allows unrestricted access to anyone on the network, posing unique risks to financial institutions.
The BCBS has identified several issues with permissionless blockchains, particularly the lack of control over who can participate in transaction validation. This decentralized governance model presents challenges in addressing security vulnerabilities and conducting effective due diligence on third parties. To mitigate these risks, the committee has recommended implementing Business Continuity Planning (BCP) and technology-based controls.
Operational and Security Risks
Permissionless blockchains are susceptible to technological attacks, legal and compliance risks, money laundering, and terrorism financing. There are also concerns about lapses in processing settlements and the potential for system failures. Banks must be prepared to manage operational, liquidity, and market risks associated with these networks.
While risk mitigation practices for permissionless blockchains are still evolving, financial institutions must invest in testing and developing solutions to address these challenges. Technology-based controls can help manage transaction oversight, privacy, confidentiality, and consumer protection risks. It is crucial for banks to stay ahead of the curve in managing these emerging risks.
As the technology landscape continues to evolve rapidly, new solutions and risks will emerge in the realm of permissionless blockchains. The BCBS emphasizes the need for continuous examination and adaptation of risk management practices to stay resilient in the face of changing threats. While there are no definitive solutions yet, ongoing developments in technology may present opportunities for improved risk management strategies.
Permissionless blockchains present unique challenges for the banking industry, requiring a proactive approach to risk management and regulatory compliance. By leveraging technology and implementing robust controls, financial institutions can navigate the complexities of these networks and ensure the security and integrity of their operations. As the landscape continues to evolve, staying vigilant and adaptable will be key to successfully managing risks associated with permissionless blockchains.
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