The Risks and Challenges of Permissionless Blockchains in Banking

The Risks and Challenges of Permissionless Blockchains in Banking

The Basel Committee on Banking Supervision (BCBS) has recently expressed its concerns regarding permissionless blockchains in the financial sector. While these blockchains are public and accessible to anyone, the committee is worried about the risks associated with their permissionless nature.

Permissionless blockchains, also known as trustless or public blockchains, are decentralized networks that allow anyone with internet access to participate in financial transactions, view the blockchain code, run a node, and even be involved in network governance. Examples of permissionless blockchains include Bitcoin, Ethereum, and BNB Smart Chains.

Challenges Highlighted by BCBS

The BCBS has outlined several concerns with permissionless blockchains, including distributed governance issues, susceptibility to technological attacks, legal and compliance risks, potential for money laundering, and lapses in processing settlements. The decentralized nature of these blockchains makes it difficult for banks to conduct due diligence and oversight of third parties.

One key recommendation from the BCBS is the implementation of Business Continuity Planning (BCP) to address challenges related to permissionless blockchains. BCP involves establishing protocols and rules to prevent and recover from system failures, such as cyber-attacks or data loss.

Technology-Based Controls for Risk Management

The BCBS suggests the use of technology-based controls to manage risks associated with permissionless blockchains, particularly in monitoring transactions and addressing concerns related to privacy, confidentiality, and consumer protection. These blockchains introduce operational, liquidity, and market risks that require banks to develop new risk management methods.

Development of Risk Mitigation Practices

The BCBS acknowledges that risk mitigation practices for permissionless blockchains are still evolving and need to be thoroughly tested to ensure effectiveness under stress. While technology-based solutions are not yet mature, ongoing advancements may lead to new solutions and risks that require further examination.

Permissionless blockchains present unique challenges for the banking sector due to their decentralized and open nature. Banks must implement robust risk management practices, including Business Continuity Planning and technology-based controls, to mitigate the risks associated with these blockchains. Continued development and testing of risk mitigation practices are essential to effectively manage the complexities of permissionless blockchains in the financial industry.

Technology

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