The Basel Committee on Banking Supervision has recently expressed concerns regarding permissionless blockchains, specifically in the context of financial institutions. While these blockchains are accessible by the public, the main issue arises from their permissionless nature, which presents various risks and challenges that need to be addressed.
Permissionless blockchains are also known as trustless or public blockchains, where anyone can participate in the network without restrictions. These networks allow users to process financial transactions, view blockchain code, operate nodes, and even engage in network governance. Examples of permissionless blockchains include Bitcoin, Ethereum, and BNB Smart Chains.
Risks Identified by BCBS
The BCBS paper points out several risks associated with permissionless blockchains in banking. These risks include challenges in governance, potential security vulnerabilities, difficulties in conducting due diligence, technological attacks, legal and compliance risks, money laundering, financial terrorism, and lapses in processing settlements.
One key mitigant suggested by the BCBS is Business Continuity Planning (BCP), which helps establish rules and protocols to prevent and recover from system failures. Technology-based controls can also be implemented to oversee transactions and address risks related to privacy, confidentiality, and consumer protection in permissionless blockchains.
Managing Operational, Liquidity, and Market Risks
The BCBS acknowledges that permissionless blockchains introduce operational, liquidity, and market risks for financial institutions. While banks have experience managing these types of risks, addressing the novel challenges posed by permissionless blockchains may require new or additional risk management methods.
The paper highlights that risk mitigation practices for permissionless blockchains are still in development and will need to be tested to ensure their effectiveness under stress. As technology-based solutions continue to evolve, new risks and solutions may emerge, necessitating ongoing examination and adaptation.
Overall, the risks associated with permissionless blockchains in banking are significant and require careful consideration and proactive risk management strategies. By addressing governance challenges, implementing technology-based controls, and developing robust risk mitigation practices, financial institutions can navigate the complexities of permissionless blockchains and safeguard their operations and assets.
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