The Dangers of Permissionless Blockchains in the Banking Industry

The use of permissionless blockchains in the banking industry has raised concerns among regulatory bodies, including the Basel Committee on Banking Supervision (BCBS). While public blockchains offer open accessibility, the permissionless nature of these networks poses significant risks for financial institutions.

Concerns Raised by the BCBS

In a recent blog post, the BCBS highlighted several key concerns related to permissionless blockchains. These concerns include challenges with distributed governance, the risk of technological attacks, legal and compliance risks, and the potential for money laundering and financial terrorism.

The BCBS paper identifies operational risk, liquidity risk, and market risk as the primary dangers associated with permissionless blockchains. The decentralized nature of these networks makes it difficult for banks to conduct effective due diligence and oversight of third parties, increasing the risk of loss and vulnerabilities.

To mitigate the risks associated with permissionless blockchains, the BCBS recommends implementing Business Continuity Planning (BCP). BCP helps establish rules and protocols to prevent and recover from system failures, including cyber-attacks and data loss. Technology-based controls can also be used to manage risks related to privacy, confidentiality, and consumer protection.

While technology-based solutions for addressing risks related to permissionless blockchains are still in development, the BCBS acknowledges the need for novel approaches to risk management. As rapid developments in blockchain technology continue to evolve, new solutions and risks may emerge, requiring further examination and testing of risk mitigation practices.

The use of permissionless blockchains in the banking industry presents unique challenges and risks that must be carefully addressed. Regulatory bodies like the BCBS are actively working to develop effective risk mitigation practices to safeguard financial institutions from the potential dangers of these networks. It is crucial for banks to stay vigilant, adopt robust controls, and continuously monitor the evolving landscape of blockchain technology to ensure the security and integrity of their operations.