The Basel Committee on Banking Supervision (BCBS) recently published an insightful blog post highlighting their apprehensions regarding permissionless blockchains that are accessible to the public. The BCBS, which establishes international banking standards, has expressed worries not about the public nature of these blockchains, but about their permissionless nature.
Permissionless blockchains, also known as trustless or public blockchains, are open networks that allow anyone to participate without restrictions. These blockchains enable users to engage in financial transactions, review blockchain code, run a node, and partake in network governance. Popular permissionless blockchains like Bitcoin, Ethereum, and BNB Smart Chains exemplify this openness. The Federal Reserve Board defines permissionless blockchains as distributed systems where multiple computers maintain a shared ledger and execute transactions using pre-defined rules.
The BCBS highlights several concerns associated with permissionless blockchains, including governance issues, the risk of cyber-attacks, legal and compliance risks, and potential exploitation for illicit activities such as money laundering and financial terrorism. The decentralized nature of permissionless blockchains poses challenges for banks in terms of due diligence and oversight of third parties participating in the network.
To address the risks posed by permissionless blockchains, the BCBS emphasizes the importance of Business Continuity Planning (BCP) as a crucial mitigant. BCP helps establish protocols to prevent and recover from system failures, including cyber-attacks and data breaches. The committee suggests implementing technology-based controls to monitor transactions and manage risks related to privacy, confidentiality, and consumer protection.
The BCBS acknowledges that current risk mitigation practices for permissionless blockchains are still evolving and require further development and testing. While banks have experience managing operational, liquidity, and market risks, permissionless blockchains introduce new challenges that may necessitate the adoption of novel risk management strategies. The committee emphasizes the importance of staying abreast of technological advancements to address emerging risks effectively.
The BCBS’s insightful blog post sheds light on the complexities and risks associated with permissionless blockchains in the banking sector. By acknowledging the challenges posed by these open networks and advocating for proactive risk mitigation strategies, the committee underscores the importance of adapting to technological advancements to ensure a secure and resilient financial system. As the landscape of blockchain technology continues to evolve, financial institutions must remain vigilant and innovative in managing the risks associated with permissionless blockchains.
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