The Basel Committee on Banking Supervision (BCBS) has recently brought to light their concerns regarding permissionless blockchains, particularly those that are accessible by the public. In a blog post, the BCBS emphasized that their issue lies not in the public nature of these blockchains, but rather in the fact that they are permissionless. This distinction is crucial as it raises red flags around the lack of regulation and control in these networks.
Permissionless blockchains, also known as trustless or public blockchains, are decentralized networks that operate on a system of physically distributed computers running a shared ledger. One of the defining features of permissionless blockchains is that anyone with internet connectivity can join the network, process transactions, view the blockchain code, operate a node, and participate in network governance. This open accessibility is both a potential strength and weakness of permissionless blockchains.
The BCBS paper highlights several risks associated with permissionless blockchains, including technological vulnerabilities, legal and compliance risks, potential for money laundering and financial terrorism, and lapses in processing settlements. One of the major concerns raised by the BCBS is the distributed governance model of permissionless blockchains, which can make it difficult for banks to conduct due diligence and oversight of third parties. This lack of centralized control poses significant challenges for banking systems.
Business Continuity Planning (BCP) has been identified as a key mitigant for addressing issues related to permissionless blockchains. By establishing rules and protocols to prevent and recover from system failures, such as cyber-attacks or data loss, banks can better manage the risks associated with these blockchains. The BCBS also suggests implementing technology-based controls to oversee transactions and address risks related to privacy, confidentiality, and consumer protection.
The Need for Further Development and Testing
While the BCBS acknowledges the importance of risk mitigation practices for permissionless blockchains, they also recognize that these practices are still in development. It is crucial for these practices to be thoroughly tested to ensure they function as expected under stress. The rapid pace of technological advancements in the blockchain space may give rise to new solutions and risks that will require continued examination and refinement.
The risks associated with permissionless blockchains are significant and require careful consideration and proactive measures to mitigate. The BCBS’s critical analysis sheds light on the challenges posed by these networks and emphasizes the need for ongoing development and testing of risk mitigation practices. By addressing these concerns head-on, financial institutions can better navigate the complexities of permissionless blockchains and safeguard their operations and assets.
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