Basel Committee Explores Risk Mitigation Strategies for Banks Using Permissionless Blockchains
The Basel Committee on Banking Supervision, part of the Bank for International Settlements (BIS), has released a working paper examining the risks associated with banks transacting on permissionless blockchains and potential mitigation strategies. The paper, published on August 28, 2024, highlights several key concerns and explores emerging solutions in this rapidly evolving sector of financial technology.
According to the report, banks engaging with permissionless blockchains face a range of risks, including operational, security, governance, legal, and compliance issues. One of the primary challenges stems from the reliance on unknown third parties, which complicates due diligence and oversight processes for banks.
The paper specifically addresses concerns related to money laundering and terrorism financing (ML/FT), as well as settlement finality. The pseudonymous nature of many blockchain transactions poses significant hurdles for banks in complying with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations.
Another notable risk highlighted in the report is the potential for political and legislative changes to impact blockchain stability. Such changes could alter validator behavior or affect the computing power required to secure the network, potentially increasing vulnerability to attacks like the 51% attack.
While acknowledging these risks, the BIS paper also explores potential mitigation strategies. It notes that technology-based solutions, particularly in the realm of privacy, are being developed. Zero-knowledge proofs are mentioned as one promising approach to addressing privacy concerns while maintaining necessary transparency.
The report emphasizes that many of these risk mitigation practices are still in various stages of development and have not been tested under stress conditions. This lack of real-world stress testing presents an additional layer of uncertainty for banks considering engagement with permissionless blockchains.
The Basel Committee’s paper serves as a comprehensive overview of the current state of permissionless blockchain risks in banking. It underscores the need for new risk management strategies and safeguards tailored to the unique challenges posed by these decentralized systems.
As the financial industry continues to explore the potential of blockchain technology, this report provides valuable insights for banks, regulators, and technology developers. It highlights the importance of ongoing research and development in creating robust solutions that can address the identified risks while harnessing the benefits of permissionless blockchain technology in the banking sector.
