- BIS working paper details risks banks face from permissionless blockchains, including security and compliance issues.
- Public blockchains like Ethereum pose operational challenges for banks due to their open participation nature.
- The paper suggests potential mitigations like business continuity plans and transaction controls.
A recent study released by the Bank for International Settlements (BIS) delves into the complexities and potential perils that banks encounter when engaging with permissionless blockchain technologies like Ethereum. The study, conducted by the Basel Committee on Banking Supervision (BCBS), offers insights into how these technologies could impact the banking sector.
Understanding Permissionless Blockchains
Permissionless, or public, blockchains allow any user to participate in their networks without needing approval, contrasting sharply with private blockchains where access is restricted. Prominent examples of public blockchains include Bitcoin and Ethereum, which stand in contrast to private networks like Ripple’s XRP Ledger.
The BIS working paper titled “Novel risks, mitigants and uncertainties with permissionless distributed ledger technologies,” elaborates on the inherent risks associated with these platforms. Issues such as money laundering, terrorism financing, and the challenges of settlement finality are prominent concerns due to the anonymous nature of transactions on these networks.
Exploring Risks and Mitigations
The paper pinpoints several risk factors that banks must manage when transacting on public blockchains. These include operational and security risks, governance complications, and legal and compliance challenges. One significant concern is the difficulty banks face in performing due diligence due to the anonymity of parties involved in blockchain transactions.
To counter these challenges, the BCBS paper outlines several strategies that banks could adopt. It suggests robust business continuity planning which could include maintaining off-chain registries to safeguard asset ownership in the event of disruptions like hard forks or cyber-attacks.
Additionally, the paper proposes the appointment of a controller entity. This entity would not control the blockchain itself but would manage access to specific crypto assets, allowing it to block or reverse fraudulent transactions. This could help banks mitigate legal and compliance risks associated with these technologies.
Emerging Solutions and Future Directions
The working paper also discusses advanced technological solutions like zero-knowledge proofs (ZKP), which could offer privacy-preserving identity verification without compromising transaction security. However, it notes that such technologies are still in early development stages and require further research and refinement.
The Basel Committee members contributing to this work come from diverse international backgrounds, including representatives from Canada, Europe, Japan, and the United States, highlighting the global relevance of the issues discussed.
The paper concludes that while current mitigations for the risks posed by public blockchains are still developing, ongoing technological advancements could soon provide more robust solutions. This ongoing dialogue is crucial as banks continue to explore the integration of blockchain technologies into their operational frameworks.
