The Basel Committee on Banking Supervision (BCBS) has recently expressed its concerns regarding permissionless blockchains that are accessible to the public. The BCBS, which sets the global standards for banking regulations, emphasized that the issue does not lie in the public nature of these blockchains, but rather in their permissionless nature. This means that while anyone can access these networks, there are no restrictions in place to guide users towards ethical financial practices.
The Definition and Functionality of Permissionless Blockchains
Permissionless blockchains, also referred to as trustless or public blockchains, are open networks that allow anyone with internet connectivity to join. These networks operate on a system of physically distributed computers that run a shared ledger and use software rules to enable all participants to read, submit, and validate transactions. Examples of permissionless blockchains include Bitcoin, Ethereum, and BNB Smart Chains.
The distributed governance model of permissionless blockchains poses challenges for banking systems. According to the BCBS, the decentralization of governance may lead to difficulties in addressing bugs, security vulnerabilities, and overseeing third parties. Additionally, there are concerns related to technological attacks, legal and compliance risks, and the potential misuse of these networks for illicit activities such as money laundering and financial terrorism.
Proposed Solutions and Mitigation Strategies
One key mitigation strategy recommended by the BCBS is Business Continuity Planning (BCP), which helps establish rules and protocols to prevent and recover from system failures. Technology-based controls can also be implemented to manage risks associated with permissionless blockchains, particularly in areas such as transaction oversight, privacy, confidentiality, and consumer protection. The BCBS acknowledges that managing risks related to permissionless blockchains is still an evolving practice, and new methods may be required to address these challenges effectively.
While technological solutions for managing risks associated with permissionless blockchains are currently under development, the BCBS recognizes the need for further testing to ensure their effectiveness under stress. As these technologies continue to evolve, new solutions and risks may emerge, requiring ongoing examination and assessment. It is essential for financial institutions to stay informed and proactive in managing these emerging risks to safeguard the integrity and security of their operations.
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