Banks that transact on permissionless blockchains face a multitude of risks, including money laundering and terrorism financing, according to a new report by the Basel Committee on Banking Supervision. The committee, part of the Bank for International Settlements (BIS), has identified several key areas of concern.
One major risk stems from the reliance on unknown third parties within permissionless blockchain networks. This makes it difficult for banks to conduct due diligence and oversight, increasing the potential for illicit activities. Additionally, the decentralized nature of these blockchains can make it challenging to establish clear governance structures and ensure compliance with regulatory requirements.
Another significant risk is the potential for operational and security issues. The complexity of blockchain technology can introduce vulnerabilities that could be exploited by malicious actors. Furthermore, the lack of centralized control can make it difficult to respond effectively to incidents and ensure the integrity of transactions.
The report also highlights the legal and regulatory uncertainties surrounding the use of permissionless blockchains in the banking sector. The rapidly evolving landscape of blockchain technology can make it difficult for banks to keep pace with changing regulations and ensure compliance with applicable laws.
Settlement finality is another area of concern. In traditional financial systems, transactions are typically irrevocable once they are settled. However, the decentralized nature of permissionless blockchains can introduce the possibility of reversibility, which can create risks for banks and their customers.
To mitigate these risks, the Basel Committee recommends that banks adopt robust risk management strategies and safeguards. This includes conducting thorough due diligence on third parties, implementing strong security measures, and staying informed about regulatory developments.
The committee also emphasizes the importance of developing new technologies to address specific risks, such as privacy concerns. Zero-knowledge proofs, for example, offer the potential to protect sensitive information while still enabling transactions on blockchain networks.
In light of these risks, the Basel Committee has approved a disclosure framework for banks’ exposure to crypto assets. This framework will require banks to provide information about their crypto-related activities, including the types of crypto assets they hold and the risks they are exposed to.
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The implementation of this disclosure framework will help to improve transparency and accountability in the banking sector, and it will also provide regulators with valuable data to inform their policy decisions.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
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