Indeed, permissionless blockchains, such as Ethereum (ETH), offer unprecedented opportunities for decentralized finance.
Nevertheless, their decentralized and open-to-all nature poses serious challenges to traditional financial institutions.
A new report from the Bank for International Settlements (BIS) highlights the risks faced by banks wishing to venture into this universe.
Multiple and Complex Risks
The BIS report points out that banks that interact with blockchains without permission expose themselves to numerous risks.
The first of these concerns security: cyber-attacks, loss of private keys, and protocol vulnerabilities represent constant threats.
Compliance is another area of concern. Compliance with anti-money laundering and anti-terrorist financing regulations is more complex on decentralized networks.
Governance is another identified risk. The absence of a central decision-making body makes it difficult to resolve conflicts and implement changes.
The purpose of transactions could also have an impact. Unlike traditional banking systems, transactions on a blockchain may be irreversible under certain conditions. This can create legal uncertainty.
Opportunities to Reduce Exposure
The BIS proposes several ways of mitigating these risks. Firstly, it calls for enhanced surveillance. This would require sophisticated monitoring systems to detect suspicious activity.
Secondly, access control should be implemented. Teams should designate an entity to regulate access to digital assets and block fraudulent transactions.
Thirdly, continuity planning should be put in place. It would be important to be able to plan recovery mechanisms in the event of network failure.
Finally, privacy technologies would enable tools such as zero-knowledge proofs to be used to protect personal data.
Permissionless blockchains represent a technological revolution. This could profoundly transform the financial sector. However, banks need to approach this new reality with caution and put strong safeguards in place.
The BIS report highlights the importance of a balanced approach. This will enable us to seize the opportunities offered by these technologies, while controlling the risks.
New challenges lie ahead in the world of banking and cryptocurrencies!
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