Banks that engage in digital asset transactions face risks that may require new approaches to risk management, according to a new working paper by the Basel Committee on Banking Supervision. The paper explored risks associated with transactions involving permissionless blockchains and similar distributed ledger technologies. Most major cryptocurrencies, such as Bitcoin, use permissionless blockchains.
The technology creates risks for banks related to operations and security, governance, legal, compliance and settlement finality, the report concluded. Certain risks stem from the blockchains’ reliance on unknown third parties, “which makes it difficult for banks to conduct due diligence and oversight.”
Banks have experience managing the risks that permissionless blockchains pose, but the technology presents “some novel challenges that may require new or additional methods to manage risk,” according to the report.
“Practices for mitigating these risks are in various stages of development and have generally not been tested under stress,” the report said. “While technology-based solutions to these risks are not yet mature, rapid developments may generate new solutions (and risks) which may benefit from further examination.”
