Banks Using Permissionless Blockchains for Transactions Face Multiple Risks: BIS

As a seasoned analyst with over two decades of experience in the financial sector, I’ve witnessed the evolution of technology and its impact on the banking industry. The recent working paper by the Bank for International Settlements (BIS) highlights the challenges banks face when transacting on permissionless blockchains, echoing my own concerns about operational stability, security, governance, and compliance risks.

Blockchain-based banks might encounter various hazards, such as money laundering and funding of terrorism, according to a recent report by the Basel Committee on Banking Supervision.

The committee belongs to the Bank for International Settlements (BIS), which serves as the main institution that establishes global standards for financially sound banks.

Additional risks encompass operational and security matters, governance issues, legal concerns, ensuring settlement finality, as well as adhering to compliance regulations, according to the document.

“The use of unidentified third parties in blockchain systems can create certain risks that make it challenging for banks to perform necessary checks and supervision. This necessitates innovative risk management approaches and protective measures. At present, strategies to minimize these risks are still being refined and have yet to be tested under pressure.”

Financial institutions, such as banks, can face instability due to political unrest since fresh regulations might alter validator conduct. This modification could potentially make the blockchains themselves operationally volatile. For example, a ban may limit the amount of computational power or locked native tokens used for securing the blockchain, thereby enhancing the short-term risk of a 51% attack. In such an attack, a concerted effort is made to command more than half of the validation nodes, which could potentially lead to control over the network.

The paper also said technology to address some of the risks, particularly privacy, is being developed, naming zero-knowledge proofs as a potential solution.

By early 2026, banks will need to put into practice a transparency structure regarding their involvement with cryptocurrencies, as it was agreed upon last month by the committee.