BIS Committee Warns Banks Using Permissionless Blockchains

Jimmy Aki
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The Basel Committee on Banking Supervision, part of the Bank for International Settlements (BIS), has released a new paper highlighting significant risks for banks that engage with permissionless blockchains.

The 25-page document, titled “Novel risks, mitigants and uncertainties with permissionless distributed ledger technologies,” explores various issues, including governance, technology, and compliance risks associated with this emerging technology.

Basel Committee’s Findings on Permissionless Blockchain Risks

The paper, published on August 28 on the BIS website, emphasizes that banks transacting on permissionless blockchains or similar distributed ledger technologies (DLT) face numerous risks related to operations, security, governance, legal compliance, and more.

Key concerns include money laundering and terrorism financing risks, settlement finality issues, and operational instability due to reliance on unknown third parties.

The committee notes: “Certain risks stem from the blockchains’ reliance on unknown third parties, which makes it difficult for banks to conduct due diligence and oversight. […] Current practices for mitigating these risks remain in various stages of development and have not been tested under stress.”

For more context, permissionless blockchains, also known as public blockchains, are networks that do not restrict users from participating in the consensus process to validate transactions and data.

Examples include Bitcoin and Ethereum, which differ from permissioned or private blockchains like Ripple’s XRP Ledger.

To address the challenges associated with public blockchain deployments in banking, the working paper suggests several potential mitigations.

These include business continuity planning, which could involve an off-chain registry for ownership recovery after disruptions, and technology-driven transaction controls.

The paper, which states that its views do not necessarily represent the official stance of the Basel Committee but rather those of the authors, also suggests exploring privacy-preserving identity verification methods, such as zero-knowledge proofs (ZKPs), for identity verification while maintaining transaction-level privacy.

However, the authors caution that these technologies are still in the early stages of development and application.

Political and Regulatory Considerations And Recent BIS Initiatives

The paper also highlights the exposure of banks to political uncertainty.
New legislation could potentially “change validator behavior,” making blockchains operationally unstable.

For instance, a ban could reduce the computing power or staked tokens available to secure the blockchain, temporarily increasing the risk of a 51% attack, in which a coordinated effort is put forward to control greater than 50% of the validation nodes.

Moreover, the working paper mentions that at least ten members are involved in the permissionless DLT workstream, including jurisdictions such as Canada, Europe, France, Italy, Japan, Singapore, Spain, Switzerland, and the United States.

This broad involvement underscores the global interest in understanding and mitigating the risks of permissionless blockchains in the banking sector.

In July, the Basel committee approved a disclosure framework for banks’ crypto exposure, to be implemented by the start of 2026.

This move indicates the growing recognition of the need for standardized reporting and transparency in banks’ interactions with cryptocurrency and blockchain technologies.

Additionally, the BIS recently announced that its multi-central bank CBDC platform, Project mBridge, has reached the Minimum Viable Product (MVP) stage.

This platform, built using distributed ledger technology, aims to enable instant international payments and settlements.

About Jimmy Aki PRO INVESTOR

Based in the UK, Jimmy is an economic researcher with outstanding hands-on and heads-on experience in Macroeconomic finance analysis, forecasting and planning. He has honed his skills having worked cross-continental as a finance analyst, which gives him inter-cultural experience. He currently has a strong passion for regulation and macroeconomic trends as it allows him peek under the global bonnet to see how the world works.