Management of Blockchain and Internet Financial Risks

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Management of Blockchain and Internet Financial Risks

Risk Management of Blockchain and Internet Financial Risks

Blockchain carries significant transformative potential, but it also poses unique risks that require new risk-mitigation strategies. As such, it’s important for information risk management professionals to understand the risks of this technology so they can design appropriate control environments.

A recent theft of digital-currency assets from an exchange highlights the vulnerability of blockchains. This research confirmed that perceptions of usefulness and ease of use are related to behavioural intention to adopt emergent technologies for risk management.

1. Cryptocurrency

Cryptocurrency is digital money that operates over the internet and is typically decentralized, meaning there is no central authority to control issuance and transactions. The currency is managed by a community of contributors, called nodes, who verify and validate new transaction entries to the blockchain ledger. This system makes it difficult for hackers to tamper with the ledger.

A cryptocurrency can be traded for goods and services or held as an investment asset, similar to stocks or bonds. It can also be used to transfer funds between parties globally, typically at a much lower cost than traditional wire transfers.

Some governments have embraced and regulated the technology, while others have banned it or are in the process of developing regulations. These differences create risks including the potential for a regulatory crackdown that could make it challenging to sell or buy the asset, and the vulnerability of investors and merchants to theft and bad management practices. The rise of cryptocurrencies and DeFi has also put pressure on regulators to develop rules that limit traditional financial risks without stifling innovation.

2. Privacy

Privacy is the right to protect one’s personal life from unwanted scrutiny. Historically, governments, powerful business entities, and criminals have sought private information to malign people, target races or religions, or control or coerce the masses.

In today’s hyper-efficient, highly publicized data-gathering and -dissemination environment, the loss of privacy is provoking a reexamination of fundamental values like free speech and the integrity of judicial process. It has also prompted privacy experts to examine how accountability can be leveraged to drive home the importance of protecting sensitive information even in organizations operating in jurisdictions without data protection laws.

Prosser’s first category of privacy intrusion involves information that is “inappropriate, unwanted, or unwarranted.” Throughout history, this type of privacy invasion has involved information about a person’s behavior, associations, thoughts, possessions, and beliefs. For example, the private lives of protestors for democracy have been violated by invasive surveillance techniques used by oppressive governments. It has also included unauthorized disclosure of private records such as medical treatment, reckless driving citations, or SEC violations. In contrast,The Impact of Blockchain Technology on Supply Chain Financing for Chemical Enterprises , some critics have argued that privacy is not distinctive and that it can be reduced to other rights or interests such as property and bodily security (Posner, 1981)..

3. Fraud

Blockchains are essentially a peer-to-peer framework for transferring assets, including information and currencies. As a result, they present a different set of risks for which institutions must prepare.

As a global network, blockchains are subject to hackers and other cyber threats that may impact their integrity and security. For example, fraudsters may try to intercept large data transfers and extract private information or cryptocurrencies from wallet keys. They may also phish wallet key owners for credentials and send fake hyperlinks to steal money or currency.

In addition, blockchains do not operate during traditional business hours. Hence, the integrity and security of blockchains is affected during the weekends and holidays.

A robust cybersecurity program is essential to manage these risks and mitigate their impact on information risk management programs. However, the structure of blockchains requires a unique approach to ensure a balance of access and security for all participants. This is because blockchain records are generally immutable and require a special programming adjustment to reverse tampering. This will increase the complexity of an audit and require additional resources to restore integrity.

4. Security

Security is the ability of a person, community, nation or system to resist unwanted external coercion. This may be achieved through resilience, redundancy and the application of policies and procedures to control risk. Security also involves the protection of assets, which includes people and property as well as intellectual property.

Blockchain allows information to be spread across several networked computers, making it more difficult for thieves to tamper with the data. This means that a blockchain transaction is more secure than one conducted through a central authority, where the information would be stored in one database and could be altered at will.

As organisations explore using blockchain, they must ensure that their existing information risk management framework adequately caters for these new risks. To ensure that this is the case, risk managers should consider a checklist of critical blockchain-related risks as they plan their use cases and proofs of concept. This will help them to understand what pitfalls they should avoid. It will also assist them in determining whether their enterprise risk management framework is up to the job.

5. Interoperability

Essentially, interoperability allows different information technology systems to communicate with one another seamlessly. This happens when they use common data formats and communication protocols. It’s also when technology from different manufacturers can talk to each other without issues.

Interoperability is a major consideration when it comes to Blockchain, as it’s essential for businesses in all industries to have the ability to exchange information effectively and efficiently. It enables better productivity, efficiency, and control by making sure that all systems can access the necessary data when needed.

In terms of software, it ensures that applications work together and share the same information in real-time – instantly interpreting and presenting the data to the user. This is referred to as ‘syntactic’ interoperability and is achieved by adopting common file formats and data structures, such as XML and SQL.

Legislation requiring tech platforms to allow more interoperability could benefit upstart companies that build tools that connect with these dominant systems. Such examples include the growing crop of shopping tools that work within WhatsApp conversations. These could potentially monetize the information that’s generated on Facebook-owned WhatsApp.