Resilience risks: cryptocurrency and blockchain

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Printed: Friday, 20 Could 2022 12:46

Resilience and danger professionals, significantly these from a non-IT background, must develop their total understanding of rising applied sciences says Luke Hen, FBCI. How else are they going to have the ability to totally admire the magnitude of dangers probably going through their enterprise? On this article Luke offers a backgrounder on cryptocurrency and blockchain within the context of danger.

Many resilience and danger professionals who’re much less in contact with the world of expertise will say, “My IT people will inform me,” however past the ‘techy’ descriptions you’re solely ever getting their particular person and specialist perspective. Are your IT specialists conscious of all of the enterprise processes that depend on that expertise and in several methods? Or maybe even the attainable affect to buyer expertise if the expertise was misplaced? Or, the way it would possibly affect the long-term management technique as to why they’ve the expertise within the first place?

To assist contextualise the danger it’s subsequently very important for resilience and danger professionals, who face off to a spread of senior stakeholders, to have a primary understanding of the expertise that has been applied of their group.

This text goes to try to take a look at the extremely fashionable however extremely complicated world of cryptocurrency and blockchain expertise however from a danger lens.  Nevertheless, earlier than that may be completed, one must attempt to perceive what it’s…

And therein lies the problem. Let’s give it a shot!

Cryptocurrency and non-financial danger

Cryptocurrency is now in every single place you look. It’s within the information; it’s on-line and your family and friends are in all probability discussing it and are probably investing in it.

In a latest article, the European Central Bank reported that the crypto market is now bigger than the sub-prime mortgage market was when price USD 1.3 trillion (earlier than the crash). It’s subsequently no shock that some elements of economic companies are starting to have a look at how they could become involved.

As resilience and danger professionals, we have to have an consciousness of what that is, the place it got here from and the place it’s probably going. The problem, as with something new, is that it’s coated in jargon and thriller!

The place did it come from?

The origins of cryptocurrency, when it was invented, and who it was that made the invention are nonetheless up for some debate. Nevertheless, it’s unique rise in reputation is in little question attributed to the creator of a kind of cryptocurrency known as Bitcoin in 2009, by somebody known as Satoshi Nakamoto (or quite the software program builders utilizing that pseudonym as a result of no person is aware of who this individual is!).

That is already too difficult for me – what’s it? the place do I begin?

With out taking place too deeply down into the rabbit holes of the mechanics behind cryptocurrency and shedding you with phrases like cipher textual content and uneven cryptography (which is an article in its personal proper). The place ought to one discover the fundamentals?

There are infinite streams of books, podcasts, YouTube and tutorial content material on-line that cowl the fundamentals and origins of cryptocurrency proper by to extremely technical cryptographic element.

Nevertheless, a YouTuber by the identify of ‘Crypto Casey’ has kindly and clearly put collectively a 30-minute rationalization for anybody wanting to grasp the fundamentals, utilizing Bitcoin for example. She even goes one additional to make comparisons to the present international monetary system, which for a lot of will assist be a part of the dots.

One other very helpful and simple to grasp article was additionally revealed by Forbes in April 2022 which says:

“Cryptocurrencies are likened to a digital type of an asset akin to gold, the place a perceived retailer of worth is then topic to the legal guidelines of provide and demand.”

Provide and demand of the digital asset (on this case Bitcoin, which is actually a string of numbers and letters that give every Bitcoin a singular id) requires a safe transaction and report of that transaction however with out the involvement of a central social gathering.

How is Bitcoin transferred securely between consumers and sellers?

The clue is within the title – ‘crypto’ foreign money referring to cryptography, which is the examine of safe communications strategies that permit solely the sender and meant recipient of a message to view its contents. That is achieved by way of an alternate of private and non-private encrypted ‘keys’. Keys are mathematically generated codes, developed in such an excessively difficult means that it’s nearly not possible to copy. As soon as the meant consumer receives that key it may be used to decrypt the message.

Finally, that is solely a part of the safe course of behind transferring ‘cash’. The transaction must be recorded on some form of ledger and that is the place Blockchain expertise is available in.

Blockchain

Blockchain is finally a shared database. Every consumer has a dwell copy of the database which could be up to date and distributed dwell, offering the credentials of the consumer making the change could be verified by the vast majority of the opposite customers. Blockchain isn’t checking the content material being up to date however quite the integrity of the consumer who’s doing the updating.  That is completed utilizing what they name a consensus algorithm. That is achieved by way of encryption i.e., checking the suitable mixture of private and non-private encryption keys. 

There’s a nice 30 minute Mckinsey podcast on blockchain which is price a pay attention. Additionally, a barely extra technical 10-minute sound-bite is offered from the Data Scientist podcast as effectively.

One such extensively used blockchain platform that’s described as a digital ledger for crypto foreign money (in the intervening time no less than) is the Ethereum.

You might also have heard of Bitcoin mining. That is primarily these people who carry out the aforementioned authentication to the ledger (i.e., fixing extremely advanced mathematical puzzles utilizing their computational energy) and as such are rewarded with Bitcoin funds.

Why would banks need to become involved in cryptocurrency?

There are a selection of the reason why monetary companies is likely to be cryptocurrency and blockchain. Not least due to its motion and worth available in the market with the likes of Bitcoin.

Additionally, the monetary market is held up by one thing known as monetary market infrastructure. These are central organizations that carry out important capabilities as a part of the monetary ecosystem. So, clearing homes and exchanges, for instance.

One such use case for blockchain could be that it removes these central our bodies for quite a lot of actions which might permit for transactions to be carried out in different methods that are probably extra aggressive. The entry to this knowledge may have main business benefits to avoid a compulsory a part of a commerce’s journey. 

Examples of non-financial dangers to contemplate

Tech, knowledge, and cyber danger – the sooner referenced podcasts discuss how blockchain is actually good at authenticating a consumer and validating a change however not so good on the particular factor being modified. This evolution brings with it new knowledge, {hardware}, software program, and entry necessities and with that comes vulnerability and danger.

Local weather danger – the attainable non-financial dangers are a lot wider than some would possibly think about. As an illustration, blockchain expertise poses some important local weather danger give the sheer quantity of computing energy it takes. There are many articles on the market however this one from the Columbia Climate School talks about how Bitcoin now consumes extra electrical energy in a 12 months than the whole nation of Argentina!

Regulatory danger – there’s undoubtedly a rising regulatory focus on this area. In Europe for instance, the Markets in Crypto-assets (MiCA) Regulation is presently within the proposal stage and regarded as dwell within the coming 12 months or two. This represents the numerous progress regionally on this area. There’s a actually good HSBC 10-minute digi-talk podcast on this actual subject. A ‘Expensive CEO’ letter got here out in March 2022 from the UK Prudential Regulatory Authority (PRA) – Existing or planned exposure to cryptoassets. The letter is a comply with up from a high-level positioning letter in 2018 about managing danger on this area.  It factors to a newly revealed 40-page focus doc from the BoE on Cryptoassets and decentralised finance and extra particularly the BoE’s responses from the discussion paper on new forms of digital money. There’s a lot of content material to digest however a number of preliminary observations:

Higher Focus – a two web page letter in 2018 in comparison with 86 pages of content material in 2022 – the PRA is recognising the fast progress within the area and that banks are starting to make a significant motion.

Higher danger administration – the PRA don’t formally endorse crypto property however the place companies do have exposures, they’ve expectations round danger administration and measurement towards the prevailing prudential framework. Banks are anticipated to take full account of their whole danger and adapt current danger administration methods and danger administration techniques to swimsuit the various danger profiles of crypto actions.

Worldwide coverage nonetheless excellent – e.g., BCBS are but to launch finalised place on crypto property which can alter the PRA place sooner or later.

Operational danger vs resilience – there is just one point out of resilience particularly within the letter with a higher give attention to operational danger as a key space to deal with. “Operational dangers are significantly related to sure crypto-related actions. As an illustration, some actions will expose companies to higher ranges of fraud or cyber dangers.”

Remaining ideas

You don’t should be a expertise wizard or an energetic investor in Bitcoin to understand the attainable danger right here. In essence, you have got a brand new foreign money that circumvents international monetary infrastructure and is quickly turning into one of the crucial helpful markets on the planet. How will this now finally turn out to be a danger to your group?

If you happen to assume that is only a banking-world factor, then assume once more. That is simply the place it begins. Each group might quickly be utilising crypto property or distributed ledger expertise (blockchain). There are such a lot of use-cases for non-financial sectors. If you happen to take heed to the podcasts referenced earlier you’ll hear a number of: from title deeds registers to weak individuals logs. That is actually scalable so take word!

The creator

Luke Hen FBCI CRISC  is a world award-winning continuity and resilience skilled with 12 years’ expertise of danger administration in public sector and monetary companies. He’s presently specializing in expertise. Learn Luke’s weblog at https://resiliencerewire.co.uk