Risk Management Challenges

Blockchain technology was created to transfer value and ensure that each counterparty to a transaction fulfills its end of the deal. However, the application of this technology creates a plethora of new concerns:

Will there be a formal original agreement or other document evidencing ownership, or will all information be encoded?
If institutions rely on technological coding, how will the integrity of this information be ensured?
What if the securities or other assets memorialized in the blockchain are forgeries or misrepresentations? Does the blockchain ensure adequate recovery for losses incurred when a party to a transaction makes decisions based on false information? This may be especially top-of-mind for financial institutions that may be entering into transactions with parties using multiple blockchain-based technologies.
How do parties to a transaction ensure that all requirements for validation and potential conflicts are properly encoded in the blockchain? Who bears the risk of an inaccurate or incomplete encoding of validation requirements?

The application of blockchain technology to the transfer of securities and negotiable instruments could potentially increase the risk of fraud. That's because a blockchain transaction may not undergo a comprehensive review looking for fraud, alteration, and forgery. The participating financial institutions may not receive the original documents on which the transaction is based, and thus may not have an opportunity to analyze those documents' authenticity. If the technology evolves such that original documents are no longer provided, that could introduce the potential for information to be lost through hacking or through a technological failure.

Instant Insights /

Blockchain Technology: Balancing Benefits and Evolving Risks

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