The European Banking Authority (EBA), which is one of the main regulatory agencies of the European Union, has recently warned European banks about the risks of using distributed ledger technology (blockchain) on trading and finances.
The stance of the organization is not very positive on this new technology, as the European Banking Authority reports there are major issues that could be potentially dangerous for banks that decide to use this technology: legal and regulatory uncertainties, heavy dependency on third party actors like the internet providers and the people or institutions that could act as nodes on the network.
EBA continues its report stating that fintech companies often do not warn the banks on these risks and the report also states that smart contract systems and blockchain technology can have an enormous impact on trading and customer due diligence procedures that is not yet fully realized by many companies.
Not All Bad But Definitely Not Good Enough
It is clear by reading the reports that, while the EBA is not 100% against the distributed ledger technology and acknowledges some of its advantages like reducing the time of the transactions and the costs, it also has “prudential risks” that cannot be ignored by banks.
The EBA notes on the report that these technologies are still very new, so unforeseen risks arise due to the immaturity of the technology and that legal and regulation uncertainties can make the companies get in trouble with governments around the world by using this technology because many countries do not see the blockchain technology in a very positive light.
Another important concern of the institution is that the distributed ledger technology has problems with identifying anti money laundering and counterfeiting terrorist financing laws. As there is considerably less physical documents to be analyzed, this technology could easily be abused, the report affirms.
According to the organization, non-compliance with these laws could lead to severe fines, material financial impact and reputational consequences for the companies if they use the distributed ledger technology without ensuring certain steps to be compliant with the regulation that is used around the world to prevent these illegal actions.
The documents finishes by presenting two specific problems that could arise from the use of blockchain. One of them, very specific from this technology, is that the nodes that support the blockchain are less secure than they might seen initially and that this could mean that the clients of the company can be exposed to security flaws and people could illegitimately access the blockchain.
Another risk is that even if a company tries to comply with Know Your Customer procedures, the legislation about verifying customer data without the customer being present at the location is potentially risky. According to the document, it is unclear whether it could become a problem that the client is not physically present during the creation of accounts.