The European Banking Authority (EBA) has recently released a comprehensive report on the risks and opportunties that the use of distributed ledger technology (DLT) poses in the financial services sector.
“The use of technologies by financial services firms is not new per se. Financial services firms have always implemented technological solutions to support the provision of services to their customers and to ensure that they comply with regulatory obligations,” the EBA study read.
DLT refers to a database “consensually shared and synchronized across network spread across multiple sites, institutions or geographies,” which supposed makes cyberattacks difficult, an Investopedia entry said.
EBA said that from a “prudential risk point of view, legal and compliance risks appear to be potentially affected, mainly because of current legal and regulatory uncertainties as well as possible difficulties entailed in designing the governance of such a model. The immaturity of the technology could potentially pose other prudential risks in addition to the challenge currently faced regarding cooperation and participation by all the parties involved in the trade finance process,”
EBA further added the use of DLT will “streamline the process and and reduce time and costs with punctual information for the parties of a transaction.”
However, there are potential risks that were identified. For one, EBA said there is a growing concern on data privacy.
“Nevertheless, as privacy of information is a key requirement for numerous services, attention is currently being diverted towards restricted ledgers, where an institution or consortium administers the ledger, with authorised and recognisable members and a limited group of trusted validators,” said the EBA study.
Still, the study stipulated that while data is replicated in different computers, “it could also entail more nodes to protect, each one with a different security level,” which may help prevent even an organized crime group from accessing one’s account, especially where the so-called “smart contracts” are concerned.
EBA believes that DLT will provide the trade and finance sector a more resilient platform.
The banking authority said, “While the engagement with FinTech may come with potential risks, which should be thoroughly and comprehensively assessed and managed, a number of prospective opportunities could materialise in return. This prospect is essentially the key driver of the active interest observed around FinTech.”