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Gaps in banks’ DLT security need filling

Safety in numbers: why DTCC wants the industry to develop standards for blockchain-based projects.

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Distributed-ledger technology offers many potential benefits to financial institutions, including better security. Banks and other entities that are deploying DLT or enterprise-blockchain services are taking security seriously – but gaps remain, particularly when firms rely on their traditional cybersecurity protocols.

The Depository Trust Clearing Corporation has recently released a paper outlining those areas where it sees gaps between traditional security and security required for DLT environments. It is calling for banks and other institutions to speak with it about forming common standards to help address any shortcomings.

DTCC often takes the lead at industry-level technology discussions because it is the world’s largest processor of securities transactions. The paper, Security of DLT Networks, can be downloaded here.

Mind the gaps

Security covers a lot of things, and DTCC says most firms have covered many of them as they’ve developed DLT projects. A few areas, however, have not been covered so well, including incident management, business continuity and transactions.

Transactions in particular involves smart contracts. Smart contracts use programmable code to execute a deal, such as if certain conditions are met then a buy or a sell at a certain price, or to certain counterparties, then the transaction takes place.

Smart contracts are incredibly efficient tools, enabling trusted, legally binding deals involving multiple parties. But because smart contracts are both legal documents and immutable (you can’t claw it back), they represent a new host of security and compliance challenges. The lack of human oversight makes it difficult for firms to monitor what’s going on, and exposes them to a greater risk of exploitation should someone hack the contract. A bank might not have any idea it’s being robbed or manipulated.

There are other aspects to DLT that suggest a security breach could go undetected for longer than in traditional I.T. infrastructure. Distributed infrastructure means a decreased level of oversight; decentralization limits the amount of control a given firm can exercise; and data immutability means that if data is compromised, fixing it may require huge resources.

Consensus versus standards

There’s one other fundamental risks unique to blockchain-based services: consensus.

Consensus mechanisms are key to how blockchain works, and many firms are ready to trust a system in which consensus is made by known participants, or even a central player. But consensus methods can be hacked: because there are so many access points, with multiple players using different keys and nodes, there are many opportunities for someone’s identity to be hijacked.

Blockchain relies on cryptography for protecting and validating identities, among other things, so banks will have to be confident they have both safeguards around their cryptographic private keys, and a plan in case these are lost or stolen. In other words, a business continuity plan that accounts for DLT features such as immutability.

The DTCC has outlined a variety of other DLT-specific risks.

The good news is that firms the DTCC has surveyed appear to be on top of these issues. “It is clear that organizations have thought carefully about how their DLT environments will be impacted” by many possible vulnerabilities, it says.

At the industry level, the broadest challenge is that DLT projects are all unique, with their own protocols and user bases. From a transactional point of view, there is no “interoperability”, that is, compatibility. They are closed loops. So too then are their approaches to security. Even basic things like dictionaries and buzzwords are different, which can lead to confusion.

The DTCC would like to see standards to make DLT projects be able to talk to each other. This is partly to help firms realize the most out of DLT which, after all, is designed to maximize efficiencies as a network. But standards can also help set principles for data governance, identity management, and other areas that are critical to keeping these networks secure.

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Gaps in banks' DLT security need filling