Since the beginning of the blockchain hype, banks and financial institutions have emphasized the importance of permissioned blockchains or private networks in overseeing cross-border transactions and the settlement of assets. Federal Reserve governor Lael Brainard disagrees, stating the security of blockchain networks should always be the priority.
Earlier in September, multi-billion dollar research firm Accenture spurred a series of controversial discussions upon the introduction of “editable blockchains,” with which blockchain operators such as banks and financial establishments can manipulate and control data on the network.
A significant number of experts criticized Accenture’s research and technology as it contradicted the concept of the blockchain technology, which was created to store sensitive data and information in an irrefutable ledger.
Essentially, blockchain without decentralization or an open-source community is simply described as a federated database, in which operators and network administrators can make any changes and alterations without any boundaries. The consequence of this flexibility, however, is security.
When a blockchain network is anchored to a centralized network, its data and information become vulnerable to security breaches and hacking attacks that target central IT infrastructures and systems of an organization. For instance, if the US government integrated a blockchain network to store confidential government data, hackers that successfully break into the government IT system would be able to gain control over the private blockchain network.
To cover this vulnerability of private blockchains, Fed Governor Lael Brainard states that every blockchain network and platform must employ necessary security measures and protocols to ensure that it is protected from external attacks and breaches.
“We recognize the potential of distributed ledger technology, or blockchain, to transform the way financial market participants transfer, store, and maintain ownership,” explained Brainard, at the Institute of International Finance annual meeting.
Considering the blockchain technology’s ability to store sensitive and personal data, Brainard further emphasized that banks and financial institutions must be more cautious in utilizing the technology when dealing with financial data specifically in the fields of trade finance and banking.
“Brainard said common ledgers could simplify the complicated cross-border record keeping involved in trade finance, lower counterparty risk in securities transactions, or even automatically enforce bond payment or other contracts,” stated Howard Schneider of Reuters, who exclusively covered the event.
In theory, Brainard is encouraging banks and financial institutions to implement decentralized and irrefutable blockchains that are immune to hacking attacks. She recognizes that private and centralized networks will inevitably become susceptible to security issues in the future and the prevention of such issues is more vital than dealing with serious consequences in the future.
For instance, the Ethereum network has been the target of high severity DoS attacks that have stalled the network and delayed various transactions and settlement of contracts for weeks. Despite the Ethereum network’s supportive open-source community and its talented team of engineers, the attacks are still significantly affecting the network’s performance.
If the same magnitude of attacks were to be launched on private blockchain-based platforms and cross-border financial systems of banks, its closed and limited pool of developers will struggle to deal with the attacks and come up with proper fixes to deal with them.