Blockchain is a new technology, and not all businesses or enterprises understand how to successfully implement it. If your company is considering moving to the blockchain, it must first conduct proper blockchain risk management.

Changing the business process to use blockchain is not an easy task. To get started, it takes time, effort, and, most importantly, a good investment. It is not an option to fail. If risk management is not done correctly, you risk losing resources and possibly failing the project.

Don’t worry; in this article, we’ll look at proper blockchain risk assessment, which will cover various aspects of a blockchain project.

Framework for Blockchain Enterprise Risk Assessment and Management

Before delving into the concept of blockchain risk assessment, let’s first define blockchain.

Blockchain is a peer-to-peer ledger that is decentralized. It provides numerous advantages, such as efficiency, decentralization, distributed ledger, immutability, and irreversibility. Companies can use blockchain to spend more time innovating and less time managing. Smart contracts on the blockchain enable businesses to automate.

A smart contract is the legal equivalent of a contract. They provide the tools required to automate the network.

The consensus method is also critical to the success of blockchain or distributed ledger technology (DLT). Proof of Work (PoW) is used by Bitcoin, but it is not suitable for enterprise blockchain. There are numerous viable alternatives for enterprises, including Hyperledger Fabric, Quorum, IBM blockchain, and so on.

In short, you can use blockchain to significantly improve your business processes.

Is your company prepared for the risks associated with blockchain?

Blockchain is, without a doubt, one of the most innovative technologies. It has also caused risk practitioners to reconsider how they perceive risks when using technology. It is promising, which is why the risks are more visible than ever.

The priority right now is to reduce risks as much as possible. In some cases, it is possible to completely eliminate the risks associated with blockchain implementation. However, the threats are novel, and there are numerous ways for malicious actors to disrupt the system. Furthermore, risks exist within the network itself.

For example, the enterprise requires a permissioned network to function properly. Enterprises would struggle to set up their blockchain solution without a proper permission management system. Permissions should be layered so that no sensitive information is exposed. After all, it is the data that distinguishes them, and any leak could cause their market grasp to slip.

The good news is that risk practitioners recognize blockchain as a tool for risk migration. It provides features that no other technology has ever provided. Decentralization is a critical component. It establishes the blockchain as a facilitator of trust.

Blockchain types and the risks they pose

We must examine the different types of blockchain in order to better understand blockchain risk assessment and the risks associated with it.

Blockchains can be broadly divided into 2 main types: Permissioned and permissionless blockchains.

It is simple to understand the risks associated with permissionless blockchain technology. Users are not connected to any “know your customer” (KYC) databases. Miners are also required to run the network and verify transactions. The risks associated with miners are also unique, including a 51 percent attack rate. When it comes to permissionless blockchain, there is also a possibility of money laundering, privacy problems, and scalability. Due to all of these risks, it is unsuitable for businesses or financial institutions

On the other hand, permissioned blockchains are immune to the disadvantages that permissionless blockchains bring. The first thing you’ll notice is that it doesn’t require miners to operate it. Additionally, there is no need for cryptocurrency because there are no miners. A permissioned network is perfect for closed blockchain networks because it has some nodes that can validate transactions at its core. However, a different kind of consensus algorithm is needed for the network to function.

Permission-based blockchains are also scalable and private without any issues. Only the administrators have access to information about the network’s members. This is essential for an enterprise blockchain’s long-term success. Additionally, because they have the most knowledge about the network, the security team can respond quickly if there is any suspicious activity.

Risk considerations that you should consider

To provide a clear picture, we will consider risks in broad risk categories. They will specify what must be done. The following are the primary risk considerations:

Standard Risks

Standard risk considerations are risks that are thought to be shared by all blockchain projects. They are about broad risks. Let’s take a look at the blockchain risks below:

Business continuity risk

Business continuity risk is a common blockchain business risk. As a business, you must deal with constantly changing governance and regulations. It is also necessary to provide the business process with all the necessary cyberattack protection. To resolve the issue, the company must have proper continuity plans in place and a quick response time when the need arises.

Strategic risks

Strategic risks are another common blockchain risk. The blockchain is not a panacea. No, not everybody. However, some businesses feel that switching to blockchain will give them a competitive advantage. In actuality, though, there is no need to. Since blockchain is a relatively new technology, it will take some time to develop. Businesses must consider the impact of switching to the blockchain on the entities as well as the fact that it is a new technology. It’s also important to understand the constraints it will impose on the ecosystem of goods and services.

Information security risks

As with any other technology, there are information security risks with blockchain as well. When it comes to distributed databases or cryptography, it offers better internal security. However, when we consider account or wallet security, things may not go as planned. Malicious actors have the ability to take control of the account’s ownership. Additionally, blockchain technology is not completely secure and is attackable.

Reputational risks

When businesses don’t integrate blockchain into their existing systems, they run the risk of losing their reputation. If done incorrectly, it may lead to a bad customer experience and easily damage the company’s reputation.

Regulatory risks

The top concern for businesses looking to adopt new technology has always been regulations. Global corporations find it challenging to manage regulations and operate within them because every government or authority has its own set of rules. Transactions that cross borders are among the main risks. Companies must manage data protection and privacy in this use case. When trading securities, FINRA, a regulatory body, wants all transactions to adhere to state and federal laws. It has an impact on both businesses and the fundamental principles underlying distributed ledger technologies.

IT and operational risks

It can be challenging and dangerous to depart from standard operating procedures and policies. The new business processes must be included in the change as well. Scalability, interface, and speed are other issues that the IT team must address.

Supplier risks

Due to the practical impossibility of implementing an end-to-end blockchain solution, the company also exposes itself to risks related to third-party vendors.

Contractual risk

In terms of contractual risk, the administrator’s and nodes’ service-level agreements (SLAs) are the main focus.

Smart contract roles and their risks

Businesses use blockchain technology because of smart contracts, which are the foundation of every enterprise blockchain. It aids businesses in automating or putting their business logic into action. They can be utilized for network-wide financial and legal agreements. It is necessary for any legitimate method of business process automation.

Once a condition is met, they can process information and act autonomously. They have become the top target for bad actors as a result of this. With their complexity and significance come business risks for the blockchain.

The enterprise must ensure proper testing of smart contracts in order to guarantee that they are planned and executed correctly. The goal is to reduce risk through careful testing.

Institutes must be aware of all the risks involved and take appropriate action. It can result in data loss and other risks if done incorrectly. Let’s look at the smart contract-related blockchain risk assessment.

Business/Regulation Risks 

The parties can encode business, economic, or legal logic using smart contracts. Once completed, they operate without a hitch throughout the network and guarantee that everyone can benefit from it. However, because of legal concerns, smart contracts also need to have exception handling. Risk increases when exceptional handling is required. Because of this, the smart contracts must be thoroughly tested using various networks, legal requirements, and other limitations or execution environments.

Legal Risks

An additional issue with smart contracts is one of legal liability. Because permissioned networks benefit from a closed-decentralized approach, it is impossible to assign blame when something goes wrong. Would that be a manager or the programmers’ engineers? Additionally, conflict among nodes can cause people to leave, starving the network of its essential resources.

Information security risks

If smart contracts are not properly coded, there may be security risks, such as intrusions by internal or external nodes. The answer is to create a proper amendment to fix smart contracts and prevent any node from taking advantage of the bug. In addition, incidents that occur need to be watched closely. A suitable incident management procedure should be put in place to guarantee that bugs are discovered and fixed quickly. Finally, external entities must be carefully considered because they have the potential to activate internal smart contracts by sending inaccurate or deceptive data.

Value transfer risks

Peers can now exchange information without a centralized authority thanks to decentralization. Although there are risks involved, this novel strategy has the potential to alter how businesses function. Let’s look at the peer-to-peer information exchange risk assessments that are associated with the blockchain.

Risk of consensus methods

Any blockchain platform’s core is the risk associated with consensus methods. Any network transactions are completed in accordance with the selected consensus method. A cryptographic protocol is also used by the consensus method. These consensus-building techniques carry a risk of their own. For instance, parties must agree on the system membership in a BFT algorithm. There are issues with other consensus algorithms as well.

Data confidentiality risk

When it comes to the public blockchain, it is simple to understand the network’s transactions. However, results are communicated using the hashed format in permissioned networks. However, the hashed format makes the nature of the transaction and the participants visible, which is not ideal in all use cases.

Liquidity risks

DLT always causes problems with liquidity. Not every cryptocurrency or asset in the network has been in demand constantly. Additionally, there is always the possibility of a dispute, which increases the liquidity risks.

Major management issue

The main problem arises when users fail to protect their private keys, even though DLTs are very secure when it comes to securing stored data. This implies that the theft of private keys is a constant possibility. You, as a company or organization, must instruct users on how to safeguard their private keys.

Conclusion,

This brings us to the conclusion of our analysis of the blockchain risk. Blockchain business risks were thoroughly discussed. Without a doubt, the blockchain risk management plan needs to receive more attention. Businesses must receive proper training on the blockchain for this. It offers an intriguing perspective on the dangers of blockchain.