Magazine article Risk Management

Three Risks to Assess as Your Company Considers Blockchain

Magazine article Risk Management

Three Risks to Assess as Your Company Considers Blockchain

Article excerpt

Distributed ledger technology, often called "blockchain," is rapidly emerging as a potential solution for businesses in many sectors, often with promises of increased security, reduced risk and greater efficiency. With any new technology, however, come new risks. Risk management professionals should understand, assess and plan for the risks that their organization will face resulting from the implementation of blockchain--not only today but in the future. Three risks in particular merit careful consideration:

1. VENDOR RISKS

Many industries and organizations exploring blockchain applications lack the institutional expertise to develop and implement a blockchain-based solution and deploy smart contracts on any scale completely in-house. A robust blockchain-as-a-service market, as well as numerous industry consortia, provide blockchain applications for specific use cases in various industries. The value of these services, however, is only as strong as the vendor providing the service, and in this developing market, one should carefully select vendors and ensure that proper contract provisions are in place to appropriately transfer risk to them.

As many of these vendors are recent startups and therefore may lack the assets to address any loss arising from blockchain, risk managers should verify the insurance coverage for their organization under the vendor's insurance policies as an additional insured. The vendor's coverage limits need to be sufficient to cover losses that the company could sustain arising out of the vendor's provision of blockchain services. Risk managers should also verify their company's additional insured status by requiring a copy of the vendor's insurance policy. Do not settle for a certificate of insurance, which is not binding on the insurance carrier and is not proof of coverage. Hand-in-hand with this shifting of risk to the vendors' insurance policies, contract documentation should note this risk-shifting while incorporating terms designed to mitigate some of the pitfalls of additional insured coverage (such as limitations on scope and available limits found in many standard additional insured endorsements).

2. CREDENTIAL SECURITY

While blockchain offers a variety of new features and promises to improve information security by automating the verification process for transactions, systems are only as secure as the access point. For a public system, anyone who gains access to the private keys that allow a user to "sign" the ledger effectively becomes that user because current systems generally do not provide for multi-factor authentication. …

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