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- Published: Tuesday 19 April 2022 08:24
Is risk and compliance one of the organizational areas that will benefit from the advent of blockchain? Kevin Spiers looks at blockchain opportunities in third-party risk management and asks if the reality lives up to the hype. ask?
The benefits of using technology to manage third-party risk are not lost for compliance professionals. Given the growing size, complexity, and geographic diversity of companies’ third-party ecosystems, it’s easy to see why. With 60% of the organization now working with his over 1,000 third parties, managing the risks of doing business with third parties is costly and cumbersome.
Big data, AI, robotic process automation, and machine learning are just a few of the technologies compliance teams are using to meet their challenges. But blockchain has another long-awaited new kid that’s causing quite a stir.
Described as a “technical feat” by Bill Gates, blockchain has its origins in cryptocurrency, but its applications extend far beyond that. “Blockchain will be a game-changer in most industries,” Gartner said.
Blockchain: What is it? Where did it come from?
A blockchain is a digital ledger of transactions replicated and distributed across a network of computer systems on the blockchain. Each block of the chain contains a number of transactions, and each time a new transaction is made, a record of that transaction is added to all participants’ ledgers. This makes it difficult or impossible to modify, hack, or cheat the system, and this is one of the aspects that make the system attractive.
Blockchain was originally implemented as a public ledger of transactions made using Bitcoin, a decentralized digital currency. However, since the birth of cryptocurrency, blockchain has made its mark in many other industries and in various ways.
So what can you do to stop your risk and compliance department from benefiting?
Third Party Risk Management: The Benefits of Blockchain
There are good reasons to believe that blockchain can help solve some of the biggest challenges posed by third-party risk management. Key benefits include transparency and immutability of data, real-time access to data, and increased security and better automation of repetitive tasks, ultimately resulting in greater efficiency.
Blockchain gives compliance teams easy access to up-to-date background information about third parties. Imagine how much time you could save on research. Quickly and easily narrow down to the right vendor from the start.
Exhaustive and time-consuming risk assessment questionnaires will be a thing of the past. These documents can be hundreds of pages long, taxing resources and making them difficult for third parties to complete and for organizations to manage and validate. Instead of completing a one-time assessment, blockchain allows organizations to track compliance benchmarks in real time on a distributed ledger. In fact, all the information required for screening individuals and companies could be held on the blockchain. That is, they are created once and used many times.
Data integrity is another big advantage. The fact that data on the blockchain cannot be altered or tampered with by outside parties or the vendor itself means compliance professionals can be trusted. The data, the digital ledger, also serves as a secure, immutable, time-stamped audit trail to prove compliance activity, all stored in one place.
Also worth noting is the ability to execute blockchain smart contracts. This makes our relationships with third parties more transparent and efficient. Traditional contracts rely on humans and are subject to error and interpretation, whereas smart contracts rely on data and only data. The terms and penalties initially agreed upon are clear, accessible to all parties, and the contract is automatically enforced without the need for intermediaries. Also, contract versions are distributed across the network, so they are in no danger of being lost.
Blockchain could be a game changer for smaller vendors looking to do business with larger companies. These companies typically spend thousands of dollars to meet the stringent compliance requirements of their large corporate partners. Cost and effort may force you out of the contract. The good news is that blockchain will help level the playing field and allow smaller players to catch up to the big players. The exhaustive questionnaires we need are left to history and replaced with a robust digital ledger. Every time there is a change or update, such as a new security certification or a new HR policy, the ledger will be updated and visible to everyone on the blockchain.
Blockchain and Third Party Risk: Barriers
Clearly, blockchain has many advantages, but using the nascent technology is not without its problems.
Gartner believes the technology has long-term potential, but its 7 mistakes to avoid in using blockchain highlight that most blockchain products today are too immature for large-scale production. doing.
Data security is considered one of the main benefits of blockchain, but the technology is not without risks. One of the most recognized security problems is the so-called 51% attack. This happens when one or more malicious entities gain control of a majority of nodes on the blockchain. Entities can prevent valid transactions from occurring, as well as undo transactions that have already occurred on the blockchain.
Speed and scalability are also issues. Basically, the more people join the network, the slower it gets. There is also the skill aspect to consider. Compliance does not require every member of his team to have an in-depth understanding of blockchain technology, Robertson said, but project managers and internal developers should be aware of the blockchains the organization has chosen and which chains are being used. It states that you must have expertise. their third party.
For large companies, the biggest challenge is getting buy-in from the business.
For smaller organizations, the biggest barrier to adoption is prioritization. If the average startup spends $83,000 in compliance costs in his first year, how can he prioritize blockchain over other compliance costs?
what’s next?
Perhaps it’s not, or still isn’t, a panacea that many lead us to believe, but the potential benefits of blockchain for third-party risk management are compelling. Nothing is more valuable than a single, authoritative source of up-to-date, real-time access. Not to mention an irreversible record of all third-party compliance activities, we keep all of them. to one place?
Blockchain is unlikely to see mass adoption anytime soon. But if Gartner and other experts believe, blockchain will become mainstream in the compliance industry in about five years. From time to time, you can expect various issues and vulnerabilities to be resolved and addressed. As more companies experiment with this technology, we may gain a better understanding of its true potential.
When it comes to blockchain, the possibilities are undeniable.
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Kevin Spiers, Head of Professional Services at ethiXbase, said:
