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Understanding Blockchain Technology Risks for Service Organizations
Service organizations using blockchain face a variety of risks, including unauthorized access, poor cryptographic key management, and smart contract errors. While these risks exist at the technical level, there are higher-level risks to consider, such as lack of third-party protections, privacy breaches, and other governance risks. The technical risks we will discuss in this article can lead to serious security breaches and operational failures. Therefore, it is important to understand and address these risks, especially during System and Organization Controls (SOC) audits, to ensure system integrity and security.
Recognizing and mitigating these vulnerabilities can protect your organization and build trust among stakeholders. In this article, we will explore the significant risks associated with blockchain in service organizations, highlighting the need for effective controls to mitigate these risks.
What is Blockchain Technology?
Blockchain technology is a system for recording transactions, ensuring security and transparency. It requires specialized software to create and manage the digital ledger, which records data across a network of computers. Key components include nodes (individual computers), cryptographic keys for secure access, and consensus mechanisms to validate transactions. The infrastructure involves decentralized networks, meaning no single entity controls the entire system.
Additionally, smart contracts are an integral part of blockchain. These are self-executing contracts with terms written directly into the code, which automatically enforce agreements without the need for intermediaries. This setup ensures data integrity and reduces the risk of fraud, making blockchain a reliable tool in almost all industries. This reliability is due to immutable records; once information is received on a blockchain, it cannot be changed retroactively.
Let’s now take a look at the major risks associated with blockchain.
Access control mechanisms
Access control mechanisms are critical to maintaining the security of blockchain transactions. Failure of these mechanisms can result in unauthorized transactions or exposure of sensitive corporate or personal information. Unauthorized participants who gain inappropriate read or write access to the blockchain can compromise the integrity and confidentiality of transactions.
Access controls can be implemented in various places, such as user authentication systems or within smart contracts. For example, access controls can limit who can initiate a transaction or change the terms of a smart contract. However, access controls can be misconfigured, leading to potential security vulnerabilities. Therefore, strict access controls are needed to prevent unauthorized activity and ensure that only authorized users can access sensitive blockchain data, preserving the overall security and reliability of the system.
Cryptographic key management
are essential to blockchain technology, as they secure transactions and control access to the blockchain. For example, a private key is used to sign transactions, ensuring that only the owner can authorize changes. Effective cryptographic key management is critical to blockchain security. Poor key management practices can lead to unauthorized access, resulting in unauthorized transactions and disclosures.
Improper implementation of cryptographic keys can lead to data loss or corruption. Additionally, storing multi-signature cryptographic keys on the same server increases the risk of simultaneous compromise, increasing the possibility of unauthorized transactions. Key loss can lead to the inability to access digital assets and records, while inadequate inventory and audit logs of cryptographic keys can facilitate unauthorized access and transactions.
Consensus mechanisms and protocols
Consensus mechanisms are protocols or rules that ensure that all nodes in a network agree on the state of the blockchain. This essential function is vulnerable to various risks, such as a “51% attack”, where attackers who control the majority of the network’s computing power can manipulate blockchain dataThe use of validator shares in consensus mechanisms, where a certain amount of cryptocurrency or token belongs to an individual due to their participation in the consensus process, can lead to conflicts of interest, especially if the validator’s share represents a small portion of their net worth.
Additionally, consensus mechanism failures, algorithmic weaknesses, and protocol compromises can cause digital assets to be frozen, assets to be lost, or transactions to be recorded inaccurately. Asset loss can occur due to bugs or vulnerabilities in the consensus algorithm, and inaccurate transaction recording can result from protocol compromises, where an attacker, bug, or error in the code can ultimately undermine the reliability of the blockchain system.
Risk of double spending
Permissionless public blockchains are susceptible to double-spend attacks, where the same digital asset is spent multiple times. This attack requires an attacker to gain control of more than 50% of the network’s mining power to reverse or invalidate transactions. By temporarily taking control of the majority of the network, the attacker can create conflicting transactions, causing significant financial discrepancies and compromising the blockchain’s reliability.
Organizations use strong consensus mechanisms and decentralized technologies to protect themselves from attacks like this. Some additional mitigation strategies used include waiting for confirmations, using established or trusted networks, and using wallets that prevent unconfirmed transactions.
Immutability
While the immutability of blockchain is often seen as a strength, some protocols can allow previously recorded transactions to be modified. Events such as hard forks, where a blockchain splits into two separate chains due to divergent protocol changes or double-spend attacks, can cause transactions to be reversed or modified, compromising the integrity of blockchain records.
Integration and interoperability risks
Integration and interoperability challenges arise when existing technology and systems are not seamlessly integrated with the blockchain. Such failures can degrade the integrity and availability of processing, impacting the overall functionality and efficiency of the blockchain system. Oracles, which inject external data into the blockchain, present unique risks. While error mitigation techniques such as standardizing data formats and APIs are used, software oracles can introduce coding errors and communication latency, leading to incorrect transaction execution. Hardware oracle failures can cause incorrect data reporting, and human oracles can be compromised, introducing biased or incorrect data into the blockchain.
Examples of data that can be fed through oracles include real-time market prices for cryptocurrencies, weather data for insurance smart contracts, IoT sensor readings for supply chain monitoring, and even traditional financial data like stock prices or interest rates. Ensuring the reliability and security of oracles is critical to maintaining the integrity of blockchain-based applications.
Example of a service organization using Blockchain
HealthChain Solutions, a group of healthcare providers, uses Blockchain-as-a-Service (BaaS) to create a private blockchain for managing patient records and processing insurance claims. This blockchain system uses secure identity and access management to validate transactions.
The first block in the HealthChain blockchain is a smart contract that automates the recording and processing of patient information and insurance claims. Oracles in insurance company systems send policy updates to the smart contract, which then calculates patient coverage and payments. All transactions involving medical records and patient claims by HealthChain members are securely recorded on the blockchain, ensuring data accuracy and compliance with healthcare regulations.
Of course, blockchain isn’t limited to the healthcare industry. Whether it’s financial services, law enforcement and security, supply chain management, identity management, software security, SaaS companies, media organizations, messaging apps, or real estate, there are countless ways blockchain technology is being implemented within organizations.
Next steps
Many organizations using blockchain technology benefit from subjected to SOC readiness review to identify gaps that can be addressed prior to an audit. If your company is curious about the completeness of your data integrity and security, Contact a CBIZ expert to learn more about our SOC services.
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