Cardano Proposes Tech-Neutral Guidelines for Third-Party Risk

• Cardano has disclosed in a recent report that the BIS’ principles and standards for managing third-party risks restrict the use of decentralized infrastructures like blockchain. 
• Cardano also highlights that some of the ways to facilitate resilient frameworks include technological neutrality and alternative risk management approaches. 

In a recent report, Cardano (ADA) has proposed detailed measures to manage operational risks around the principles of the Bank for International Settlements (BIS) to ensure operational resilience. According to the report, its principles are crucial since they serve as the basis for national regulation.

The BIS is an international standard-setter for financial regulation. As part of its role, it issues principles and standards for managing third-party risks. Financial institutions are known for regularly outsourcing certain activities to third-party service providers. In this case, BIS influences which third-party infrastructures and services financial institutions could effectively use for outsourcing.

In our latest article, we share suggestions for making @BIS_org’s third-party risk principles less focused on centralized models.
We advocate for tech-neutral regulations to empower decentralized models and unlock blockchain’s potential.
Read more:https://t.co/NYMx9AkW9G— Cardano Foundation (@Cardano_CF) November 26, 2024

Cardano’s Statement on Strengthening Operational Resilience Via Tec-Neutrality

According to Cardano, formulating such standard risks restricts the use of decentralized architectures like the blockchain. The report highlighted that decentralized and open-access digital infrastructures like the public, permissionless blockchain, including Cardano, offset the risks existing in today’s financial market.

An excerpt of the report reads:

Open and diverse financial markets should empower institutions to make architectural choices based on their unique needs, free from regulatory constraints that favor legacy (centralized) models. By allowing institutions to explore a range of approaches and technologies, regulators can foster competitive innovation and support the emergence of the most effective and resilient solutions for evolving operational and risk management needs.

Cardano also discloses that decentralized infrastructure comes with several unique advantages, such as:

• Avoidance of single-entity dependency
• Enhanced resilience
• Transparency and audibility
• Composability and open-source develop
• Lower barriers to entry and cost reduction

According to the report, the current third-party risks principles of BIS rely on what it terms as the identifiable counterparty. This limits financial institutions to centralized services. Meanwhile, decentralized infrastructures are designed to operate without any central controlling entity.

In this case, it remains difficult to apply traditional counterparty-based risk management standards. Even that, financial institutions can manage risks in decentralized systems via a combination of alternative approaches such as:

• Infrastructure design and code base evaluation
• Collective risk assurance
• Direct participation.

According to Cardano, a technical neutral risk management framework should be resorted to enable financial institutions to capitalize on decentralized infrastructures by supporting both operational resilience and innovation in the financial sector.

Recommendations

The BIS third-party risk principles, as stated by Cardano, favor a traditional or centralized services model that requires a single legal counterparty for outsourcing.

This approach limits financial institutions’ ability to leverage decentralized infrastructures, which offer significant advantages in resilience, security, and cost efficiency. A counterparty-centric model inherently restricts technological neutrality and stifles innovation, preventing decentralized solutions from fully contributing to the financial system.

To facilitate a more resilient framework, Cardano recommends:

• Technological neutrality by revising the principles to avoid bias towards centralized models.
• Alternative Risk Management Approaches by allowing decentralized infrastructures to adopt tailored risk mitigation methods.
• Direct participation for risk mitigation by encouraging institutions to engage in decentralized infrastructures by running nodes, participating in governance, and contributing to development.