What changes will blockchain technology bring to third-party risk management?

The advantages of technology in managing third-party risk have not left compliance professionals out of the market. When considering the growing size, complexity, and geographic diversity of a company’s third-party ecosystem, it’s easy to see why.

At present, 60% of organizations are cooperating with more than 1,000 third-party companies or organizations, and the risk of third-party risk management and business operations is extremely high and the process is very cumbersome.

Big data, artificial intelligence, process automation bots and machine learning are just some of the technologies that compliance teams are using to meet the challenge. Another highly acclaimed and sensational segment in this space is blockchain.

Bill Gates described blockchain as a “masterpiece of technology”. Blockchain originated in Crypto, but its applications go far beyond that.

According to Gartner, “blockchain will transform most industries within five to ten years.”

Having said that, we cannot help but ask: Is the compliance industry one of the industries that benefit? Will the reality live up to the hype about blockchain when it comes to third-party risk management?

What exactly is blockchain? where does it come from?

A blockchain is a tradable digital ledger where data is replicated and distributed across a blockchain’s network of computer systems.

Each block in a blockchain contains many transactions, and every time a new transaction is made, a record of that transaction is added to each participant’s ledger.

This makes it very difficult to change, hack or cheat the system, which is one of the so attractive aspects of blockchain technology.

Blockchain was originally implemented as a public ledger on which the decentralized digital currency BTC is exchanged.

However, since the birth of Crypto, blockchain has left its mark on many other industries in many different ways.

So, how can compliance departments also benefit from this?

The vision of blockchain

There are good reasons to believe that blockchain can help solve some of the great challenges posed by third-party risk management.

Key benefits include data transparency and immutability, real-time access to data, and enhanced security and automation of repetitive tasks, ultimately resulting in increased efficiency.

With blockchain, compliance teams can easily access up-to-date background information from third parties.

Just imagine how much research time this will save making it faster and easier to shortlist the right suppliers from the start?

Exhaustive and time-consuming risk assessment questionnaires will also be a thing of the past. Because these documents can be hundreds of pages long, they can put a huge strain on resources, making them difficult for third parties to complete and difficult for organizations to manage and verify.

Instead of completing a one-time assessment, blockchain enables organizations to track compliance benchmarks on a decentralized ledger in real-time.

In fact, all the information needed to screen an individual or company can be kept on the blockchain and, once created, can be used multiple times.

Data integrity is another huge advantage that blockchain brings. The data on the blockchain cannot be modified or tampered with by outside parties or the suppliers themselves, which means compliance professionals can fully trust the data on the chain.

Data or digital ledgers can also serve as secure, immutable, time-stamped audit trails for certifying compliance activities, all in one place.

Also of interest is the blockchain’s ability to execute smart contracts, which provides greater transparency and efficiency in third-party relationships. Traditional contracts rely on manual operations, which are prone to some errors.

But smart contracts only rely on immutable data. The terms and penalties agreed upon at the outset are clear and can be used by all parties, and the contracts of smart contracts are automatically executed without the participation of intermediaries. And since the versions of the contracts are distributed across the network, there is no risk of loss.

For smaller suppliers looking to do business with enterprise companies, blockchain could be a game-changer for the industry.

These companies often spend thousands of dollars to meet the stringent compliance requirements of the large enterprises they work with.

Robertson of Polyient, an investment firm focused on the NFT and blockchain gaming industries, said that sometimes the cost and effort meant they needed to be forced to forgo more lucrative contracts.

For this, blockchain can help level the playing field, allowing small players to keep up with the big players. The practice of third parties having to complete an exhaustive questionnaire every year for every business they work with will be a thing of the past, replaced by a robust digital ledger.

Every time data is changed or updated, such as when a new security certification is obtained or a new HR policy is introduced, it is updated in the ledger, making it visible to everyone on the blockchain.

Barriers to Blockchain and Third-Party Risk

Obviously, blockchain has many uses, but that doesn’t mean that using the emerging technology isn’t without problems.

Gartner consulting firm sees the long-term potential of blockchain technology, but there are still some mistakes to avoid when using blockchain, which also highlights that most blockchain products today are too immature for mass production.

While data security is considered one of the main advantages of blockchain, blockchain technology is not without risks.

One of the most well-known security issues is the so-called 51% attack, which occurs when one or more malicious nodes gain majority control of a blockchain node. The node will then have the power to block valid transactions from taking place as well as reverse transactions that have already taken place on the blockchain.

The speed and scalability of blockchain technology is also considered an issue.

Basically, the more people join the network, the slower the network will be. In addition to this, there are skills aspects to consider.

It’s not necessary for every member of the compliance team to have a deep understanding of blockchain technology, but program managers and in-house developers need to have expertise in the blockchain of their organization’s choice, or any chain they use, Robertson said. cognition.

For large enterprises, perhaps the biggest challenge they face is getting corporate support.

For smaller organizations, the biggest barrier to adopting blockchain technology is priority.

If startups spend an average of $83,000 in compliance costs in the first year, how will it prioritize blockchain over other compliance costs?

What’s next?

Maybe blockchain is not the panacea that everyone believes or approves, but the potential benefits of blockchain for third-party risk management are absolutely compelling.

What could be more valuable to suppliers and other third parties than a single source of truth that is both up-to-date and accessible in real-time? Not to mention that immutable records of all third-party compliance activities will all be kept in one place.

We are unlikely to see mass adoption of blockchain anytime soon.

But blockchain will become mainstream in the compliance industry within five years or so, according to forecasts by consulting firm Gartner and some other experts. From now until that day, we can work on solving the various problems and vulnerabilities of blockchain technology.

As more and more businesses start experimenting with blockchain technology, our understanding of the true potential of blockchain will likely increase as well.

Blockchain definitely has undeniable advantages.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-changes-will-blockchain-technology-bring-to-third-party-risk-management/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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