Service organizations using blockchain face several risks, including unauthorized access, poor management of cryptographic keys and errors in smart contracts. While these risks exist on a technical level, there are higher level risks to consider, such as lack of third-party protections, privacy violations, and other governance risks. The technical risks that we will cover in this article can lead to serious security breaches and operational failures. Therefore, it’s important to understand and address these risks, especially during System and Organization Controls (SOC) audits, to ensure the integrity and security of the system.

Recognizing and mitigating these vulnerabilities can protect your organization and build stakeholder trust. In this article, we will explore the significant risks associated with blockchain in service organizations, emphasizing the necessity 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 directly written into code, automatically enforcing agreements without the need for intermediaries. This setup ensures data integrity and reduces the risk of fraud, making blockchain a reliable tool in almost any industry. This reliability is due to immutable records; once information is received on a blockchain, it cannot be altered retroactively.

Now, let’s look at the biggest risks associated with blockchain.

Access Control Mechanisms

Access control mechanisms are fundamental to maintaining the security of blockchain transactions. Failure of these mechanisms can result in unauthorized transactions or the exposure of sensitive business or personal information. Unauthorized participants gaining inappropriate read or write access to the blockchain can compromise transaction integrity and confidentiality.

Access controls may be implemented at various points, such as user authentication systems or within smart contracts. For example, access controls can restrict who can initiate a transaction or modify a smart contract's terms. However, access controls can be misconfigured, leading to potential security vulnerabilities. Hence, strong access controls are needed to prevent unauthorized activities and ensure that only authorized users can access sensitive blockchain data, preserving the system's overall security and trustworthiness.

Cryptographic Key Management

are fundamental to blockchain technology, as they secure transactions and control access to the blockchain. For example, a private key is used to sign transactions, ensuring only the owner can authorize changes. Effective management of cryptographic keys is crucial for blockchain security. Poor key management practices can lead to unauthorized access, resulting in unauthorized transactions and disclosures.

The incorrect implementation of cryptographic keys can cause data loss or corruption. Moreover, storing multi-signature cryptographic keys on the same server increases the risk of simultaneous compromise, heightening the chances of unauthorized transactions. Key loss can lead to an 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 all nodes in a network agree on the state of the blockchain. This essential function is vulnerable to various risks, such as the "51% attack," where attackers controlling the majority of the network's computing power can manipulate blockchain data. The use of validators’ stakes in consensus mechanisms — where a certain amount of cryptocurrency or tokens belong to an individual due to their participation in the consensus process—can lead to conflicts of interest, especially if the validator's stake represents a small portion of their net worth.

Additionally, consensus mechanism failures, algorithm weaknesses and protocol compromises can result in the freezing of digital assets, loss of assets or inaccurate transaction recording. Loss of assets may occur due to bugs or vulnerabilities in the consensus algorithm, and inaccurate transaction recording could result from protocol compromises, where an attacker, a bug or an error in the code can ultimately undermine the reliability of the blockchain system.

Double-Spend Risks

Permissionless public blockchains are susceptible to double-spend attacks, where the same digital asset is spent multiple times. This attack involves an attacker gaining control of more than 50% of the network’s mining power to reverse or invalidate transactions. By temporarily taking over the majority of the network, the attacker can create conflicting transactions, causing significant financial discrepancies and undermining the blockchain’s reliability.

Organizations utilize strong consensus mechanisms and decentralized technology to protect themselves from attacks like this. Some additional mitigation strategies utilized include waiting for confirmations, using established or trusted networks, and using wallets that prevent unconfirmed transactions.

Immutability

While blockchain immutability is often seen as a strength, certain protocols may allow previously recorded transactions to be altered. Events like hard forks, where a blockchain splits into two separate chains due to diverging protocol changes or double-spend attacks, can result in the reversal or alteration of transactions, compromising the integrity of the 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 processing integrity and availability, affecting the overall functionality and efficiency of the blockchain system. Oracles, which feed external data into the blockchain, pose unique risks. While error-mitigating techniques such as standardization of data formats and APIs are used, software oracles can introduce coding errors and communication latency, leading to incorrect transaction execution. Hardware oracle malfunctions can result in erroneous 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 tracking and even traditional financial data like stock prices or interest rates. Ensuring the reliability and security of oracles is crucial to maintaining the integrity of blockchain-based applications.

Example of a Service Organization Using Blockchain

HealthChain Solutions, a group of healthcare service 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 HealthChain's 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 related to patient records and claims by HealthChain members are securely recorded in the blockchain, ensuring data accuracy and compliance with healthcare regulations.

Of course, blockchain is not limited to the healthcare industry. Whether it be 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 implemented within organizations.

Next Steps

Many organizations utilizing blockchain technology benefit from undergoing a SOC Readiness Review to identify gaps that can be remediated before an audit. If your company is curious about the thoroughness of your data integrity and security, connect with a CBIZ expert to learn more about our SOC services.