1. Open Source Operational Risk
Should Public Blockchains Serve as Financial Market Infrastructures?
Angela Walch
Associate Professor
St. Mary’s University School of Law
Research Fellow, UCL Centre for Blockchain Technologies
Blockchain Protocol Analysis & Security Engineering Stanford Cyber Initiative
January 26, 2017

2. Blockchain Protocol Analysis & Security Engineering 2017
Main Questions
How do common practices from “grassroots” open source software generate operational risks for public blockchains?
Are these risks ok for financial market infrastructures?
Blockchain Protocol Analysis & Security Engineering 2017

3. Blockchain Protocol Analysis & Security Engineering 2017
How We’ll Proceed
Background on critical nature of financial market infrastructures and practices global regulators see as important in ensuring their uninterrupted operation.
Discussion of how common practices from grassroots open source software generate operational risks for public blockchains.
Blockchain Protocol Analysis & Security Engineering 2017

4. The “Beating Heart” of Finance
Blockchain Technology
Blockchain Protocol Analysis & Security Engineering 2017

5. Blockchain Protocol Analysis & Security Engineering 2017
Operational Risk
The risk that deficiencies in information systems or internal processes, human errors, management failures, or disruptions from external events will result in the reduction, deterioration, or break-down of services provided by the [financial market infrastructure]…includ[ing] physical threats, such as natural disasters and terrorist attacks, and information security threats, such as cyberattacks. Further, deficiencies in information systems or internal processes include errors or delays in processing, system outages, insufficient capacity, fraud, data loss, and leakage. (Federal Reserve)
Blockchain Protocol Analysis & Security Engineering 2017

6. Principles for Financial Market Infrastructures
Principle 17: Operational risk: An FMI should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to have a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfillment of the FMI’s obligations, including in the event of a wide-scale or major disruption. (PFMI 2012).
Blockchain Protocol Analysis & Security Engineering 2017

7. Blockchain Protocol Analysis & Security Engineering 2017
Principle 2: Governance: An FMI should have governance arrangements that are clear and transparent, promote the safety and efficiency of the FMI, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.
Blockchain Protocol Analysis & Security Engineering 2017

8. Blockchain Protocol Analysis & Security Engineering 2017
Principle 3: Framework for the comprehensive management of risks: An FMI should have a sound risk-management framework for comprehensively managing legal, credit, liquidity, operational, and other risks.
Blockchain Protocol Analysis & Security Engineering 2017

9. Grassroots Open Source Software
How software development is governed.
How software development is funded.
The forking feature.
Blockchain Protocol Analysis & Security Engineering 2017

10. Decentralized, Undefined Governance
No official responsibility/accountability to keep software operational.
No one is the official “decider.”
Unacknowledged Centralization of Power
Unaccountable
Unchecked
Lead to  Paralysis/Delay in fixing code.
Blockchain Protocol Analysis & Security Engineering 2017

11. Problematic Funding Model
Grassroots OSS development generally uncompensated.
Inadequate care of critical OSS projects?
Heartbleed / Core Infrastructure Initiative / Mozilla’s SOS
Bitcoin had luxury of low-stakes youth.
No one is low-stakes now.
Experiments in funding:
Pre-sales, Tokens, ICOs.
Private Companies / Sponsorships
Conflicts of Interest? How stable is funding source long-term? Are consumers protected?
Blockchain Protocol Analysis & Security Engineering 2017

12. Blockchain Protocol Analysis & Security Engineering 2017
Forks
Possible Outcomes:
Peaceful coexistence of old and new
Old dies
New dies
Contentious coexistence of old and new
Consequences significant for Public Blockchains.
Embed and transfer actual value
Serve as authoritative record of events
Blockchain Protocol Analysis & Security Engineering 2017

13. Blockchain Protocol Analysis & Security Engineering 2017
Real World Examples
March 2013 Hard Fork
Different versions incompatible.
2 ledgers.
Human Coordination to fix (requiring ALTRUISM)
Bitcoin Block Size Debate
Political Question  Not just technical.
Paralysis because consequences so extreme.
Ethereum’s July 2016 Hard Fork
Ethereum & Ethereum Classic
Blockchain Protocol Analysis & Security Engineering 2017

14. Blockchain Protocol Analysis & Security Engineering 2017
Lessons Learned
New software releasesfractured networks.
Fixing forks may need human coordination.
Core devs wield a lot of power/influence.
Risk of forks  Paralysis.
Upper-level apps can impact underlying blockchain.
Neither humans nor code are perfect.
Competing Blockchains are possible outcome of fork.
Which is legitimate?
If embed critical records, which is “correct”?
Blockchain Protocol Analysis & Security Engineering 2017

15. Chaining People Together
Magnified software risks for structures atop them.
Community commits to staying together for system to have value – 1 authoritative record.
Each potential hard fork like binding secession referendum.
If don’t go w/ majority  you’ve seceded.
Build your own!
Blockchain Protocol Analysis & Security Engineering 2017

16. Blockchain Protocol Analysis & Security Engineering 2017
Reflections
Undefined governance, problematic funding, and forking chance create operational risks for public blockchains.
As practices are tweaked, risks change.
Very different from how we operate current FMI’s.
Clear governance.
Comprehensive risk management.
Identifying and mitigating operational risks.
Broader Implications -- think about use of grassroots OSS practices in other critical systems?
Blockchain Protocol Analysis & Security Engineering 2017