How blockchain can support third-party risk management

In the contemporary business landscape characterized by rapid technological advancements and escalating digital risks, the traditional paradigms of third-party risk management are under reevaluation. Blockchain technology is one area emerging as a technological disruptor with the potential to strategically propel TPRM into a new era of transparency and trust.

The integration of blockchain technology into TPRM strategies represents a significant evolution in the methods used to manage third-party risks. For example, blockchain supports data integrity and confidentiality by embedding transparency and trust into every transaction -- critical factors when mitigating risks associated with third-party engagements.

Compliance professionals and risk managers must begin to consider blockchain as a technological asset that offers the potential to enhance transparency, trust and efficiency in TPRM. This technology's ability to streamline regulatory compliance, coupled with its ability to integrate with AI for predictive risk management, can help organizations simplify and navigate complex digital risks with confidence and foresight.

Several specific aspects of blockchain technology can be especially impactful in a TPRM and compliance context. These include the following:

• Smart contracts. Self-executing, immutable arrangements with the terms of an agreement between parties can be written into code and automated. With blockchain-based smart contracts, the code and the agreements exist across a distributed, decentralized network. The technical architecture behind such systems enables autonomous operation, executing predefined actions without the need for intermediaries when certain conditions are met.
  
  Smart contracts can also be designed to interface with regulatory compliance databases, automatically updating and adapting to new regulations as they come into effect. This dynamic adaptability is crucial for maintaining compliance in today's fast-changing regulatory landscape, providing executives with peace of mind that their TPRM frameworks remain up to date with minimal manual intervention.
• Cryptographic controls and permissions. Blockchain technology's advanced cryptographic techniques, which ensure the integrity and confidentiality of data transactions, are foundational to establishing resilience against risks that third-party interactions often pose. Organizations can improve data integrity and confidentiality by leveraging encryption methods, cryptographic chaining and permissioned blockchains. Application of these technologies can enable robust data privacy, permissions and access controls to uphold compliance with an array of requirements.
• Integration with external data sources. Blockchain's ability to serve as a secure, immutable ledger is exponentially enhanced when combined with IoT devices and real-time analytics. This introduces the potential for significant advancement in TPRM, shifting the paradigm toward continuous, real-time monitoring and dynamic risk assessment. Organizations can achieve a more nuanced, responsive approach to managing third-party risks by leveraging the decentralized data collection capabilities of blockchain and the predictive analytics of AI together. This ensures they remain agile and resilient in the face of an increasingly volatile and unpredictable global risk environment.
• Automation to fuel value creation. The operational efficiencies gained through blockchain application extend beyond cost savings, translating into significant strategic advantages for organizations. Enhanced speed and reliability in TPRM processes improve business relationships with third parties by nurturing trust and transparency. Moreover, the ability to reduce the potential for human error and mitigate risks more effectively positions organizations to seize opportunities with greater confidence and less exposure to potential losses.

Blockchain technology's intrinsic attributes -- automation, decentralization and immutability -- can streamline TPRM processes, thereby reducing the labor-intensive and costly operations traditionally associated with TPRM. As organizations grapple with a continually intensifying landscape of digital risks, alongside increasing regulatory scrutiny, blockchain offers forward-thinking possibilities. It can alleviate resource constraints by automating key TPRM functions and underpin a data management framework that paves the way for more reliable, efficient and dynamic organizational operations.

While blockchain implementation in TPRM presents challenges, strategic planning and careful consideration of integration, scalability and standardization supports successful adoption. Compliance leaders who recognize the potential for transformative technology to automate and enhance compliance help their organizations sharpen competitive advantage and more effectively safeguard against the myriad risks in the third-party ecosystem.

Jonathan Prewitt is a risk and compliance expert and senior director at FTI Technology. With more than 20 years of experience in risk management, which began with intelligence collection, analysis and reporting for the U.S. Navy and numerous private sector organizations, he supports clients with governance, risk and compliance projects and technology selection.

Jeremy A. Sheridan, managing director at FTI Technology, is an expert in digital currencies, financial crime investigation, blockchain and smart contracts. Sheridan supports all FTI Consulting's cryptocurrency workstreams, with his focus on digital asset investigations and expert testimony for digital asset-based cases. He deploys strategies for validating assets under custody, routinely evaluates the technological and operational soundness of potential targets in diligence and develops investigative strategies to identify the flow of funds and assign attribution to end-user accounts.