Challenges in Banks Verifying Onchain Records Independently
A recent analysis by Fireblocks has shed light on the challenges banks face in verifying their own onchain records, emphasizing the need for third-party validation to meet regulatory and audit standards. The findings come from Fireblocks’ Financial Grid survey, which surveyed financial institutions on the complexities of building wallet infrastructure for digital asset operations.
Key Challenges in Wallet Infrastructure
The survey revealed that compliance and regulatory requirements are the top concern for 52% of respondents, followed by integration with core banking systems at 47%, security architecture and key management at 44%, and 24/7 operational readiness at 39%. Financial and regulatory reporting ranked last, with only 3% of respondents citing it as a primary challenge. According to Fireblocks, this reflects the sequential nature of banks addressing operational hurdles, with audit readiness becoming a critical issue only during regulatory filings or audits.
Why Banks Cannot Certify Their Own Records
Fireblocks highlights a fundamental issue: core banking systems are not designed to natively interact with blockchains. These systems, built to track interbank money flows, cannot directly read or reconcile onchain activity. As a result, banks must create a system of record that translates blockchain activity into formats compatible with their general ledger systems. However, this self-built system cannot independently verify whether the bank’s records align with blockchain data, as it relies on the same internal processes it aims to validate. This creates a conflict of interest and undermines the reliability of self-attestation.
Additionally, raw blockchain data lacks the SOC (System and Organization Controls) reporting framework required for auditors to rely on it as evidence. Fireblocks argues that independent third-party verification is essential, as it provides an unbiased check on the bank’s records by directly reading blockchain data under certified controls.
Criteria for Third-Party Verified Financial Data
Fireblocks outlines four conditions that must be met for financial data to qualify as third-party verified:
- Direct source: The verifier must read blockchain data directly from nodes it operates, rather than relying on custodians or aggregators.
- Self-reconciliation: The verifier must ensure that the sum of all transactions matches the blockchain’s reported balance for any given date, using an archive node to access historical data.
- Point-in-time answers: Auditors must be able to request specific data, such as holdings by client or wallet at a past date, tied to a specific blockchain block.
- Certified controls: The verifier must operate under SOC 1 Type II standards, ensuring the accuracy and reliability of the data.
Meeting these criteria allows banks to reconcile their records with verified data from blockchains, custodians, trading venues, and other financial rails, ensuring compliance and audit readiness.
Implications for Banking Operations
By leveraging third-party verified data, banks can establish a unified system of record that supports reconciliation, accounting, and client reporting. This system enables daily transaction and balance-level comparisons, with exceptions routed to designated teams for resolution. Additionally, it ensures compliance with jurisdictional data hosting requirements, a critical factor for regulatory adherence.
Fireblocks’ findings underscore the importance of independent verification in the evolving landscape of digital asset operations, where traditional banking systems must adapt to the unique challenges posed by blockchain technology.