Blockchain’s Rising Role in Business: Are Data Protection and Security Being Compromised?

Below, we’ll look at the emerging risks and vulnerabilities in blockchain for audits and how businesses can navigate them to protect sensitive information.

One of the key advantages blockchain offers businesses is its ability to provide immutable records. Yet, this very feature can become a double-edged sword when it comes to privacy and security. Blockchain’s reliance on cryptographic keys to grant access to its decentralised network is a primary area of concern. When these private keys are exposed, lost or stolen, businesses face catastrophic consequences, ranging from data theft to severe financial losses.

These issues are compounded by the increasing sophistication of cyber-attacks, with many hackers specifically targeting key management systems. Phishing attacks, malware and social engineering are now common tactics used to infiltrate blockchain systems. Corporate auditors must be vigilant about these risks when working with blockchain-based financial and transactional data.  

The latter are the cases that tend to make headlines. The news last year that a Hong Kong finance worker was tricked into sending $25m to fraudsters by a deepfake video call, broke the topic out of its niche and into the mainstream. The trouble is, most fraud is much less flashy. Retail Banker International reported in March that ID fraud may account for half of all bank-related fraud by 2025.  

Explaining why this is an issue, Rehaks said, “There are a couple of high-profile cases where someone steals $25m, and that’s nice, but typical cases that we hear about every day range from $5,000 to $50,000. If you lose that much money, it doesn’t make the news, but the real news is how normal this crime is. If you look at the rates where these crimes are investigated and they apprehend the perpetrators, they are essentially zero.

“Typically, this means someone walking away with the money, and not much money left for the victim. There are some exceptional cases where the gangs get prosecuted, but most of the crime is targeting different countries for political reasons, and convincing police to investigate a case that spans multiple countries and makes them do 60 different paperwork requests in five different languages is very hard. They are trying to combat the crimes of the 21st century using the means of the 19th.

Many businesses today are operating in a hybrid environment, combining Web2 technologies with Web3 systems, which introduces complex security challenges. A key example is how traditional cybersecurity measures, such as firewalls and antivirus software, struggle to secure decentralised applications (Dapps) and smart contracts on the blockchain.

As companies move more data onto decentralised platforms, the vulnerabilities previously mitigated in Web2 environments may become more pronounced. One of the most significant concerns is the potential for Dapp hacks, where the decentralisation meant to increase security inadvertently exposes new points of failure. For example, vulnerabilities in smart contracts, which are self-executing contracts with terms of an agreement directly written into code, can be exploited by attackers if not properly audited and tested.

A crucial challenge in this hybrid space is the potential for DNS hijacking and other Web2-based attacks that can impact decentralised systems. Web3 aims to be resistant to censorship and control by centralised entities, but the reality is that much of the infrastructure around blockchain networks still relies on traditional Web2 services like cloud hosting, DNS servers, and API servers. These points can become targets for hackers, undermining the blockchain’s security benefits and creating new risks.  

While blockchain provides an enhanced sense of security, it also introduces significant regulatory challenges, particularly with regard to data privacy laws such as the General Data Protection Regulation (GDPR) in Europe and the Health Insurance Portability and Accountability Act (HIPAA) in the United States. Depending on the industry, these regulations can place strict guidelines on how sensitive personal information should be stored, processed, and shared.

However, blockchain’s design creates a unique tension between privacy requirements and the ability to have all information permanently stored. For example, under GDPR, individuals have the right to request the deletion of their personal data. But once data is recorded on a blockchain, it cannot be easily removed. Moreover, businesses must also address the issue of data leakage, as blockchain’s transparency could potentially expose private business information and/or trade secrets if not properly encrypted.

To navigate these challenges, businesses should adopt new approaches to blockchain data storage and handling. For example, privacy-preserving technologies such as zero-knowledge proofs (ZKPs) enable data verification without revealing the actual content of the data, allowing businesses to prove compliance while maintaining transaction privacy.  

As blockchain technology continues to evolve, so too does the need for comprehensive auditing tools. Audits will no longer simply involve reviewing financial statements or transaction logs, but will also require assessing the security, privacy, and compliance of decentralised systems. Given the increasing complexity of blockchain technology, auditors must stay ahead of emerging threats and vulnerabilities, which will require continuous learning and adaptation.

Organisations will need to invest in advanced blockchain-specific auditing software that can detect and address vulnerabilities unique to blockchain networks. This could involve analysing smart contracts for potential bugs, reviewing cryptographic practices for weaknesses, and ensuring compliance with both privacy regulations and industry standards.

Additionally, the rise of decentralised finance (DeFi) and decentralised autonomous organisations (DAOs) has introduced new auditing requirements. These entities often operate outside traditional regulatory frameworks, creating difficulties for auditors who must assess their risks — which will also likely increase the demand for specialised blockchain auditors in years to come.  

Blockchain technology is revolutionising audits and transaction tracking for businesses, but it also brings new security, privacy and compliance challenges. While its benefits are clear, companies must address emerging vulnerabilities, from key management to regulatory compliance. By taking proactive steps to mitigate these risks, businesses can harness the full potential of blockchain while ensuring data protection and safeguarding trust.