RISK MANAGEMENT AND GOVERNANCE

Model Risk

The risk of adverse outcomes arising from errors in AI or algorithmic models used in financial decision-making—including on-chain agents—stemming from incorrect assumptions, training data bias, or failure to generalize to new market conditions.

EXAMPLE

SR 11-7 model risk management guidance is now being applied by bank supervisors to AI systems making autonomous on-chain trading and collateral management decisions.

Relevant Roles and Functions

On-chain Role
Chief Risk Officer
Function
Crypto Market Exposure
DeFi Exposure
Digital Asset Operational Risk
Liquidity Risk
Protocol Counterparty Risk
Settlement Risk across Blockchain Networks
Smart Contract Risk

Related Terms

Agentic Finance

The use of autonomous AI agents—capable of interpreting intent, evaluating market conditions, and executing multi-step financial operations—within on-chain environments. Agentic systems go beyond rule-based automation by exercising judgment within defined guardrails.

Example

An agentic treasury system at a global bank monitors real-time on-chain liquidity, automatically rebalancing stablecoin positions across chains based on yield and risk parameters set by human operators.

Human-in-the-Loop

A governance model in which a human decision-maker must approve or review AI or automated system outputs before they execute consequential financial actions, preserving accountability while leveraging automation.

Example

Autonomous AI agent initiates crypto trades, swaps, or transfers on blockchains, but the transaction must be manually approved by a human on their Ledger device before the smart contract executes the transfer of value.

Kill Switch

A governance mechanism embedded in a smart contract or AI system that allows authorized operators to pause, halt, or reverse operations in the event of a malfunction, attack, or regulatory directive.

Example

The OCC has signaled that any bank deploying autonomous on-chain agents must demonstrate a tested kill switch capable of halting operations within seconds of a governance trigger.

Counterparty Risk

The risk that the opposing party in a financial transaction defaults before settlement is complete. Atomic on-chain settlement targets the elimination of counterparty risk by making asset exchange simultaneous and conditional.

Example

Blockchain-based bilateral settlement reduces counterparty risk by making payment and delivery inseparable rather than relying on a clearing intermediary.