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Navigating Decentralized Finance: The Essentials of DeFi Risk Assessment

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Imagine embarking on a financial journey where the conventional intermediaries have vanished, replaced by blockchain protocols and smart contracts. This realm is known as Decentralized Finance, or DeFi, an innovative frontier reshaping the monetary landscape by offering alternative financial solutions. As thrilling as this ecosystem is with its rapid growth and potential for high returns, it is riddled with complexities and risks that call for a thorough understanding and strategic assessment.

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Decentralized Finance empowers individuals by eliminating traditional gatekeepers, yet it introduces a unique set of challenges, especially in terms of risk. From smart contract vulnerabilities to asset volatility and evolving regulatory frameworks, navigating the DeFi landscape requires a keen eye for potential pitfalls. Understanding the underlying technologies and identifying the associated risks critically impacts both seasoned investors and new participants alike.

This article will serve as your essential guide to effectively navigating DeFi, delving into the intricacies of risk assessment within this dynamic domain. We will explore the fundamental aspects of DeFi, dissect the potential security threats, and discuss advanced technologies for managing risks. Whether you’re an enthusiast or investor eager to venture into the world of Decentralized Finance, mastering these essentials is imperative for a successful and secure experience.

Understanding Decentralized Finance (DeFi)

Decentralized Finance, or DeFi, is changing how we think about financial services. By using public blockchains, DeFi provides financial tools without needing banks or brokers. This makes it easier for people to participate in financial markets. Instead of relying on central authorities, DeFi uses smart contracts. These are automated programs on the blockchain that execute tasks when specific conditions are met. They provide transparency and efficiency. Nonetheless, DeFi has its risks. Without regulation, users must be careful about potential fraud or scams. Each DeFi project brings its own set of challenges, requiring specific risk assessments different from traditional finance. Understanding these elements is key to navigating this innovative space safely and effectively.

Definition and Key Concepts

DeFi offers a new way to access financial services. By using public blockchains, it eliminates the need for lengthy processes and middlemen. With just an internet connection, anyone can engage in DeFi activities. One crucial feature of DeFi is the control it gives users over their assets. Instead of storing assets with a bank, users keep them under their own control through private keys. This full custody model ensures autonomy but also places the responsibility for security on the user. The interconnected nature of DeFi allows various platforms and services to work together, enhancing the network’s potential. Despite its promise, DeFi comes with risks from smart contracts. Flaws in these contracts can lead to potential losses, so users need to understand them well.

The Growth and Popularity of DeFi

DeFi has seen remarkable growth in a short time. In just two years, the value locked in DeFi increased from less than $1 billion to over $100 billion. This rapid expansion shows how appealing DeFi is to many people. It mimics traditional financial functions like lending and borrowing but does so without central control. This appeals to both individual and institutional investors. With the DeFi market projected to reach $800 billion, more people and organizations are taking notice. Many participants in centralized finance are exploring DeFi for trading and exchanging crypto-assets. The unique value DeFi offers continues to attract a growing number of users and investors, signifying its importance in the financial landscape.

Identifying Risks in DeFi

Decentralized finance, or DeFi, offers an exciting alternative to traditional finance. However, it also presents unique potential risks that need careful evaluation. Risk assessments in DeFi help users understand and manage the diverse threats that come with handling Digital Assets. Smart contracts, decentralized exchanges, and crypto assets all contribute to the landscape of DeFi, but with them come risks like smart contract failures and liquidity issues. As the recent U.S. Department of the Treasury’s 2023 report highlights, DeFi involves aspects that require keen oversight from regulators to address concerns like illicit finance risks. Understanding these risks is crucial for anyone involved in this evolving financial field.

Smart Contract Vulnerabilities

Smart contracts are the backbone of many DeFi operations, yet they carry significant risks. Bugs in the code can lead to the loss of funds for users. Even a minor error can cause serious vulnerabilities. When exploited, these weaknesses allow malicious actors to steal or destroy the value managed in these contracts. High-profile smart contract hacks have underscored the urgency for solid risk management. DeFi users are safer with protocols that undergo thorough audits. These audits help ensure that the code is free from vulnerabilities before being deployed. As such, smart contract security is a key focus for any DeFi participant.

Asset Tokenomics and Price Volatility

Tokenomics defines how tokens are distributed, circulated, and valued within DeFi protocols. These aspects influence user behavior, and, in turn, token valuation. DeFi can suffer from severe price volatility due to distortions in supply and locked-up tokens. Flash loan attacks exploit high leverage to manipulate token prices, adding to instability. When a significant portion of tokens is staked, the circulating supply changes, which can inflate or deflate token value. The design and incentives behind tokenomics need careful planning to prevent economic instability. This highlights the importance of understanding and addressing tokenomics in DeFi.

Pool Design and Management Risks

Managing risks related to pool design and strategies is crucial in DeFi. Pools with complex yield strategies and reliance on off-chain computations introduce additional risks. As strategies grow more complex, so does the likelihood of errors or exploits. Without effective slashing mechanisms, pools leave users vulnerable to losses. DeFi risk assessments stress the importance of robust frameworks in mitigating these threats. Additionally, pools often depend on bridges to operate across blockchains. These bridges are susceptible to hacks due to the significant value they handle. Therefore, rigorous risk management is necessary to safeguard assets within pool operations.

Developing a Risk Assessment Framework

In the realm of decentralized finance, risk assessment frameworks must adapt to unique challenges. Traditional systems like Enterprise Risk Management (ERM) and ISO 31000 fall short in addressing the decentralized and technology-driven features of DeFi. A DeFi risk framework should prioritize identifying, analyzing, and monitoring specific risks, particularly those associated with smart contracts and governance issues. The U.S. Department of Treasury has highlighted these challenges in their Illicit Finance Risk Assessment, offering foundational insights for shaping future regulations. Building a robust framework aims to foster trust, ensure accountability, and encourage cooperation among stakeholders. This approach is vital for establishing DeFi as a secure alternative to traditional finance.

General Risk Assessment Strategies

Risk assessment in DeFi involves understanding and managing potential risks tied to its specific protocols and activities. Due diligence and using effective tools are necessary for mitigating these risks. This process demands strong corporate governance and sound internal controls to manage smart contract, liquidity, and platform risks. Blockchain technology offers innovative strategies to exceed traditional risk management methods. By pairing risk management with product development, DeFi protocols can make informed decisions, balancing risk and reward. This adaptability is essential to address unique risks within the DeFi landscape, ensuring safety and efficiency in financial operations.

Blockchain and Protocol-Specific Evaluations

Evaluating the blockchain and protocols used in DeFi is essential for ensuring security and robustness. This includes assessing potential vulnerabilities and making necessary improvements. Formal verification processes help pinpoint weaknesses, enabling protocols to address issues proactively. Blockchain’s inherent properties like traceability and immutability aid in mitigating financial risks. Effective governance, combined with rigorous processes and controls, is crucial for managing these risks. By continuously reviewing and improving protocol security, organizations can safeguard their operations and users against evolving threats. This commitment to safety builds trust and advances the reliability of DeFi systems.

Adapting to Technological Changes and Innovations

Keeping pace with technological changes in DeFi demands adaptation from industries like accounting. By exploring blockchain-based solutions, firms can enhance the efficiency of their processes with real-time auditing and automated reconciliation. Educating teams about blockchain and smart contracts is vital, as is understanding the evolving regulatory landscape. Forming partnerships with technology and cybersecurity firms can improve capabilities, offering comprehensive services in DeFi. New risk management tools, such as decentralized insurance and smart contract audits, show a commitment to embracing innovation. Balancing technological advances with regulatory compliance ensures that DeFi systems remain secure and reliable.

Security Threats in DeFi

Decentralized Finance, or DeFi, is changing how we think about finance. It uses blockchain technology to move beyond traditional systems. However, with innovation comes risk. DeFi platforms are susceptible to several security threats. The absence of a centralized authority means there’s no one to intervene when problems arise, such as smart contract bugs or liquidity risks. The U.S. Treasury has even noted the sector’s vulnerability to illicit finance risks, including criminal activities like ransomware and scams. DeFi’s technological complexity also makes it a target for hackers, who can exploit weaknesses in these systems.

Unsecured Flash Loan Price Manipulations

Flash loans are a unique but risky feature of the DeFi ecosystem. They allow users to borrow large amounts of crypto without collateral, provided they repay immediately. However, this opens the door to scams. Malicious actors can exploit these loans to manipulate token prices temporarily. By borrowing and swapping large amounts of tokens in one liquidity pool, they can alter valuations. This directly harms liquidity providers, who face losses as a result. Moreover, these manipulations highlight the need for effective detection and protection mechanisms within DeFi platforms.

Reentrancy Attacks and Exploits

Reentrancy attacks are a well-known risk in smart contracts. In these attacks, hackers exploit a vulnerability by repeatedly calling a withdrawal function. This means they can drain funds faster than the system can verify balances. As a result, the smart contract may not recognize the lost funds until it’s too late. This type of exploit can leave DeFi users vulnerable to significant financial losses. Fixing these vulnerabilities is crucial for the long-term security of DeFi protocols. Preventing such attacks will ensure greater trust and stability in the decentralized financial markets.

Potential Phishing and Cyber Attacks

Cyber threats are not new to the financial world, but they are evolving in the DeFi space. Hackers are constantly looking for weaknesses in blockchain technology, especially within user interfaces. They can carry out phishing attacks by tricking users or operators into revealing sensitive information. If successful, attackers gain unauthorized access to crypto assets. This can lead to control of entire protocols. Such risks demand vigilant security practices. Ensuring user protection against cybercrime is an ongoing challenge that DeFi platforms must address. By improving security measures, DeFi can better safeguard against potential cyber threats.

Regulatory Concerns and Compliance

Decentralized finance (DeFi) has grown rapidly, but it faces major regulatory concerns. The US Treasury has issued a risk assessment that highlights the sector’s exposure to illicit activities. With platforms allowing financial services without traditional banks, there is a growing need for regulatory oversight. DeFi’s fast-paced innovations often outstrip existing compliance measures, creating gaps that malicious actors exploit. Therefore, introducing standardized protocols is becoming crucial. The Treasury’s assessment serves as a first step to understanding these potential risks and initiating dialogue on regulation. It aims to align DeFi with anti-money laundering norms and sanctions, addressing vulnerabilities tied to global illicit activities.

Understanding Current DeFi Regulations

DeFi platforms face increasing pressure to comply with evolving regulations. They use compliance tools like wallet attribution and transaction monitoring to meet anti-money laundering (AML) and Know Your Customer (KYC) standards. These tools aim to combat illicit finance risks, but they make operations more complex and costly. Regulatory scrutiny requires platforms to balance user access with legal compliance. As regulations stiffen, platforms may alienate smaller users who find these measures difficult or unnecessary. To stay competitive and compliant, DeFi platforms must adapt continuously, often updating internal processes. Real-time transaction visibility on public blockchains helps regulatory bodies enforce compliance, offering a tool against financial crimes.

Impact of Regulations on DeFi Projects

Regulations impact DeFi projects in various ways, enhancing both potential risks and opportunities. The absence of legal certainty in DeFi can worsen market risks, as expected regulatory changes may affect project participation. The US Treasury’s risk assessment pointed out DeFi’s ties to money laundering and compliance issues. As a result, anti-money laundering practices and sanctions are gaining importance in DeFi. Increased scrutiny has emerged due to DeFi’s links to criminal activities, including those related to North Korean cybercriminals. This scrutiny helps contextualize and define DeFi’s regulatory risks, starting important discussions before official rules are set. Understanding these dynamics is vital for project sustainability.

Balancing Innovation and Regulatory Compliance

Balancing the need for innovation with regulatory demands is a challenge for DeFi platforms. Platforms like Chainalysis and Elliptic offer advanced features for risk management, but they often come at high costs. These costs can limit accessibility, particularly for smaller users. In contrast, free platforms like Etherscan provide basic tools that might not meet all compliance needs. As DeFi evolves, innovative solutions are needed to integrate compliance affordably and effectively. A gap exists in aligning platform functionalities with user needs, inviting DeFi players to innovate continuously. The lack of standardized protocols demands tailored models for decentralized ecosystems, highlighting a key area for ongoing development in combining innovation with regulatory adherence.

Utilizing Advanced Technologies for Risk Management

The decentralized finance (DeFi) ecosystem is transforming how we see finance. Advanced technologies ensure DeFi’s integrity by monitoring activities and ensuring compliance. Blockchain forensics and intelligence tools are now crucial in tracing and tracking funds within the DeFi landscape, proving vital in addressing theft and illicit finance risks. Public blockchains offer transparency, assisting in criminal activity investigations despite the challenge of pseudonymity. Potential solutions, like digital identity systems and zero-knowledge proofs, work toward compliance while maintaining user privacy. Collaboration between government and industry is key to grasping evolving regulatory landscapes and implementing these advanced tools effectively.

The Role of AI and Machine Learning

AI and machine learning (AI/ML) are making strides in the DeFi world, particularly in risk assessments. These technologies can spot high-risk transactions by examining vast data sets. They use both supervised and unsupervised learning to flag anomalies in real time. This evolution marks a shift toward more sophisticated DeFi risk management systems. AI-powered systems detect unusual transaction patterns that could point to fraud or market manipulation, enhancing the safety of financial transactions. By integrating these technologies, DeFi platforms continue to bolster their security measures against potential risks and malicious actors.

Real-Time Monitoring and Predictive Analytics

Real-time monitoring is crucial in DeFi for timely risk detection. It allows platforms to spot attacks or unusual behaviors promptly, enabling immediate intervention. Automated tools, with machine learning, can identify user behaviors that may signal prepared attacks. Platforms like Chainalysis and Nansen set the benchmark with their predictive analytics, offering real-time alerts that significantly aid in risk management. Users, especially institutional investors, highly value these features for their impact on trust and satisfaction. Real-time capabilities not only ensure better threat detection but also elevate the overall credibility of DeFi platforms in the financial markets.

Enhancing Security Using Technological Tools

DeFi’s growth demands robust security measures to counter potential risks. Tools like blockchain intelligence, such as TRM, evolve to support compliance while maintaining privacy. The use of digital identities and zero-knowledge proofs is crucial in improving user privacy. The U.S. Treasury emphasizes a private-public collaboration to enhance cyber resilience in DeFi. Blockchain’s immutable nature offers a strong foundation for tracking and preventing illicit finance activities. Technological tools like blockchain forensics are vital for ensuring the compliance and integrity of the DeFi ecosystem, providing a level of security that surpasses traditional finance systems.

Strategies for Robust DeFi Risk Management

Decentralized finance, or DeFi, shows great promise, but it comes with risks. Effective DeFi risk management uses due diligence, risk assessment tools, insurance coverage, and careful portfolio risk management. These strategies help handle unique risks such as smart contract and liquidity risks. As DeFi grows, it also faces scrutiny for involvement in illicit finance. This calls for strong risk management strategies to keep the system safe. Smart contract risks are unique to DeFi. They involve threats from potential bugs or exploits within the code. Managing these risks is crucial. Additionally, DeFi must address systemic risk, the threat of an entire market collapse. Lastly, DeFi platforms face platform risk, related to user interfaces and security. These require comprehensive approaches to maintain platform integrity and user trust.

Due Diligence and Thorough Research

Conducting due diligence is essential for effective DeFi risk management. It helps users understand a DeFi protocol before engaging with it. By performing due diligence, users can review smart contracts and governance structures. This contributes to informed decision-making. Assessing the team behind a DeFi protocol, as well as community support, is crucial. Due diligence also gives insights into potential risks and returns. This practice can aid in evaluating the safety and viability of investments. Furthermore, due diligence often includes evaluating the identity and background of smart contract operators. This can be facilitated through Know Your Customer (KYC) services. In doing so, users can better evaluate the potential risks associated with the protocol.

Integrating Insurance Safeguards

DeFi insurance provides a vital layer of protection by using new forms of coverage. Decentralized insurance protocols, like Nexus Mutual and Etherisc, protect against risks like smart contract failures. These systems use pooled user funds for quicker reimbursements, reducing reliance on traditional insurers. This method makes DeFi safer and more transparent. Users can enhance their risk management by purchasing coverage through decentralized insurance protocols. These systems use blockchain technology to maintain transparency. This reassurance boosts user confidence, much like traditional financial systems. Thus, decentralized insurance boosts DeFi’s appeal and safety.

Strategic Partnership and Collaboration

Strategic partnerships strengthen DeFi by pairing with traditional finance entities. DeFi protocols have teamed up with insurance firms to cover risks like smart contract hacks. These collaborations bring traditional risk management expertise into DeFi’s transparent and autonomous world. Partnerships with financial derivatives providers offer hedging solutions. However, they may incur high transaction fees and counterparty risks. Engaging with industry groups and legal experts also helps. It enhances trust and effective compliance risk management within DeFi protocols. Additionally, traditional financial institutions and DeFi are seeking alliances. These collaborations help integrate and manage substantial assets within decentralized finance ecosystems, enriching the DeFi landscape.

Opportunities and Challenges in DeFi

Decentralized finance, or DeFi, is reshaping how financial services operate. By using smart contracts, these platforms enable transactions like lending, borrowing, and trading without needing banks. With these services come unique risks, such as smart contract failures and illicit finance risks. DeFi platforms offer new opportunities but also demand careful risk assessments. Companies might need advisory services from accounting firms as they adopt these technologies. AI and machine learning hold promise for boosting risk management, despite challenges such as cost and data limitations. The US Department of the Treasury’s involvement shows the importance of understanding these risks before setting regulations.

Expanding Global Market Access

DeFi opens doors to global markets by letting companies and investors engage without middlemen. This reduces costs and boosts efficiency. With access to global financial markets, businesses and investors can enjoy economic growth. From lending to trading, DeFi offers users a chance to join in global financial activities without traditional banks. The growth is significant, with DeFi assets skyrocketing to over $100 billion, from under $1 billion in just two years. This surge has widened market access and attracted over a million investors, showcasing its vast potential in global finance.

Seeking Expertise: MicroSolved, Inc.

For those navigating the complex world of decentralized finance, expert guidance can be invaluable. MicroSolved, Inc. stands out as a leading provider of cybersecurity and risk assessment services with a strong reputation for effectively addressing the unique challenges inherent in DeFi ecosystems.

Why Choose MicroSolved, Inc.?

  1. Industry Expertise: With extensive experience in cybersecurity and risk management, MicroSolved, Inc. brings a wealth of knowledge that is crucial for identifying and mitigating potential risks in DeFi platforms.
  2. Tailored Solutions: The company offers customized risk assessment services that cater to the specific needs of DeFi projects. This ensures a comprehensive approach to understanding and managing risks related to smart contracts, platform vulnerabilities, and regulatory compliance.
  3. Advanced Tools and Techniques: Leveraging cutting-edge technology, including AI and machine learning, MicroSolved, Inc. is equipped to detect subtle vulnerabilities and provide actionable insights that empower DeFi platforms to enhance their security postures.
  4. Consultative Approach: Understanding that DeFi is an evolving landscape, MicroSolved, Inc. adopts a consultative approach, working closely with clients to not just identify risks, but to also develop strategic plans for long-term platform stability and growth.

How to Get in Touch

Organizations and individuals interested in bolstering their DeFi risk management strategies can reach out to MicroSolved, Inc. for support and consultation. By collaborating with their team of experts, DeFi participants can enhance their understanding of potential threats and implement robust measures to safeguard their operations.

To learn more or to schedule a consultation, visit MicroSolved, Inc.’s website or contact their advisors directly at +1.614.351.1237 or info@microsolved.com. With their assistance, navigating the DeFi space becomes more secure and informed, paving the way for innovation and expansion.

 

 

 

* AI tools were used as a research assistant for this content.

 

High-Level FAQ on Attack Surface Mapping

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Q:What is attack surface mapping?

A: Attack surface mapping is a technique used to identify and assess potential attack vectors on a system or network. It involves identifying and analyzing the various components, data flows, and security controls of a system to identify potential vulnerabilities.

Q:What are the benefits of attack surface mapping?

A:Attack surface mapping helps organizations to better understand their security posture, identify weaknesses, and deploy appropriate controls. It can also help reduce risk by providing visibility into the system’s attack surface, allowing organizations to better prepare for potential threats.

Q:What are the components involved in attack surface mapping?

A: Attack surface mapping involves examining the various components of a system or network, including hardware, software, infrastructure, data flows, and security controls. It also includes evaluating the system’s current security posture, identifying potential attack vectors, and deploying appropriate controls.

Q:What techniques are used in attack surface mapping?

A: Attack surface mapping typically involves using visual representations such as mind-maps, heat maps, and photos to illustrate the various components and data flows of a system. In addition, it may involve using video demonstrations to show how potential vulnerabilities can be exploited.

3 Steps To Increase Cyber Security At Your Dealership

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Car dealerships and automotive groups are juicy targets for cybercriminals with their wealth of identity and financial information. Cyber security in many dealerships is lax, and many don’t even have full time IT teams, with even fewer having cybersecurity risk management skills in house. While this is changing, for the better, as dealerships become more data-centric and more automated, many are moving to become more proactive against cybersecurity threats. 

In addition to organized criminals seeking to capture and sell personal information,  global threats stemming from phishing, malware, ransomware and social engineering also plague dealerships. Phishing and ransomware are among the leading causes of financial losses tied to cybersecurity in the dealership space. Even as the federal regulators refine their focus on dealerships as financial institutions, more and more attackers have shifted some of their attention in the automotive sales direction.

Additionally, a short walk through social media doesn’t require much effort to identify dealerships as a common target for consumer anger, frustration and threats. Some of the anger shown toward car dealerships has proven to turn into physical security concerns, while it is almost assured that some of the industry’s network breaches and data breaches can also be tied back to this form of “hacktivism”. In fact, spend some time on Twitter or chat rooms, and you can find conversations and a variety of information of hacking dealership wireless networks and WiFi cameras. These types of cybersecurity incidents are proving to be more and more popular. 

With all of this cybersecurity attention to dealerships, are there any quick wins to be had? We asked our MSI team and the folks we work with at the SecureDrive Alliance that very question. Here’s the best 3 tips they could put forth:

1) Perform a yearly cybersecurity risk assessment – this should be a comprehensive view of your network architecture, security posture, defenses, detection tools, incident response plans and disaster recovery/business continuity plan capabilities. It should include a complete inventory of all PII and threats that your dealership faces. Usually this is combined with penetration testing and vulnerability assessment of your information systems to measure network security and computer security, as well as address issues with applications and social engineering. 

2) Ensure that all customer wireless networks and physical security systems are logically and physically segmented from operations networks – all networks should be hardened in accordance with information security best practices and separated from the networks used for normal operations, especially finance and other PII related processes. Network traffic from the customer wireless networks should only be allowed to traverse the firewall to the Internet, and may even have its own Internet connection such as a cable modem or the like. Cameras and physical security systems should be hardened against attacks and all common credentials and default passwords should be changed. Software updates for all systems should be applied on a regular basis.

3) Train your staff to recognize phishing, eliminate password re-use among systems and applications and reportcybersecurity attacks to the proper team members – your staff is your single best means of detecting cyber threats. The more you train them to identify and resist dangerous behaviors, the stronger your cybersecurity maturity will be. Training staff members to recognize, handle, report and resist cyber risks is one of the strongest value propositions in information security today. The more your team members know about your dealership’s security protocols, service providers and threats, the more effective they can be at protecting the company and themselves. Buidling a training resource center, and setting up a single point of contact for reporting issues, along with sending out email blasts about the latest threats are all great ways to keep your team on top of the issues.

There you have it, three quick and easy wins to help your dealership do the due diligence of keeping things cyber secure. These three basic steps will go a long way to protecting the business, meeting the requirements of your regulatory authority and reduce the chances of substantial harm from cyber attacks. As always, remaining vigilant and attentive can turn the tide. 

If you need any assistance with cybersecurity, risk management, penetration testing or training, MicroSolved and the SecureDrive Alliance are here to help. No matter if you’re a small business or a large auto group, our risk management and information security processes based on the cybersecurity framework from the National Institute of Standards and Technology (NIST) will get you on the road to effective data security. Simply contact MSI via this web form, or the SecureDrive Alliance via our site, and we will be happy to have a no cost, no hassle discussion to see how we can assist you.  

All About FINRA Risk Assessments

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FINRA (Financial Industry Regulatory Authority) requires an enterprise risk assessment once per year for all member firms. This risk assessment should be completed using the NIST Cyber-Security Framework, if appropriate for the size of the organization. At MSI, we fully embrace the NIST framework and use it routinely for our approach to information security and risk management.

Who Performs the FINRA Risk Assessment?

The FINRA requirements for risk assessment include that it be completed by independent third-party assessors, if possible, or otherwise by internal information security experts (if qualified and available). MSI’s approach is to work WITH our client’s internal team members, including them in the process, and leveraging their deep knowledge of the firm’s operations, while still maintaining our independence. In our experience, this provides the best return on investment for the risk assessment, and allows granular analysis without draining critical internal client resources.

What Analysis Does the FINRA Risk Assessment Require?

Each FINRA risk assessment should include an inventory of all critical data, PII and other sensitive information. Then, each asset should be reviewed for its impact on the business and identification of relevant controls, risks, mitigations and residual risks should occur. This process requires deeper knowledge of cyber security than most firms are comfortable with, and the experience and attention to detail of the assessor can make or break the value of the assessment.

Is the FINRA Risk Assessment Affordable?

Since the workload of a risk assessment varies greatly based on the size and complexity of the organization being assessed, smaller firms are naturally more affordable than larger firms. Risk assessments are affordable for nearly every firm today, and the work plans can be easily customized to fit even the tightest of budgets. In addition, when working with experienced and knowledgable assessors, the cost can be even lower and the results even more valuable. At MSI, our assessment team has more than 15 years of experience, across a wide variety of size, type and operational styles of client firms. You won’t find any “on the job training” here, our experts are among the best and most recognized in the world. We are excellent at what we do, and we can help your firm get the best ROI on a risk assessment in the industry.

How Do I Get Started on a FINRA Risk Assessment from MSI?

Simply drop us a line via this web form, or give us a call at (614) 351-1237 to arrange for a free, no hassle call with our team. We’ll explain how our process works, gather some basic information and provide you with a proposal. We’d love the chance to talk with you, and be of service to your firm. At MSI, we build long-term client relationships and we truly want to partner to help your firm be more successful, safer and manage the risks of the online world more easily. Give us a call today! 

A Quick Expert Conversation About Gap Assessment

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Gap Assessment Interview with John Davis

What follows is a quick interview session with John Davis, who leads the risk assessment/policy/process team at MicroSolved. We completed the interview in January of 2020, and below are the relevant parts of our conversation.

Brent Huston: “Thanks for joining me today, John. Let’s start with what a gap assessment is in terms of HIPAA or other regulatory guidance.”

John Davis: “Thanks for the chance to talk about gap assessment. I have run into several HIPAA concerns such as hospitals and health systems who do HIPAA gap analysis / gap assessment in lieu of HIPAA risk assessment. Admittedly, gap assessment is the bulk of risk assessment, however, a gap assessment does not go to the point of assigning a risk rating to the gaps found. It also doesn’t go to the extent of addressing other risks to PHI that aren’t covered in HIPAA/HITECH guidance.”

BH: “So, in some ways, the gap assessment is more of an exploratory exercise – certainly providing guidance on existing gaps, but faster and more affordable than a full risk assessment? Like the 80/20 approach to a risk assessment?”

John Davis: “I suppose so, yes. The price is likely less than a full blown risk assessment, given that there is less analysis and reporting work for the assessment team. It’s also a bit faster of an engagement, since the deep details of performing risk analysis aren’t a part of it.”

BH: “Should folks interested in a gap assessment consider adding any technical components to the work plan? Does that combination ever occur?”

JD: “I can envision a gap assessment that also includes vulnerability assessment of their networks / applications. Don’t get me wrong, I think there is immense value in this approach. I think that to be more effective, you can always add a vulnerability assessment to gauge how well the policies and processes they have in place are working in the context of the day-to-day real-world operations.”

BH: “Can you tie this back up with what a full risk assessment contains, in addition to the gap assessment portion of the work plan?”

JD: “Sure! Real risk assessment includes controls and vulnerability analysis as regular parts of the engagement. But more than that, a complete risk assessment also examines threats and possibilities of occurrence. So, in addition to the statement of the gaps and a roadmap for improvement, you also get a much more significant and accurate view of the data you need to prioritize and scope many of the changes and control improvements needed. In my mind, it also gets you a much greater view of potential issues and threats against PHI than what may be directly referenced in the guidance.” 

BH: “Thanks for clarifying that, John. As always, we appreciate your expert insights and experience.”

JD: “Anytime, always happy to help.”

If you’d like to learn more about a gap assessment, vulnerability assessment or a full blown risk assessment against HIPAA, HITECH or any other regulatory guidance or framework, please just give us a call at (614) 351-1237 or you can click here to contact us via a webform. We look forward to hearing from you. Get in touch today! 

3 Reasons Your Supply Chain Security Program Stinks

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  1. Let’s face it, Supply Chain Security and Vendor Risk Management is just plain hard. There are a lot of moving pieces – companies, contacts, agreements, SLAs, metrics, reporting, etc. Suppliers also change frequently, since they have their own mergers/acquisitions, get replaced due to price changes or quality issues, new suppliers are added to support new product lines and old vendors go away as their product lines become obsolete. Among all of that, is cyber-security. MSI has a better and faster way forward – an automated way to reduce the churn – a way to get a concise, easy to use and manageable view of the security of your vendors’ security posture. This month, we will show you what we have been doing in secret for some of the largest companies in the world… 
  2. Vendors with good security postures often look the same as vendors with dangerous security postures, on paper at least. You know the drill – review the contracts, maybe they send you an audit or scan report (often aged), maybe they do a questionnaire (if you’re lucky). You get all of this – after you chase them down and hound them for it. You hope they were honest. You hope the data is valid. You hope they are diligent. You hope they stay in the same security posture or improve over time, and not the opposite. You hope for a lot. You just don’t often KNOW, and what most companies do know about their vendors is often quite old in Internet terms, and can be far afield from where their security posture is at the moment. MSI can help here too. This month, we will make our passive assessment tool available to the public for the first time. Leveraging it, you will be able to rapidly, efficiently and definitively get a historic and current view of the security posture of your vendors, without their permission or knowledge, with as frequent updates as you desire. You’ll be able to get the definitive audit of their posture, from the eyes of an attacker, in a variety of formats – including direct data feeds back into your GRC tools. Yes, that’s right – you can easily differentiate between good and bad security AND put an end to data entry and keyboarding sessions. We will show you how… 
  3. Supply chain security via manual processes just won’t scale. That’s why we have created a set of automated tools and services to help organizations do ongoing assessments of their entire supply chain. You can even sort your supply chain vendors by criticality or impact, and assign more or less frequent testing to those groups. You can get written reports, suitable for auditors – or as we wrote above, data feeds back to your GRC tools directly. We can test tens of vendors or thousands of vendors – whatever you need to gain trust and assurance over your supply chain vendors. The point is, we built workflows, methodologies, services and tools that scale to the largest companies on the planet. This month, we will show you how to solve your supply chain security problems.
 
If you would like a private, sneak peak preview briefing of our research and the work we have done on this issue, please get in touch with your account executive or drop us a line via info (at) microsolved /dot/ com, call us at (614) 351-1237 or click the request a quote button at the top of our website – http://microsolved.com. We’ll be happy to sit down and walk through it with you. 
 
If you prefer to learn more throughout March – stay tuned to https://stateofsecurity.com for more to come. Thanks for reading! 

Comparing 2 Models for DMZ Implementations

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I recently had a discussion with another technician about the security of the two most popular DMZ implementation models. That is: 
  • The “3 Legged Model” or “single firewall” – where the DMZ segment(s) are connected via a dedicated interface (or interfaces) and a single firewall implements traffic control rules between all of the network segments (the firewall could be a traditional firewall simply enforcing interface to interface rules or a “next generation” firewall implementing virtualized “zones” or other logical object groupings)
  • The “Layered Model” or “dual firewall”- where the DMZ segment(s) are connected between two sets of firewalls, like a sandwich
 
Both approaches are clearly illustrated above, and explained in detail in the linked wikipedia article, so I won’t repeat that here. 
 
I fully believe that the “3 Legged Model” is a lower risk implementation than the layered model. This outright contradicts what the wikipedia article above states: 
 
     “The most secure approach, according to Stuart Jacobs, [1]is to use two firewalls to create a DMZ.” — wikipedia article above.
 
While the Layered model looks compelling at first blush, and seems to apply the concept of “more firewalls would need to be compromised to lead to internal network access”; I believe that, in fact, it reduces the overall security posture in the real world, and increases risk. Here’s why I feel that way. Two real-world issues that often make things that look great at first blush or that “just work” in the lab environment, have significant disadvantages in the real world are control complexity and entropy. Before we dig too deeply into those issues though, let’s talk about how the two models are similar. (Note that we are assuming that the firewalls themselves are equally hardened and monitored – IE, they have adequate and equal security postures both as an independent system and as a control set, in aggregate.)
 
Reviewing the Similarities
 
In both of the models, traffic from the DMZ segment(s) pass through the firewall(s) and traffic controls are applied. Both result in filtered access to the internal trusted network via an often complex set of rules. Since in both cases, traffic is appropriately filtered, authorization, logging and alerting can adequately occur in both models. 
 
Establishing Differences
 
Now the differences. In the 3 Legged model, the controls are contained in one place (assuming a high availability/failover pair counts as a single set of  synced controls), enforced in one place, managed and monitored in one place. The rule set does not have cascading dependencies on other implementations of firewalls, and if the rule set is well designed and implemented, analysis at a holistic level is less complex.
 
In the Layered model, the controls are contained across two separate instances, each with different goals, roles and enforcement requirements. However, the controls and rule sets are interdependent. The traffic must be controlled through a holistic approach spread across the devices, and failures at either firewall to adequately control traffic or adequately design the rule sets could cause cascading unintended results. The complexity of managing these rules across devices, with different rule sets, capabilities, goals and roles is significantly larger than in a single control instance. Many studies have shown that increased control complexity results in larger amounts of human error, which in turn contributes to higher levels of risk. 
 
Control Complexity Matters
 
Misconfigurations, human errors and outright mistakes are involved in a significant number (~95%) of compromises. How impactful are human mistakes on outright breaches? Well according to the 2015 Verizon DBIR:
 
“As with years past, errors made by internal staff, especially system administrators who were the prime actors in over 60% of incidents, represent a significant volume of breaches and records ,even with our strict definition of what an “error” is.” —DBIR
 
Specifically, misconfiguration of devices were involved in the cause of breaches directly in 3.6% of the breaches studied in the DBIR. That percentage may seem small, but the data set of 79,790 incidents resulting in 2,122 breaches that means a staggering number of 76 breaches of data were the result of misconfigurations.
 
This is exactly why control complexity matters. Since control complexity correlates with misconfiguration and human error directly, when complexity rises, so does risk – conversely, when controls are simplified, complexity falls and risk of misconfiguration and human error is reduced.
 
Not to beat on the wikipedia article and Stuart Jacob’s assertions, but further compounding the complexity of his suggestion is multiple types of firewalls, managed by multiple vendors. Talk about adding complexity, take an interdependent set of rules and spread them across devices, with differing roles and goals and you get complexity. Now make each part of the set a different device type with it’s own features, nuances, rule language, configuration mechanism and managed service vendor, and try to manage both of those vendors in sync to create a holistic implementation of a control function. What you have is a NIGHTMARE of complexity. At an enterprise scale, this implementation approach would scale in complexity, resources required and oversight needs logarthmically as new devices and alternate connections are added. 
 
So, which is less complex, a single implementation, on a single platform, with a unified rule set, managed, monitored and enforced in a single location – OR – a control implemented across multiple devices, with multiple rule sets that require monitoring, management and enforcement in interdependent deployments? I think the choice is obvious and rational.
 
Now Add Entropy
 
Ahh, entropy, our inevitable combatant and the age old foe of order. What can you say about the tendency for all things to break down? You know what I am about to point out though, right? Things that are complex, tend to break down more quickly. This applies to complex organisms, complex structures, complex machinery and complex processes. It also applies to complex controls.
 
In the case of our firewall implementation, both of our models will suffer entropy. Mistakes will be made. Firewall rules will be implemented that allow wider access than is needed. Over time, all controls lose efficiency and effectiveness. Many times this is referred to as “control drift” or “configuration drift”. In our case, the control drift over a single unified rule set would have a score of 1. Changes to the rule set, apply directly to behavior and effectiveness. However, in the case of the Layered model, the firewalls each have a distinct rule set, which will degrade – BUT – they are interdependent on each other – giving an effective score of 2 for each firewall. Thus, you can easily see, that as each firewall’s rule set degrades, the private network’s “view” of the risk increases significantly and at a more rapid pace. Simply put, entropy in the more complex implementation of multiple firewalls will occur faster, and is likely to result in more impact to risk. Again, add the additional complexity of different types of firewalls and distinct vendors for each, and the entropy will simply eat you alive…
 
Let’s Close with Threat Scenarios

Let’s discuss one last point – the actual threat scenarios involved in attacking the private network from the DMZ. In most cases, compromise of a DMZ host will give an attacker a foothold into the environment. From there, they will need to pivot to find a way to compromise internal network resources and establish a presence on the internal network. (Note that I am only focusing on this threat scenario, not the more common phishing/watering hole scenarios that don’t often involve the compromise of a DMZ host, except perhaps for exfiltration paths. But, this is outside our current scope.) If they get lucky, and the DMZ is poorly designed, they may find that their initially compromised host has some form of access to the internal network that they can exploit. But, in most cases, the attacker needs to perform lateral movement to compromise additional hosts, searching for a victim that has the capability to provide a launching point for attacks against the internal network.
 
In these cases, detection is the goal of the security team. Each attacker move and probe, should cause “friction” against the controls, thereby raising the alert and log levels and the amount of unusual activity. Ultimately, this should lead to the detection of the attacker presence and the incident response process engagement.
 
However, let’s say that you are the attacker, trying to find a host that can talk to the internal network from the DMZ in a manner that you can exploit. How likely are you to launch an attack against the firewalls themselves? After all, these are devices that are designed for security and detection. Most attackers, ignore the firewalls as a target, and continue to attempt to evade their detection capabilities. As such, in terms of the threat scenario, additional discreet firewall devices, offer little to no advantage – and the idea that the attacker would need to compromise more devices to gain access loses credibility. They aren’t usually looking to pop the firewall itself. They are looking for a pivot host that they can leverage for access through whatever firewalls are present to exploit internal systems. Thus, in this case, both deployment models are rationally equal in their control integrity and “strength” (for lack of a better term).
 
Wrapping This Up
 
So, we have established that the Layered model is more complex than the 3 Legged model, and that it suffers from higher entropy. We also established that in terms of control integrity against the most common threat scenario, the implementation models are equal. Thus, to implement the Layered model over the 3 Legged model, is to increase risk, both initially, and at a more rapid pace over time for NO increase in capability or control “strength”. This supports my assertion that the 3 Legged model is, in fact, less risky than the Layered model of implementation.
 
As always, feel free to let me know your thoughts on social media. I can be found on Twitter at @lbhuston. Thanks for reading! 

State Of Security Podcast Episode 4

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We are proud to announce the release of State Of Security, the podcast, Episode 4. This time around I am hosting John Davis, who riffs on policy development for modern users, crowdsourcing policy and process management, rational risk assessment and a bit of history.

Give it a listen and let us know what you think!

Thanks for supporting the podcast!

How to Use Risk Assessment to Secure Your Own Home

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Risk assessment and treatment is something we all do, consciously or unconsciously, every day. For example, when you look out the window in the morning before you leave for work, see the sky is gray and decide to take your umbrella with you, you have just assessed and treated the risk of getting wet in the rain. In effect, you have identified a threat (rain) and a vulnerability (you are subject to getting wet), you have analyzed the possibility of occurrence (likely) and the impact of threat realization (having to sit soggy at your desk), and you have decided to treat that risk (taking your umbrella) – risk assessment.

However, this kind of risk assessment is what is called “ad hoc”. All of the analysis and decision making you just made was informal and done on the fly. Pertinent information wasn’t gathered and factored in, other consequences such as the bother of carrying the umbrella around wasn’t properly considered, other treatment options weren’t considered, etc. What business concerns and government agencies have learned from long experience is that if you investigate, write down and consider such factors rationally and holistically, you end up with a more realistic idea of what you are really letting yourself in for, and therefore you are making better risk decisions – formal risk assessment.

So why not apply this more formal risk assessment technique to important matters in your own life such as securing your home? It’s not really difficult, but you do have to know how to go about it. Here are the steps:

1. System characterization: For home security, the system you are considering is your house, its contents, the people who live there, the activities that take place there, etc. Although, you know these things intimately it never hurts to write them down. Something about viewing information on the written page helps clarify it in our minds.

  1. Threat identification: In this step you imagine all the things that could threaten the security of your home and family. These would be such things as fire, bad weather, intruders, broken pipes, etc. For this (and other steps in the process), you can go beyond your own experience and see what threats other people have identified (i.e. google inquiries, insurance publications).

  2. Vulnerability identification: This is where you pair up the threats you have just identified with weaknesses in your home and its use. For example, perhaps your house is located on low ground that is subject to flooding, or you live in a neighborhood where burglaries may occur, or you have old ungrounded electrical wiring that may short and cause a fire. These are all vulnerabilities.

  3. Controls analysis: Controls analysis is simply listing the security mechanisms you already have in place. For example, security controls used around your home would be such things as locks on the doors and windows, alarm systems, motion-detecting lighting, etc.

  4. Likelihood determination: In this step you decide how likely it is that the threat/vulnerability will actually occur. There are really two ways you can make this determination. One is to make your best guess based on knowledge and experience (qualitative judgement). The second is to do some research and calculation and try to come up with actual percentage numbers (quantitative judgement). For home purposes I definitely recommend qualitative judgement. You can simply rate the likelihood of occurrence as high, medium or low risk.

  5. Impact analysis: In this step you decide what the consequences of threat/vulnerability realization will be. As with likelihood determination, this can be judged quantitatively or qualitatively, but for home purposes I recommend looking at worst-case scenarios. For example, if someone broke into your home, it could result in something as low impact as minor theft or vandalism, or it could result in very high impact such as serious injury or death. You should keep these more dire extremes in mind when you decide how you are going to treat the risks you find.

  1. Risk determination: Risk is determined by factoring in how likely threat/vulnerability realizations is with the magnitude of the impact that could occur and the effectiveness of the controls you already have in place. For example you could rate the possibility of home invasion occurring as low, and the impact of the occurrence as high. This would make your initial risk rating a medium. Then you factor in the fact that you have an alarm system and un- pickable door locks in place, which would lower your final risk rating to low. That final rating is known as residual risk.

  2. Risk treatment: That’s it! Once you have determined the level of residual risk, it is time to decide how to proceed from there. Is the risk of home invasion low enough that you think you don’t need to apply any other controls? That is called accepting risk. Is the risk high enough that you feel you need to add more security controls to bring it down? That is called risk limitation or remediation. Do you think that the overall risk of home invasion is just so great that you have to move away? That is called risk avoidance. Do you not want to treat the risk yourself at all, and so you get extra insurance and hire a security company? That is called risk transference.

So, next time you have to make a serious decision in your life such as changing jobs or buying a new house, why not apply the risk assessment process? It will allow you to make a more rational and informed decision, and you will have the comfort of knowing you did your best in making the decision. 

Thanks to John Davis for this post.

Three Danger Signs I Look for when Scoping Risk Assessments

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Scoping an enterprise-level risk assessment can be a real guessing game. One of the main problems is that it’s much more difficult and time consuming to do competent risk assessments of organizations with shoddy, disorganized information security programs than it is organizations with complete, well organized information security programs. There are many reasons why this is true, but generally it is because attaining accurate information is more difficult and because one must dig more deeply to ascertain the truth. So when I want to quickly judge the state of an organization’s information security program, I look for “danger” signs in three areas.

First, I’ll find out what kinds of network security assessments the organization undertakes. Is external network security assessment limited to vulnerability studies, or are penetration testing and social engineering exercises also performed on occasion? Does the organization also perform regular vulnerability assessments of the internal network? Is internal penetration testing also done? How about software application security testing? Are configuration and network architecture security reviews ever done?

Second, I look to see how complete and well maintained their written information security program is. Does the organization have a complete set of written information security policies that cover all of the business processes, IT processes and equipment used by the organization? Are there detailed network diagrams, inventories and data flow maps in place? Does the organization have written vendor management, incident response and business continuity plans? Are there written procedures in place for all of the above? Are all of these documents updated and refined on a regular basis? 

Third, I’ll look at the organization’s security awareness and training program. Does the organization provide security training to all personnel on a recurring basis? Is this training “real world”? Are security awareness reminders generously provided throughout the year? If asked, will general employees be able to tell you what their information security responsibilities are? Do they know how to keep their work areas, laptops and passwords safe? Do they know how to recognize and resist social engineering tricks like phishing emails? Do they know how to recognize and report a security incident, and do they know their responsibilities in case a disaster of some kind occurs?

I’ve found that if the answer to all of these questions is “yes”, you will have a pretty easy time conducting a thorough risk assessment of the organization in question. All of the information you need will be readily available and employees will be knowledgeable and cooperative. Conversely I’ve found that if the answer to most (or even some) of these questions is “no” you are going to have more problems and delays to deal with. And if the answers to all of these questions is “no”, you should really build in plenty of extra time for the assessment. You will need it!

Thanks to John Davis for this post.