Analysts Cite Deregulation as Cause for $1.5 Billion Bybit Hack

Analysts Cite Deregulation as Cause for $1.5 Billion Bybit Hack

Crypto traders faced a tumultuous Friday, with Coinbase celebrating the SEC’s dismissal of its lawsuit while Bybit fell victim to the largest crypto theft ever recorded—$1.5 billion.

The Dubai-based exchange, which handles $36 billion in daily trades, quickly confirmed the breach. CEO Ben Zhou posted on X, explaining that hackers had gained control of an Ethereum cold wallet and emptied it into an unidentified address.

The hack caused a significant drop in Bitcoin’s value, falling over 3% from $98,000 to $96,000, according to CoinGecko data.

This incident has raised alarms about the security of crypto exchanges in light of increasing deregulation. As the SEC steps back, fewer compliance checks leave exchanges vulnerable to attacks.

Hilary Allen, a professor at American University, warned, “Deregulated markets seem appealing until an attack like this happens. In the short term, there’s a lot of support for loosening regulations, but we need to be cautious about what that leads to.”

On-chain investigator ZachXBT traced the stolen Ethereum to wallets connected to North Korea’s Lazarus Group. This notorious state-backed cybercriminal organization has been behind some of the biggest crypto thefts, including the $235 million WazirX hack and the $50 million Radiant Capital breach.

Lazarus Group uses a long, complex process to launder stolen funds, making recovery nearly impossible. They convert the stolen tokens to Ethereum, swap it for Bitcoin, mix transactions, and cash out via Chinese OTC brokers. This process can take years, and Lazarus has sometimes held onto stolen funds for over six years.

Although Bybit secured a loan to facilitate withdrawals, the stolen funds are lost forever. As a result, Bybit will need to buy Ethereum on the market to settle its debts, creating an unusual dynamic. Bybit’s demand could increase ETH prices, while Lazarus sells ETH for Bitcoin, putting downward pressure on BTC.

Traders may see Ethereum remain stable, but Bitcoin could face sustained sell pressure as Lazarus slowly converts its stolen funds.

Bybit Faces Bank Run Amid Hack

Before Bybit made an official announcement, traders noticed unusual outflows from the platform. Shortly after, CEO Ben Zhou addressed the community live on X, explaining, "The hacker took control of the ETH cold wallet and transferred all ETH to an unknown address."

Bitget CEO Gracy Chen downplayed the situation, saying, "Bybit is a strong competitor, and although the loss is large, it represents only their annual profit. Customer funds remain safe. No need to panic."

Despite these reassurances, panic spread, leading to a massive bank run. Bybit received 350,000 withdrawal requests within 10 hours, far outpacing the platform’s ability to process them. With $16.2 billion in reserves, Bybit saw 9% of its total assets wiped out.

To stabilize the situation, rival exchange Bitget provided a loan of 40,000 ETH ($106 million) to help with withdrawals.

Zhou, running on no sleep, reported, "Since the hack, we’ve had the highest volume of withdrawals we’ve ever seen," noting that Bybit had processed 99.994% of withdrawal requests.

Lazarus Group Linked to North Korea’s Weapons Program

Security firm Chainalysis revealed that Lazarus funnels stolen crypto into North Korea’s nuclear and ballistic missile programs. The group remains a top target of U.S. and U.N. sanctions, but their tactics continue to evolve.

In 2021, Lazarus stole $400 million from exchanges and investment firms. Interestingly, Bitcoin now accounts for less than a quarter of the funds they steal. Ethereum has become their primary target, comprising 58% of stolen funds in 2021.

Lazarus also uses mixers to hide their transactions. In 2019, only 21% of stolen funds were mixed; by 2021, this figure had risen to 65%.

Chainalysis’ report revealed that Lazarus controls $170 million in stolen funds that have yet to be laundered.

Despite the chaos, Zhou reassured users that withdrawals were back to normal and thanked them for their patience. Bybit plans to release a full incident report and additional security measures in the coming days

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