A $6 Billion Hack Puts Crypto’s Wall Street Rebellion on Trial

For years, the digital-asset industry has sought to shake up finance by stripping away the intermediaries, delays and controls that govern the movement of money on Wall Street. The pitch: faster transactions, final settlement and fewer middlemen with the power to intervene.But the largest crypto heist on record has exposed the dangers — and limits — of that pitch. A system built to move money without restraint offers few ways to stop it when it is stolen, threatening to cement the Wild West reputation the industry has spent years trying to escape.Tokens stolen in the $6.3 billion Binance hack could be tracked across public blockchains in real time, but billions of dollars remained beyond the reach of those trying to recover them. Tether and Circle, issuers of the two largest stablecoins, were able to freeze some of the stolen tokens because they retained a form of centralized control that much of crypto was designed to eliminate.

Now, as crypto seeks a larger place in American finance, the scale of the theft is stirring unease among market participants over whether the industry has been too quick to discard the checks and delays common in traditional finance. In one corner of crypto, the response is already taking shape. Decentralized-finance provider, Unit, has introduced delays on deposits and withdrawals to give it more time to identify potentially stolen assets.

“I don’t want T+1 but maybe T+1 hour,” said Tian Zeng, chief executive officer of crypto hedge fund Third Eye, referring to TradFi’s practice of settling trades one day after execution. “The idea is to make settlements longer, with more layers, so that hackers can’t take money out this quickly.”

On Wall Street, banks, payment networks and clearinghouses provide opportunities to scrutinize suspicious transfers and, in some circumstances, intervene before funds move beyond reach. Those arrangements are neither foolproof nor always reversible. But they embody a principle that crypto has repeatedly blasted: the ability to interrupt the movement of money can be as important as the ability to move it.

Crypto has learned some of Wall Street’s lessons the hard way. The collapse of exchange FTX accelerated demand for third-party custody and arrangements that allow traders to keep collateral away from exchanges. Until then, combining trading, custody and other functions on a single platform had been a familiar feature of the industry.

This latest reassessment also comes as the industry is courting institutions whose expectations of financial infrastructure were shaped in traditional markets.

“The original ethos of crypto was instant, irreversible transfers onchain, and both centralized and DeFi venues respected that retail-user expectation,” said Joshua Lim, co-head of markets at FalconX. “But crypto’s customer base is changing as more institutions are coming in.”

Some of those institutions are less willing to accept the risks that come with irreversible transactions, particularly after a series of exchange hacks over the past year. For them, the ability to stop or reverse a transaction can be as important as the speed at which it settles.

Shiliang Tang, managing partner of Monarq Asset Management, sees a distinction between where crypto’s speed is most useful and where traditional safeguards may still have an advantage. Blockchain technology may be well suited to cross-border payments and settlement, he said, while trading could be safer when conducted through traditional financial infrastructure.

“Large institutions need to feel their capital cannot be hacked and that things can be rolled back,” he said.

All told, the hack is changing how some decentralized finance developers think about security. Systems built around code that execute transactions automatically are increasingly incorporating restrictions that allow operators more time to respond when something goes wrong. Community members of Aave are now asking for flow limits on the largest lending project in DeFi after the Binance hack.

“Security issues have made DeFi more complex, with less fully immutable code and more stopgap safeguards like withdrawal limits that could be regarded as somewhat permissioned,” said Tarun Chitra, chief executive officer of crypto risk modeling firm Gauntlet.

Chitra argues that advances in artificial intelligence are adding to the pressure for such controls by making cyberattacks more difficult to contain. Yet restoring oversight and delays is no guarantee of safety. Traditional financial institutions face security weaknesses of their own, and their operating schedules can make it harder to respond outside normal market hours.

“Traditional finance’s aging codebases, AI’s ability to reverse-engineer closed-source code, and their inherent lack of 24/7 response has made them vulnerable to hacks as well,” said Chitra, who worked as a quantitative researcher previously. At the same time, AI security is also “pushing towards more 24/7 systems in traditional finance.”