On February 21, 2025, Bybit fell victim to a cyberattack that resulted in an unprecedented loss of approximately $1.46 billion in digital assets. To put the breach into perspective, the previous largest crypto heist was the $611 million that was stolen from Poly Network in 2021. Early reports pointed to the notorious Lazarus Group, a North Korean state-backed cybercriminal organization, which has already been implicated in several high-profile hacks and money laundering operations in the past. The FBI has since confirmed the Lazarus Group as the perpetrators of the attack.

The breach raises critical questions regarding the security of centralized exchanges, particularly in the wake of the Digital Operational Resilience Act (DORA). What truly underscores the importance of compliance and anti-money laundering (AML) measures is the speed with which the stolen funds were funnelled into laundering networks. TRM Labs estimates that at least $160 million was laundered within the first 48 hours, with this figure surpassing $400 million within a week, illustrating a level of operational efficiency and professionalism we haven’t seen before.

How the funds were laundered, an overview

With the stolen funds still circulating through the crypto ecosystem, examining the methods used to obfuscate the origin of the stolen funds is more relevant than ever. The Lazarus Group’s laundering tactics were notably sophisticated, leveraging various crypto services and decentralized exchanges (DEXs) to hide the trail of illicit funds.

The laundering operation commenced immediately after the breach, when the stolen assets- initially consisting of mETH and sETH (liquid staking tokens)[1]– were converted into ETH using DEXs. This step was vital to avoid intervention by token issuers, who could potentially freeze the compromised assets. Since Ether and Bitcoin are not controlled by a centralized authority, they are less susceptible to being frozen.

Following the conversion to ETH, the Lazarus group employed a common money laundering technique known as “layering”, dispersing the funds through multiple intermediary wallets in an attempt to conceal the origin of the funds and hinder tracking efforts. While the inherent transparency of the blockchain allow for the tracing of transactions, this strategy bought the hackers time to move the funds to different wallets, swap tokens, use cross-chain bridges, and interact with no-KYC instant swap services. Using these crypto services, the hackers swapped significant amounts of ETH for other cryptocurrencies, especially BTC and DAI.

Historically, North Korea has relied on crypto mixers as part of its laundering operations to obfuscate the origin of stolen assets before converting them into fiat currencies. With increased scrutiny and law enforcement actions targeting mixing services, it appears the Lazarus Group is now prioritizing speed and efficiency over privacy.

Key Compliance and AML Takeaways

The aftermath of the Bybit hack provides several important lessons for compliance officers, regulatory bodies, and businesses operating in the cryptocurrency sector. While the hack highlights vulnerabilities that still exist, it also underscores the importance of strong compliance frameworks, robust AML practises, and industry-wide cooperation. Some key takeaways include:

1. Enhanced Transaction Monitoring Systems

The sophistication of the laundering methods used in this case highlights the necessity for cryptocurrency platforms to implement advanced transaction monitoring systems. A combined effort between blockchain analytics firms, law enforcement and centralized exchanges were able to actively trace the stolen funds, identifying and flagging wallets related to the Lazarus Group. While several centralized exchanges were able to freeze assets, a large portion of the stolen funds remain under the hackers’ control and further attempts to launder these funds are expected in the coming days or weeks. The ongoing investigations illustrate both the effectiveness of blockchain- and transaction monitoring, as well as the challenges presented by cryptocurrency services such as DeFi protocols that potentially do not leverage blockchain analytics.

2. Strengthening KYC and AML Standards:

Crypto exchanges must ensure they adhere to stringent Know Your Customer (KYC) procedures and performing regular AML checks throughout the lifecycle of their client. While KYC requirements are now standard across exchanges, many DeFi platforms continue to lag in establishing robust identity verification processes. As decentralized finance and privacy tools continue to evolve, there is a growing need for a more rigorous approach to user onboarding and transaction monitoring to prevent illicit activity. A notable example of decentralized protocol already taking such actions is Chainflip, which implemented an emergency software update, blocking incoming funds tied to the hack.

3. Collaboration within the industry and law enforcement agencies

Effective collaboration within the industry and with law enforcement agencies is vital in combating money laundering threats and protecting the ecosystem. In response to the hack, Bybit launched a bounty program offering rewards of up to 10% for successfully frozen funds. This initiative sparked collaboration among industry actors, complicating efforts by the hackers to convert stolen assets into fiat currencies. This demonstrates the importance of swift, collaborative responses to protect the integrity of the cryptocurrency ecosystem and defend against these sophisticated cyber-attacks.

4. Education and Awareness

The Bybit hack highlights the need for continuous education and awareness within the crypto industry. Firms should invest in regular training for compliance teams to stay ahead of emerging laundering tactics. Moreover, educating users on the risks of interacting with unregulated platforms remains crucial to curbing illicit activity in the crypto space.

 

Conclusion: The Path Forward for Crypto Compliance

The Bybit hack serves as a reminder of the vulnerabilities currently present in the crypto ecosystem. As illicit actors become increasingly sophisticated in their methods, the need for robust compliance and AML measures has never been greater. Exchanges, DeFi platforms, and regulators must work together to close the gaps in the current system, implement strong monitoring tools, and ensure that the crypto space remains a safe and secure environment for legitimate users.

The ongoing investigations and the collaborative actions taken in response to the hack exemplify the cryptocurrency sector’s growing commitment to improving security standards and protecting users from illicit activity. By focusing on enhancing compliance frameworks, tightening KYC and AML standards, and fostering a culture of cooperation, the industry is taking crucial steps toward mitigating the risks of future breaches.

 

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[1] Liquid staking tokens refer to obtain a tradeable asset in exchange for staking a cryptocurrency in a proof-of-stake blockchain.

The European Banking Authority (EBA) has taken another significant step towards integrating crypto assets into the regulatory framework, with its recent consultation on draft technical standards. This consultation is a key move in ensuring financial stability while supporting innovation in such a rapidly evolving sector.

As businesses and financial institutions increasingly engage with crypto assets, the challenges of managing associated risks have become more present. The EBA’s proposed standards, rooted in the Basel Committee’s prudential guidelines, aim to provide clarity on capital requirements for crypto-asset exposures. By doing so, they seek to strike a balance between risk mitigation and maintaining a level playing field in the financial ecosystem.

These are the key aspects of the consultation:

1. Classification of crypto-assets: The framework outlines distinctions between tokenized traditional assets, stablecoins, and unbacked crypto-assets, tailoring capital requirements to the specific risk profiles of each category.
2. Risk sensitivity: The draft standards propose different treatments for crypto assets based on their volatility, liquidity, and transparency. This approach helps address concerns related to potential market disruptions.
3. Operational and market risks: Beyond credit and counterparty risks, the standards consider the operational and market risks unique to crypto assets, ensuring a complete risk management.

For firms operating in the crypto space, this consultation signals the importance of aligning operational practices with growing regulatory expectations. Compliance professionals must stay ahead of these developments, proactively assessing their exposure and ensuring robust frameworks to meet potential requirements.

At Compliance Champs we understand the complexity of managing regulations like these, therefore we are here to help businesses interpret and implement these changes effectively.

The EBA’s initiative is the proof to the increasing recognition of crypto assets within mainstream finance. While challenges remain, this regulatory clarity is a step forward in enabling sustainable growth and innovation.

What are your thoughts on these draft standards? Let’s discuss how these measures might shape the future of crypto-asset regulation.

New EU travel rules go into effect in 2025, some crypto coins and bank cards can’t be used.

Tornado cash, what is it? Tornado cash is a cryptocurrency tumbler, a decentralized application built on the Ethereum blockchain that facilitates privacy for its users. It facilitates privacy by pooling the crypto of all its users, mixing them, and send the user different crypto making it almost impossible to trace the origin of the transaction. Blockchains are very transparent, and you can see which wallets make transactions with each other. To use Tornado Cash, you deposit funds into the protocol and claim your deposit minus a fee in your wallet.

On the seventh of august 2022, the Office of Foreign Asset Control (OFAC) placed Tornado Cash on the sanctions list. The protocol would have helped criminals to launder their money. Crypto analyst company Elliptic concluded that 1,5 billion dollars were laundered with Tornado Cash. It is now illegal for US citizens and companies to use the tool.

There is a lot of skepticism about placing Tornado Cash on the sanction list, Tornado Cash is not a company but a DAO (Decentralized Autonomous Organization) – simplified, a protocol that runs without any human interaction. An interesting recent example is that someone made a transaction to Black Rock, the world’s largest investment management firm based in the US, using Tornado Cash. This would imply that BlackRock is unwittingly involved in an illegal transaction.

Does Tornado Cash have any legal value? Yes, if someone lives in an oppressive regime, they might want to increase their privacy. An example demonstrating the legitimate utility of Crypto Mixers occurred when Vitalik Buterin, one of the co-founders of Ethereum, donated funds to Ukraine in support of its conflict against Russia. Consider the significance of privacy for a Russian individual seeking to contribute financially to Ukraine’s cause.

Alexey Pertsev, one of the developers of Tornado Cash, got arrested right after the US placed Tornado Cash on the sanctions list. He is held responsible for laundering over 1,2 billion dollars and might face a 64-month sentence. The controversy in this case is that crypto mixers are not illegal by law, which is why some find the accusation unfair.

In conclusion it all comes back to the question: “How do we provide a high level of privacy while making money laundering impossible?”

Let’s start at the beginning. Initially, the Travel Rule only applied to financial institutions. AMLD4 was adopted to ensure that the Financial Action Task Force (FATF) requirements on wire transfer service providers, and in particular the obligation on payment service providers to accompany transfers of funds with information on the payer and the payee, were applied uniformly throughout the EU. The latest changes introduced in June 2019 in the FATF standards on new technologies, have provided new and similar obligations for crypto-asset service providers, also known as CASPs, to facilitate the traceability of transfers of crypto-assets.

The Travel Rule is established for the purpose of preventing, detecting, and investigating money laundering and terrorist financing. The Travel Rule applies to transfers of funds, in any currency, which are sent or received by a payment service provider, or an intermediary payment service provider established in the EU. It shall also apply to transfers of crypto-assets, including transfers of crypto-assets executed by means of crypto-ATMs, where the CASP, or the intermediary CASP, of either the originator or the beneficiary has its registered office in the EU.

Since the Travel Rule is new in the crypto sector, we will focus on the requirements and implications for CASPs and financial institutions that are engaged in crypto- assets transfers. The Travel Rule requires CASPs to accompany transfers of crypto assets with information on the originators and beneficiaries of those transfers. CASPs are also required to obtain, hold, and share that information with their counterpart on the other end of the crypto assets transfer and make it available to competent authorities on request. The CASP should carry out due diligence of its counterparty. Because the personal data of the transacting parties ‘travels’ with their transfers, the regulation was dubbed the “Travel Rule”. Examples of information that needs to be shared with the counterparty are the name of the originator or beneficiary, blockchain address, address, country, and personal document number.

Interesting to mention is that the FATF recommends that countries adopt a de minimis threshold of 1,000 USD/EUR for Crypto- assets transfers, while keeping in mind that there would be fewer requirements for Crypto-assets transfers below the threshold compared to those above the threshold. The Transfer of Funds Regulation however applies to all transactions regardless of the amount. There is only one exception: A CASP is only required to verify the information on the user of a self-hosted address in the case of a transfer of an amount exceeding EUR 1 000 that is sent or received on behalf of a client of a CASP to or from a self-hosted address.

Of course, every new regulation has its own challenges and implications for the market it will apply to. We would like to name a few:

• Lack of technical resources and extra costs for CASPs: Compliance with the Travel Rule requires implementations and adjustments of the systems that are in place, which will most likely add costs to the business operations.
• Lack of interoperability: CASPs use various protocols and solutions that are not always able to interact with each other, complicating communication, and data exchange.
• Non-uniformity among jurisdictions: countries adopt the Travel Rule based on their own regulations, which may deviate from FATF standards. In particular, jurisdictions may have different de minimis thresholds as mentioned before, varying originator and beneficiary data to be collected and transferred, etc.
• Another industry concern is the so-called ‘Sunrise Issue’. The Travel Rule requirements are enforced at a different pace across jurisdictions. This means that one CASP may be Travel Rule-obligated while its cross-border counterparty may not be.

The EU Travel Rule shall apply as of the 30th of December 2024. In the meantime, the crypto market will be working hard on implementing the Travel Rule within its business.

Something to look out for is that by 1 July 2026, the Commission of the EU shall issue a report assessing the risks posed by transfers to or from self-hosted addresses or entities not established in the EU, as well as the need for specific measures to mitigate those risks, and propose, if appropriate, amendments to the Transfer of Funds Regulation.