Cybersecurity Digital Currencies Intelligence National Security Technology & Innovation
The 5x5 May 3, 2023

The 5×5—Cryptocurrency hacking’s geopolitical and cyber implications

By Simon Handler

This article is part of The 5×5, a monthly series by the Cyber Statecraft Initiative, in which five featured experts answer five questions on a common theme, trend, or current event in the world of cyber. Interested in the 5×5 and want to see a particular topic, event, or question covered? Contact Simon Handler with the Cyber Statecraft Initiative at

In January 2023, a South Korean intelligence service and a team of US private investigators conducted an operation to interdict $100 million worth of stolen cryptocurrency before its hackers could successfully convert the haul into fiat currency. The operation was the culmination of a roughly seven-month hunt to trace and retrieve the funds, stolen in June 2022 from a US-based cryptocurrency company, Harmony. The Federal Bureau of Investigation (FBI) attributed the theft to a team of North Korean state-linked hackers—one in a string of massive cryptocurrency hauls aimed at funding the hermit kingdom’s illicit nuclear and missile programs. According to blockchain analysis firm Chainalysis, North Korean hackers stole roughly $1.7 billion worth of cryptocurrency in 2022—a large percentage of the approximately $3.8 billion stolen globally last year.

North Korea’s operations have brought attention to the risks surrounding cryptocurrencies and how state and non-state groups can leverage hacking operations against cryptocurrency wallets and exchanges to further their geopolitical objectives. We brought together a group of experts to explore cybersecurity implications of cryptocurrencies, and how the United States and its allies should approach this challenge.

#1 What are the cybersecurity risks of decentralized finance (DeFi) and cryptocurrencies? What are the cybersecurity risks to cryptocurrencies?

Eitan Danon, senior cybercrimes investigator, Chainalysis

Disclaimer: Any views and opinions expressed are the author’s alone and do not reflect the official position of Chainalysis. 

“DeFi is one of the cryptocurrency ecosystem’s fastest-growing areas, and DeFi protocols accounted for 82.1 percent of all cryptocurrency stolen (totaling $3.1 billion) by hackers in 2022. One important way to mitigate against this trend is for protocols to undergo code audits for smart contracts. This would prevent hackers from exploiting vulnerabilities in protocols’ underlying code, especially for cross-chain bridges, a popular target for hackers that allows users to move funds across blockchains. As far as the risk to cryptocurrencies, the decentralized nature of cryptocurrencies increases their security by making it extraordinarily difficult for a hostile actor to take control of permissionless, public blockchains. Transactions associated with illicit activity continue to represent a minute portion (0.24 percent) of the total crypto[currency] market. On a fundamental level, cryptocurrency is a technology—like data encryption, generative artificial intelligence, and advanced biometrics—and thus a double-edged sword.” 

Kimberly Donovan director, Economic Statecraft Initiative, and Ananya Kumar, associate director of digital currencies, GeoEconomics Center, Atlantic Council

“We encourage policymakers to think about cybersecurity vulnerabilities of crypto-assets and services in two ways. The first factor is the threat of cyberattacks for issuers, exchanges, custodians, or wherever user assets are pooled and stored. Major cryptocurrency exchanges like Binance and FTX have had serious security breaches, which has led to millions of dollars being stolen. The second factor to consider is the use of crypto-assets and crypto-services in money-laundering. Often, attackers use cryptocurrencies to receive payments due to the ability to hide or obfuscate financial trails, often seen in the case of ransomware attacks. Certain kinds of crypto-services such as DeFi mixers and aggregators allow for a greater degree of anonymity to launder money for criminals, who are interested in hiding money and moving it quickly across borders.” 

Giulia Fanti, assistant professor of electrical and computer engineering, Carnegie Mellon University

“The primary cybersecurity risks (and benefits) posed by DeFi and cryptocurrencies are related to lack of centralized control, which is inherent to blockchain technology and the philosophy underlying it. Without centralized control, it is very difficult to control how these technologies are used, including for nefarious purposes. Ransomware, for example, enables the flow of money to cybercriminial organizations. The primary cybersecurity risks to cryptocurrencies on the other hand can occur at many levels. Cryptocurrencies are built on various layers of technology, ranging from an underlying peer-to-peer network to a distributed consensus mechanism to the applications that run atop the blockchain. Attacks on cryptocurrencies can happen at any of these layers. The most widely documented attacks—and those with the most significant financial repercussions—are happening at the application layer, usually exploiting vulnerabilities in smart contract code (or in some cases, private code supporting cryptocurrency wallets) to steal funds.” 

Zara Perumal, chief technology officer, Overwatch Data

“Decentralized means no one person or institution is in control. It also means that no one person can easily step in to enforce. In cases like Glupteba, fraudulent servers or data listed on a blockchain can be hard to take down in comparison to cloud hosted servers where companies can intervene. Cybersecurity risks to cryptocurrencies include endpoint risk, since there is not a centralized party to handle returning accounts as the standard ways of credential theft is a risk to cryptocurrency users. There is a bigger risk in cases like crypto[currency] lending, where one wallet or owner holds a lot of keys and is a large target. In 2022, there were numerous high-profile protocol attacks, including the Wormhole, Ronin, and BitMart attacks. These attacks highlight the risks associated with fundamental protocol vulnerabilities via blockchain, smart contracts or user interface.”

#2 What organizations are most active and capable of cryptocurrency hacking and what, if any, geopolitical impact does this enable for them?

Danon: “North Korea- and Russia-based actors remain on the forefront of crypto[currency] crime. North Korea-linked hackers, such as those in the Lazarus Group cybercrime syndicate, stole an estimated $1.7 billion in 2022 in crypto[currency] hacks that the United Nations and others ­­have assessed the cash-strapped regime uses to fund its weapons of mass destruction and ballistic missiles programs. Press reporting about Federation Tower East—a skyscraper in Moscow’s financial district housing more than a dozen companies that convert crypto[currency] to cash—has highlighted links between some of these companies to money laundering associated with the ransomware industry. Last year’s designations of Russia-based cryptocurrency exchanges Bitzlato and Garantex for laundering hundreds of millions of dollars’ worth of crypto[currency] for Russia-based darknet markets and ransomware actors cast the magnitude of this problem into starker relief and shed light on a diverse constellation of cybercriminals. Although many pundits have correctly noted that Russia cannot ‘flip a switch’ and run its G20 economy on the blockchain, crypto[currency] can enable heavily sanctioned countries, such as Russia, North Korea, and others, to project power abroad while generating sorely needed revenue.” 

Donovan and Kumar: “We see actors from North Korea, Iran, and Russia using both kinds of cybersecurity threats described above to gain access to money and move it around without compliance. Geopolitical implications include sanctioned state actors or state-sponsored actors using the technology to generate revenue and evade sanctions. Hacking and cyber vulnerabilities are not specific to the crypto-industry and exist across digital infrastructures, specifically payments architecture. These threats can lead to national security implications for the private and public entities accessing or relying on this architecture.” 

Perumal: “Generally, there are state-sponsored hacking groups that are targeting cryptocurrencies for financial gain, but also those like the Lazarus Group that are disrupting the cryptocurrency industry. Next, criminal hacking groups may both use cryptocurrency to receive ransom payments or also attack on chain protocols. These groups may or may not be associated with a government or political agenda. Many actors are purely financially motivated, while other government actors may hack to attack adversaries without escalating to kinetic impact.”

#3 How are developments in technology shifting the cryptocurrency hacking landscape?

Danon: “The continued maturation of the blockchain analytics sector has made it harder for hackers and other illicit actors to move their ill-gotten funds undetected. The ability to visualize complex crypto[currency]-based money laundering networks, including across blockchains and smart contract transactions, has been invaluable in enabling financial institutions and crypto[currency] businesses to comply with anti-money laundering and know-your-customer requirements, and empowering governments to investigate suspicious activity. In some instances, hackers have chosen to let stolen funds lie dormant in personal wallets, as sleuths on crypto[currency] Twitter and in industry forums publicly track high-profile hacks and share addresses in real-time, complicating efforts to off-ramp stolen funds. In other instances, this has led some actors to question whether this transparency risks unnecessary scrutiny from authorities. For example, in late April, Hamas’s military wing, the Izz al-Din al-Qassam Brigades, publicly announced that it was ending its longstanding cryptocurrency donation program, citing successful government efforts to identify and prosecute donors.” 

Donovan and Kumar: “Industry is responding and innovating in this space to develop technology to protect and/or trace cyber threats and cryptocurrency hacks. We are also seeing the law enforcement, regulatory, and other government communities develop the capability and expertise to investigate these types of cybercrimes. These communities are taking steps to make public the information gathered from their investigations, which further informs the private sector to safeguard against cyber operations as well as technology innovations to secure this space.” 

Fanti: “They are not really. For the most part, hacks on cryptocurrencies are not increasing in frequency because of sophisticated new hacking techniques, but rather because of relatively mundane vulnerabilities in smart contracts. There has been some research on using cutting-edge tools such as deep reinforcement learning to try to gain funds from smart contracts and other users, particularly in the context of DeFi. However, it is unclear to what extent DeFi users are using such tools; on-chain records do not allow observers to definitively conclude whether such activity is happening.” 

Perumal: “As the rate of ransomware attacks rises, cryptocurrency is more often used as a mechanism to pay ransoms. For both that and stolen cryptocurrency, defenders aim to track actors across the blockchain and threat actors increase their usage mixers and microtransactions to hide their tracks. A second trend is crypto-jacking and using cloud computing from small to large services to fund mining. The last development is not new. Sadly, phishing and social engineering for crypto[currency] logins is still a pervasive threat and there is no technical solution to easily address human error.”

More from the Cyber Statecraft Initiative:

#4 What has been the approach of the United States and allied governments toward securing this space? How should they be approaching it?

Danon: “The US approach toward securing the space has centered on law enforcement actions, including asset seizures and takedowns with partners of darknet markets, such as Hydra Market and Genesis Market. Sanctions in the crypto[currency] space, which have dramatically accelerated since Russia’s invasion of Ukraine last February, have generated awareness about crypto[currency] based money laundering. However, as is the case across a range of national security problems, the United States has at times over relied on sanctions, which are unlikely to change actors’ behavior in the absence of a comprehensive strategy. The United States and other governments committed to AML should continue to use available tools and data offered by companies like Chainalysis to disrupt and deter bad actors from abusing the international financial system through the blockchain. Given the blockchain’s borderless and unclassified nature, the United States should also pursue robust collaboration with other jurisdictions and in multilateral institutions.” 

Donovan and Kumar: “The United States and its allies are actively involved in this space to prevent regulatory arbitrage and increase information sharing on cyber risks and threats. They have also increased communication with the public and private sectors to make them aware of cyber risks and threats, and are making information available to the public and industry to protect consumers against cybercrime. Government agencies and allies should continue to approach this issue by increasing public awareness of the threats and enabling industry innovation to protect against them.” 

Fanti: “One area that I think needs more attention from a consumer protection standpoint is smart contract security. For example, there could be more baseline requirements and transparency in the smart contract ecosystem about the practices used to develop and audit smart contracts. Users currently have no standardized way to evaluate whether a smart contract was developed using secure software development practices or tested prior to deployment. Standards bodies could help set up baseline requirements, and marketplaces could be required to report such details. While such practices cannot guarantee that a smart contract is safe, they could help reduce the prevalence of some of the most common vulnerabilities.” 

Perumal: “Two recent developments from the US government are the White House cybersecurity strategy and the Cybersecurity and Infrastructure Security Agency’s (CISA) move to ‘secure by default.’ They both emphasize cooperation with the private sector to move security of this ecosystem to cloud providers. While the system is inherently decentralized, if mining or credential theft is happening on major technology platforms, these platforms have an opportunity to mitigate risk. The White House emphasized better tracing of transactions to “trace and interdict ransomware payments,” and CISA emphasizes designing software and crypto[currency] systems to be secure by default so smaller actors and users bear less of the defensive burden. At a high level, I like that this strategy moves protections to large technology players that can defend against state actors. I also like the focus on flexible frameworks that prioritize economics (e.g., cyber liability) to set the goal, but letting the market be flexible on the solution—as opposed to a prescriptive regulatory approach that cannot adapt to new technologies. In some of these cases, I think cost reduction may be a better lever than liability, which promotes fear on a balance sheet, however, I think the push toward financially motivated goals and flexible solutions is the right direction.”

#5 Has the balance of the threats between non-state vs. state actors against cryptocurrencies changed in the last five years? Should we be worried about the same entities as in 2018?

Danon: “Conventional categories of crypto[currency]-related crime, such as fraud shops, darknet markets, and child abuse material, are on the decline. Similarly, the threat from non-state actors, such as terrorist groups, remains extremely low relative to nation states, with actors such as North Korea and Russia continuing to leverage their technical sophistication to acquire and move cryptocurrency. With great power competition now dominating the policy agenda across many capitals, analysts should not overlook other ways in which states are exercising economic statecraft in the digital realm. For example, despite its crypto[currency] ban, China’s promotion of its permissioned, private blockchain, the Blockchain-based Service Network, and its central bank digital currency, the ‘digital yuan,’ deserve sustained research and analysis. Against the backdrop of China’s rise and the fallout from the war on Ukraine, it will also be instructive to monitor the efforts of Iran, Russia, and others to support non-dollar-pegged stablecoins and other initiatives aimed at eroding the dollar’s role as the international reserve currency.” 

Donovan and Kumar: “More is publicly known now on the range of actors in this space than ever. Agencies such as CISA, FBI, and the Departments of Justice and the Treasury and others have made information available and provided a wide array of resources for people to get help or learn—such as Private blockchain analytics firms have also enabled tracing and forensics, which in partnership with enforcement can prevent and punish cybercrime in the crypto[currency] space. Both the knowledge about ransomware and awareness of ransomware attacks have increased since 2018. As the popularity of Ransomware as a Service rises, both state and non-state actors can cause destruction. We should continue to be worried about cybercrime in general and remain agnostic of the actors.” 

Perumal: “State actors continue to get more involved in this space. As cryptocurrencies and some digital currencies based on the blockchain become more mainstream, attacking it allows a more targeted geopolitical impact. In addition to attacks by governments (like Lazarus Group), a big recent development was China’s ban on cryptocurrency, which moved mining power from China to other parts of the world, especially the United States and Russia. This changed attack patterns and targets. At a high level, we should be worried about both financially-motivated and government-backed groups, but as the crypto[currency] market grows so does the sophistication of attacks and attackers.”

Simon Handler is a fellow at the Atlantic Council’s Cyber Statecraft Initiative within the Digital Forensic Research Lab (DFRLab). He is also the editor-in-chief of The 5×5, a series on trends and themes in cyber policy. Follow him on Twitter @SimonPHandler.

The Atlantic Council’s Cyber Statecraft Initiative, under the Digital Forensic Research Lab (DFRLab), works at the nexus of geopolitics and cybersecurity to craft strategies to help shape the conduct of statecraft and to better inform and secure users of technology.

Related Experts: Kimberly Donovan, and Ananya Kumar

Image: Bitcoin (BTCUSD) price chart from TradingView as of May 23, 2020. From: Unsplash/Nick Chong