The Bybit Hack: What It Means for Institutional Crypto Security & How Tokenized RWAs Fit In

Background:

At DigiFT, I wrote this article as a reactive response to an industry event. This article served as topical content for the sales and business development team to promote the firm's thought leadership.

Format: 

LinkedIn article | Published 25 Feburary 2025 here

The crypto industry has been hit with yet another massive exploit. Bybit recently suffered a $1.5 billion hack, one of the largest in history, despite its use of cold storage wallets—which are typically considered the safest method for asset custody.

This breach raises critical concerns about:

• The evolving sophistication of crypto hacks

• The limitations of existing custody security

• The role of tokenized real-world assets (RWAs) in reducing centralized risks

Could regulated, institutional-grade RWAs provide a more secure framework for digital assets?

Breaking Down the Bybit Hack: What Happened?

Attack Method: UI Manipulation & Proxy Contract Exploit

Hackers tricked wallet signers into approving a malicious transaction by exploiting masked transactions—making it appear as a normal transfer.

• Multi-Sig Control Bypass: The attack manipulated a proxy contract that could be upgraded using delegate calls, enabling hackers to gain full control.

• Blind Signing via Ledger: Signers unknowingly approved a malicious contract upgrade without fully seeing transaction details.

• Centralization Weakness: Bybit stored most of its ETH in the same wallet, increasing risk exposure (Source: Business Insider).

Assets Lost & Bybit’s Response

Over 401,000 ETH, valued at around $1.5 billion, was stolen from Bybit’s cold wallet, despite multi-signature protections.

Bybit's CEO, Ben Zhou, confirmed the breach and assured users that all other wallets are secure. The company has secured a bridge loan to cover 80% of the lost funds and maintains that all client assets are backed 1:1 (Source: Bloomberg).

What This Means for Institutional Investors

This incident exposes critical vulnerabilities in custody and crypto asset security—even for well-established platforms.

Custodial Risks: Even Cold Wallets Aren’t Foolproof: Multi-signature wallets and cold storage do not guarantee immunity from attack. Delegate call exploits in smart contracts proxies are increasingly common attack vectors (Source: Chainanalysis).

Operational Risks Extend Beyond Hacks: Even without hacks, institutional investors face risks from poor security practices. This includes phishing attacks on key personnel, internal fraud or mismanagement of wallet, and regulatory uncertainty affecting custody providers (Source: Journal of Risk & Financial Management).

The Institutional Shift: From Custody to ETFs?

Security concerns are prompting investors to rethink custody models. Some institutions and high-net-worth individuals are opting to move Bitcoin exposure to ETFs, citing ease of management and reduced operational risks.

Could on-chain RWAs offer a middle ground—providing digital asset exposure with transparent, regulated custody? (Source: AInvest)

How Tokenized RWAs Can Strengthen Institutional Security

Tokenized RWAs do not eliminate all risks, but they introduce more robust safeguards compared to speculative crypto assets.

On-Chain Transparency – Unlike traditional digital assets, RWAs operate under institutional-grade transparency. This means there is a regulated framework with real-world backing, and no hidden security vulnerabilities as assets are tied to verifiable, audited financial instruments (Source: Chainanalysis).

Programmable Compliance – RWAs add another layer of security by embedding compliance rules, such as whitelist-based approval, directly into smart contracts. Whitelist-based smart contract approvals prevent unauthorized transactions and ensures that all participants in the ecosystem are fully compliant, by only allowing transfers between KYC-approved wallets. This also incorporates blacklist functionality, enabling issuers and regulators to block malicious addresses and prevent illicit activities (Source: BlockTelegraph).

Smart contracts also offer admin control and enforced transfers, a crucial function for regulatory oversight. In cases of fraud, legal intervention, or regulatory enforcement, assets can be redirected or frozen, maintaining compliance with financial regulations. These smart contract-driven controls ensure that RWAs remain within legally compliant environments, mitigating counterparty risks and enhancing investor protection (Source: BCG).

Institutional Custody Standards – Unlike purely crypto assets, RWAs are often integrated with licensed, institutional custodians who follow:

• Strict KYC & AML procedures

• Multi-layer custody security (cold storage + segregated accounts)

• Regulated operational oversight

For example, DigiFT partners with regulated tier-1 custody providers—such as Copper, Komainu, and Rakkar—to provide secure institutional-grade custody solutions.

The Future of Institutional Digital Asset Security

The Bybit hack highlights an important reality: digital asset security must evolve. While traditional custody solutions remain essential, the industry needs a multi-layered approach that enhances security at every level—from infrastructure and custody to on-chain safeguards.

Tokenized RWAs introduce another layer of institutional-grade security, blending real-world compliance with blockchain transparency. By combining regulated custody, programmable smart contracts, and on-chain verification, security RWAs offer a more robust risk management framework for institutional investors navigating the digital asset space.

As the industry moves forward, the question isn’t whether custody solutions are enough—it’s how we can continuously improve digital asset security from all angles.