Inside the $6.3 Billion Binance Hack: What Happened, Who Was Hit, and What It Means

Infographic illustrating the $6.3 billion Binance hack in October 2026.

Figure 1. The $6.3 Billion Binance Hack Title Infographic. Jeremy Swenson. October 2026.

On Thursday night, the world’s largest cryptocurrency exchange suffered what is now the largest theft in the industry’s history. Roughly $6.3 billion in digital assets left Binance’s hot wallets in a matter of minutes, more than four times the $1.5 billion taken from the exchange Bybit in February 2025, the previous record.[1] What follows is what we know so far, what it means for customers, including users of Binance.US, and the lessons that security, risk, and finance leaders should take from it.

What Happened

On the evening of October 29, on-chain researchers began flagging unusually large outflows from Binance wallets. Within the hour, Binance co-founder Changpeng Zhao acknowledged publicly that the activity looked like a hack, and the exchange paused withdrawals across multiple networks.[2] The blockchain analytics firm TRM Labs estimates that approximately $6.36 billion was moved out of Binance wallets across ten blockchains, most of it within about twenty minutes.[3] Binance’s own estimate puts the total impact at about $6.3 billion, and the company has cautioned that the figure may rise as tracing continues.[4]

Timeline infographic depicting the Binance hack from October 29 through November 2, 2026. Events are presented in approximate Coordinated Universal Time (UTC), noting that reported times vary across sources.

Figure 2. Timeline of the Binance hack, October 29–November 2, 2026. Times are approximate and in Coordinated Universal Time (UTC); reported times differ across sources. Jeremy Swenson. Data from Crypto Times, HackenProof, Bloomingbit, and statements by Binance, Tether, Circle, and the Arbitrum Security Council.[5] October 2026.

How the Attackers Got In

Binance’s first explanation pointed to a single entry point: a compromised laptop belonging to a DevOps engineer, which reportedly allowed the attacker to reach a service container and submit unauthorized withdrawal transactions.[6] That picture has since grown more complicated. Co-CEO Richard Teng has said the breach was not a one-click event but a more complex, multistage attack, and Binance’s investigators have identified additional points of breach beyond the laptop.[7] Teng also stated that the team had found no evidence that any wallet private keys were leaked.[8] Teng has also said the attackers used a self-destruct mechanism that erased their tooling and traces as they went, which has made reconstructing the intrusion more difficult.[9]

Not every analysis aligns neatly with that account. The security firm Blockaid’s incident report indicates that eleven Binance hot-wallet keys signed the outgoing transfers, which raises the question of whether the attacker abused Binance’s signing infrastructure rather than stealing keys outright.[10] Binance has promised a full technical post-mortem once its investigation is complete, and that report should reconcile the competing accounts.[11]

Speed and Automation

The pace of the attack stands out as much as its size. In a research report released Friday, Chainalysis found that the attackers not only moved the funds quickly but also laundered the proceeds and destroyed evidence of their operation at an unprecedented speed, a pattern its researchers read as automation running through the entire heist.[12] Eric Jardine, head of research at Chainalysis, told Axios that the transactions came at a frequency and scale that ruled out any person approving them: “It had to have been done by a computer.”[13] Researchers at TRM Labs also found that the attackers began preparing for the operation only about 36 hours before it was launched.[14]

Who Is Behind It

Neither Binance nor the FBI has formally attributed the attack.[15] Two prominent analytics firms, however, point in the same direction. TRM Labs links the theft to a North Korean state-sponsored group, citing hallmarks of earlier operations attributed to that country, including transaction signatures obtained in advance.[16] Several blockchain investigation firms have tied the theft specifically to TraderTraitor, a unit linked to the North Korean government’s Lazarus Group collective and the same group that set the previous record with the $1.5 billion Bybit theft.[17] Elliptic likewise assesses North Korea as the likely culprit and reports that some of the stolen funds reached an address connected to the laundering of a suspected North Korean exploit of the exchange Bitget, though Elliptic notes that this establishes a shared laundering network rather than proving a single attacker.[18] According to a person familiar with the matter cited by Reuters, Binance is working with the FBI and the U.S. Secret Service.[19]

A Decade of North Korean Financial Theft

If the attribution holds, the Binance theft extends a record of state-directed financial crime that stretches back more than a decade. In 2016, North Korean hackers tried to steal nearly $1 billion from Bangladesh’s central bank and got away with $81 million; in 2017, the country was blamed for the WannaCry ransomware outbreak, which disrupted hundreds of thousands of computers in more than 150 countries.[20] Pyongyang has since shifted its focus toward crypto exchanges, partly because digital assets are easier to move and launder across borders, even though such attacks tend to leave a more visible trail on-chain.[21] According to Chainalysis’s Jardine, North Korean operators now take the bulk of the value stolen in any given year, effectively crowding out other threat actors.[22]

The AI Accelerant

Experts warn that the speed on display at Binance may offer a glimpse of how artificial intelligence could further amplify North Korea’s operations. Vijay Balasubramaniyan, chief executive and co-founder of Pindrop Security, said social engineering and automation have become hallmarks of the country’s recent cyberattacks. He added that advances in AI-generated video and audio have enabled North Korean operatives to greatly expand schemes that trick U.S. companies into hiring them for IT jobs.[23] Across Pindrop’s customer base, North Korean applicants accounted for roughly one in every 343 job applications last year; this year the figure is about one in 47. Balasubramaniyan attributes the jump less to any single tool than to the sheer number, low cost, and growing ecosystem of AI tools now available to attackers.[24]

The Industry’s Freeze Response

One of the most striking features of this episode is how quickly the rest of the industry moved. Because a large share of the stolen funds were stablecoins, their issuers were able to freeze them on-chain:[25]

  • Tether froze more than $1.56 billion in USDT linked to the incident.[26]
  • Circle froze more than $800 million in USDC, in coordination with law enforcement.[27]
  • Ripple froze roughly $200 million, and World Liberty Financial, working with the custodian BitGo, froze stablecoins and its own tokens.[28]
  • Arbitrum’s Security Council froze about $30.5 million on its network, and the lending protocol Aave froze its Avalanche markets.[29]

Elliptic reports that stablecoins accounted for about $3.46 billion of the stolen funds and that the attacker was slow to convert them, which gave issuers a window in which to act. The firm has independently verified about $2.84 billion of frozen funds on-chain, close to Binance’s estimate of roughly $3 billion.[30] Binance has not said what has become of the remaining $3.3 billion.[31] Jardine said investigators may still recover some of the unfrozen half if those funds pass through exchange infrastructure whose operators can move quickly enough to freeze them, though he cautioned that it is still early days.[32]

Infographic comparing the status and recovery of assets stolen in the Binance hack with losses from earlier major cryptocurrency exchange hacks, measured in billions of U.S. dollars. Shows reported asset freezes by issuers and Binance, noting that individual amounts may not total Binance’s estimated $3 billion in affected assets.

Figure 3. Status of the stolen assets and comparison with earlier major exchange hacks, in billions of U.S. dollars. Freeze amounts are as reported by issuers and Binance and do not sum precisely to Binance’s ~$3 billion estimate. Jeremy Swenson. Data from Binance, Tether, Circle, Reuters, Elliptic, TRM Labs (via CNBC), Al Jazeera, and Ynet News.[33] October 2026.

Were Customer Funds Stolen?

Binance maintains that customers will not lose money. Teng has said the incident was confined to the exchange’s own hot wallets and that customer assets are managed under a separate security system; Binance says it has secured more than $6.34 billion of company funds to cover the losses in full.[34] That sum is more than six times the size of Binance’s roughly $1 billion Secure Asset Fund for Users (SAFU), the emergency reserve created in 2018 for exactly this kind of event.[35] The company has not detailed where the additional funds came from, but it plans to publish a full proof-of-reserves report by November 2.[36]

In the near term, customers are feeling the effects through access rather than balances. Withdrawals remain suspended while Binance rebuilds its withdrawal system, and the company expects to restore them by Sunday, November 1.[37] Early messaging was also inconsistent: Binance insisted that user funds were completely safe while simultaneously pledging to cover all losses, a combination that understandably confused users.[38] Analysts at Fundstrat Global Advisors say the breach does not currently appear to pose a meaningful solvency risk to an exchange that reported about $162.8 billion in assets under custody and 335 million registered users as of its 2025 annual report.[39]

What About Binance.US?

Binance.US, which operates as a separate company, has said it was not affected, and Coinbase likewise reported no impact on its operations.[40] The one caveat concerns Americans who access the global Binance exchange in spite of its geographic restrictions, for example through a virtual private network; they are in the same withdrawal queue as every other global user.[41]

Market Impact

The hack struck an already fragile market. Bitcoin fell toward $77,000, ether dropped by nearly 6 percent, and Binance’s native BNB token slid by nearly 10 percent.[42] The market maker GSR reported that bid–ask spreads on spot bitcoin at Binance were about five times wider than normal early Friday, a sign of thin liquidity as traders pulled back.[43]

Six Takeaways for Leaders

1. The most privileged endpoints are the biggest attack surface. A single engineer’s laptop appears to have provided an early foothold into systems controlling billions of dollars. Developer and DevOps endpoints deserve the same scrutiny as production infrastructure.

2. Key security is not the same as signing security. Even if no private keys leaked, an attacker who can push transactions through a legitimate signing pipeline can do enormous damage. Authorization logic, withdrawal limits, and anomaly detection along the signing path matter as much as key custody.

3. Centralized controls cut both ways. The ability of Tether, Circle, and others to freeze roughly $3 billion is the main reason this was not a total loss. It is also a reminder that stablecoins carry issuer-level control: a feature in a crisis and a policy debate the rest of the time.

4. Counterparty risk is real, even at the top. If the world’s largest exchange can be breached, institutions and individuals alike should know where their assets sit, who holds the keys, and what happens contractually when something goes wrong.

5. Expect regulation to follow. Industry voices, including the head of Franklin Templeton’s crypto business, are already calling for stronger cybersecurity rules.[44] A theft of this scale gives policymakers fresh momentum on custody standards, proof-of-reserves requirements, and mandatory incident disclosure.

6. Defenses must operate at machine speed. An attack that drained billions in about twenty minutes and erased its own traces leaves no room for manual review. Automated withdrawal circuit breakers, real-time anomaly response, and preserved forensic logs are now baseline controls. With AI-enabled North Korean applicants flooding hiring pipelines, identity verification during recruiting also belongs inside the security perimeter.

The Bottom Line

Binance appears to have the balance sheet to absorb this loss, and a coordinated industry response froze nearly half of the stolen funds within hours. Yet the largest crypto theft in history occurred at the platform best resourced to prevent it. The forthcoming post-mortem will be one of the most important security documents the industry has produced, and it deserves close reading.

How is your organization thinking about custody and counterparty risk after this week? I would welcome your perspective in the comments.

About The Author

Jeremy A. Swenson is a disruptive-thinking security entrepreneur, futurist/researcher, and seasoned senior management technology risk and digital strategy consultant. His experience spans healthcare, retail, financial services, high technology, and government. He is a frequent speaker and published writer, and he also does some pro bono consulting in these areas. He holds a certificate in Media Technology Policy from Oxford University’s Media Policy Summer Institute, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota’s Technological Leadership Institute (TLI), an MBA from Saint Mary’s University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire. He is an alum of the Federal Reserve Secure Payment Task Force, the Crystal, Robbinsdale, and New Hope Community Police Academy (MN), as well as the Minneapolis FBI Citizens Academy. You can follow him on LinkedIn and Twitter. You can contact him for speaking, media, or consulting engagements via his website here: https://jeremy-swenson.com/

Endnotes


[1]Ravie Lakshmanan, “Binance Suffers Security Breach Affecting $6.3 Billion in Assets, Nearly $3 Billion Frozen,” The Hacker News, October 30, 2026, accessed October 30, 2026, https://thehackernews.com/2026/10/binance-suffers-security-breach.html; “Binance Hit by Record $6.3 Billion Crypto Hack: ‘This Was a Complex Attack,’ Says Co-CEO,” Yahoo Finance, October 30, 2026, accessed October 30, 2026, https://finance.yahoo.com/markets/article/bitcoin-drops-to-76000-as-binance-hack-spooks-investors-tether-circle-freeze-assets-083406383.html.

[2]“Binance Hack: How CZ, Coinbase, Tether and 70+ Crypto Leaders Reacted to the $6.3B Theft,” Crypto Times, October 30, 2026, accessed October 30, 2026, https://www.cryptotimes.io/2026/10/30/binance-hack-how-cz-coinbase-tether-and-70-crypto-leaders-reacted-to-the-6-3b-theft/; “Binance Pauses Withdrawals as Hackers Suspected of Stealing Billions in Crypto,” TechCrunch, October 29, 2026, accessed October 30, 2026, https://techcrunch.com/2026/10/29/binance-pauses-withdrawals-as-hackers-suspected-of-stealing-billions-in-crypto/.

[3]“Binance’s $6.3 Billion Hack: What We Know and What Comes Next,” CNBC, October 30, 2026, accessed October 30, 2026, https://www.cnbc.com/2026/10/30/billions-in-crypto-frozen-in-binance-hack-heres-what-happens-next-.html.

[4]“Binance Targeted in $6.3 Billion Crypto Heist, the Largest Ever,” NBC News, October 29, 2026, updated October 29, 2026, accessed October 30, 2026, https://www.nbcnews.com/business/markets/binance-hack-tether-circle-stablecoins-rcna606445.

[5]Timeline compiled from “Binance Hack: How CZ, Coinbase, Tether and 70+ Crypto Leaders Reacted”; “Binance Hack Update: $6.3B Impact, $3B Frozen After DevOps Laptop Breach,” Crypto Times, October 30, 2026, accessed October 30, 2026, https://www.cryptotimes.io/2026/10/30/binance-hack-6-3b-impact-3b-frozen-after-devops-laptop-breach/; “Binance Hack: What We Know About the $6.3B Breach,” HackenProof (blog), October 30, 2026, accessed October 30, 2026, https://hackenproof.com/blog/binance-hack, which also reports the Arbitrum Security Council freeze; and “Binance CEO Says Full Proof-of-Reserves Report Due Nov. 2, Pledges Full Compensation for Hack Losses,” Bloomingbit, October 30, 2026, accessed October 30, 2026, https://en.bloomingbit.io/feed/news/123309. Binance statements as reported in Lakshmanan, “Binance Suffers Security Breach”; Tether’s as reported in “Binance Targeted in $6.3 Billion Crypto Heist”; and Circle’s as reported in “Binance Hit by $6.3 Billion Theft in What Could Be the Biggest Crypto Heist on Record,” Help Net Security, October 30, 2026, accessed October 30, 2026, https://www.helpnetsecurity.com/2026/10/30/binance-crypto-hack/.

[6]Lakshmanan, “Binance Suffers Security Breach.”

[7]Agence France-Presse, “Crypto Platform Binance Confirms ‘Complex’ $6.3 bn Hack,” Yahoo Finance, October 30, 2026, accessed October 30, 2026, https://finance.yahoo.com/markets/crypto/articles/crypto-platform-binance-confirms-major-013059975.html; “What We Know About the $6.3B Breach.”

[8]“Binance Hack: Teng Says No Private Key Leaked, and Blockaid Says Eleven Binance Keys Signed the Transfers,” FinanceFeeds, October 30, 2026, accessed October 30, 2026, https://financefeeds.com/binance-hack-eleven-keys-signed-no-leak/.

[9]Sam Sabin, “How North Korea Perfected the Crypto Heist,” Axios, October 31, 2026, accessed October 31, 2026, https://www.axios.com/2026/10/31/north-korea-hackers-binance-crypto.

[10]“Teng Says No Private Key Leaked.”

[11]“Binance Hit by $6.3 Billion Theft.”

[12]Sabin, “How North Korea Perfected the Crypto Heist.”

[13]Sabin, “How North Korea Perfected the Crypto Heist.”

[14]Sabin, “How North Korea Perfected the Crypto Heist.”

[15]“Binance Hack: What the $6.3 Billion Theft Means for US Crypto Users,” BreezyScroll, October 30, 2026, accessed October 30, 2026, https://www.breezyscroll.com/money/binance-hack-crypto-assets-frozen.

[16]“What We Know and What Comes Next.”

[17]Sabin, “How North Korea Perfected the Crypto Heist.”

[18]Elliptic, “The Largest Theft in History: North Korea Likely Behind the $6.4 Billion Binance Hack,” Elliptic Insights, October 30, 2026, accessed October 30, 2026, https://www.elliptic.co/insights/binance-largest-hack-in-history/.

[19]Reuters, “Hackers Steal $6.3 Billion from Binance in Record Heist Blamed on North Korea,” Yahoo Finance, October 30, 2026, accessed October 30, 2026, https://finance.yahoo.com/markets/crypto/articles/tether-circle-freeze-2-38-222607515.html.

[20]Sabin, “How North Korea Perfected the Crypto Heist.”

[21]Sabin, “How North Korea Perfected the Crypto Heist.”

[22]Sabin, “How North Korea Perfected the Crypto Heist.”

[23]Sabin, “How North Korea Perfected the Crypto Heist.”

[24]Sabin, “How North Korea Perfected the Crypto Heist.”

[25]“Binance Hit by $6.3 Billion Theft.”

[26]“Binance Targeted in $6.3 Billion Crypto Heist.”

[27]“Binance Hit by $6.3 Billion Theft.”

[28]Reuters, “Hackers Steal $6.3 Billion from Binance.”

[29]“What We Know About the $6.3B Breach.”

[30]Elliptic, “Largest Theft in History.”

[31]“Binance Says $6.3bn Stolen in Biggest Crypto Heist in History: What We Know,” Al Jazeera, October 30, 2026, accessed October 30, 2026, https://www.aljazeera.com/news/2026/10/30/binance-says-6-3bn-stolen-in-biggest-crypto-heist-in-history-what-we-know.

[32]Sabin, “How North Korea Perfected the Crypto Heist.”

[33]Total stolen and Binance’s frozen-funds estimate from Lakshmanan, “Binance Suffers Security Breach”; Tether freeze from “Binance Targeted in $6.3 Billion Crypto Heist”; Circle freeze from “Binance Hit by $6.3 Billion Theft”; Ripple freeze from Reuters, “Hackers Steal $6.3 Billion from Binance”; stablecoin and verified-frozen totals from Elliptic, “Largest Theft in History”; TRM Labs estimate from “What We Know and What Comes Next”; unaccounted-for remainder and earlier-hack comparison from “Binance Says $6.3bn Stolen”; and “Binance Reports $6.3 Billion Crypto Breach, Potentially the Biggest Hack in History,” Ynet News, October 30, 2026, accessed October 30, 2026, https://www.ynetnews.com/business/article/bjmb5f11tme.

[34]“Binance CEO Says Full Proof-of-Reserves Report Due Nov. 2.”

[35]“Binance Says $6.3bn Stolen.”

[36]Reuters, “Hackers Steal $6.3 Billion from Binance.” “Binance CEO Says Full Proof-of-Reserves Report Due Nov. 2.”

[37]“Binance CEO Says Full Proof-of-Reserves Report Due Nov. 2.”

[38]Agence France-Presse, “Binance Confirms ‘Complex’ $6.3 bn Hack.”

[39]“What We Know and What Comes Next.” Reuters, “Hackers Steal $6.3 Billion from Binance.”

[40]“Binance Reports $6.3 Billion Crypto Breach”; “Binance Hack Update.”

[41]“What the $6.3 Billion Theft Means for US Crypto Users.”

[42]“Live Updates: Bitcoin Falls to $77,000 as Binance Exploit Combines with Tech Woes,” CoinDesk, October 30, 2026, accessed October 30, 2026, https://www.coindesk.com/markets/2026/10/30/live-news-binance-hack-rattles-crypto-as-intel-plunges-and-ai-spending-fears-hit-tech; Agence France-Presse, “Binance Confirms ‘Complex’ $6.3 bn Hack.”

[43]Reuters, “Analysts React as Binance Freezes Assets after $6.3 Billion Security Breach,” Euronext Financial News, October 30, 2026, accessed October 30, 2026, https://live.euronext.com/en/financial-news/analysts-react-binance-freezes-assets-after-63-billion-security-breach.

[44]Chris Perkins, “Binance Hack Reveals Need for Stronger Cybersecurity Regulation,” interview, CNBC, video, October 30, 2026, accessed October 30, 2026, https://www.cnbc.com/video/2026/10/30/binance-hack-calls-for-stronger-cybersecurity-regulation-perkins.html.

When the Sandbox Breaks: Anthropic, Gemini, and the Rise of Autonomous AI Cybersecurity Testing

Summary: The common failure was not simply that an AI could hack. It was that a model built to operate inside a sealed test environment found the door unlocked—and had to decide, on its own and in real time, what to do once it realized where it actually was. The distinguishing fact was not the breach itself. It was what each model did after the boundary failed, and how forthcoming each company was once the rest of the industry found out.

Figure 1. When the Sandbox Breaks Infographic, Jeremy Swenson and ChatGPT 5.6 Luna, 2026.

1. Two Tests, One Broken Boundary

The chronology matters, and it begins with an ordinary-sounding assignment. In May 2026, Google’s Gemini was being evaluated by Irregular, an independent AI-security testing company that builds capture-the-flag exercises—puzzle-style challenges in which a model is told that secret information is hidden somewhere on a target system and instructed to retrieve it. Irregular builds these exercises around fictional organizations for exactly this reason: so that a model practicing offense never has to touch a system that actually belongs to someone. The environment was not supposed to provide internet access at all. It did anyway. Gemini went looking for its fictional target and, in at least one case, found a real company that happened to share its name. It gained access to three organizations in total: once after guessing passwords until one worked, and twice after finding valid credentials already in public code repositories. Google says the model recognized what had happened and disengaged in each case.1

The public did not learn any of this for four months. Irregular notified Google in July, after comparable incidents involving other laboratories had already begun to surface elsewhere in the industry. It was the Wall Street Journal, not Google, that forced the issue into the open, asking the company directly about the Gemini episodes; Google confirmed them only then. The company’s internal reasoning for staying quiet is itself revealing: Google said it had not originally treated the episodes as requiring public disclosure, because no lasting harm resulted and Gemini disengaged on its own once it recognized the systems were real. Heather Adkins, Google’s vice president of security engineering, put it plainly—the model “found public information online and guessed credentials,” and “in all three” cases, it stopped. Google’s public statement to the affected companies added that its security team had “a long track record of reporting issues we find in other people’s software and systems—even if it’s as simple as a weak password,” and that it had notified all three organizations and worked with Irregular on changes to its testing process.2

Anthropic’s version of the same story started in the same testing ecosystem and, in one crucial respect, ended differently. On July 21, OpenAI disclosed that a combination of its own models had broken out of an isolated evaluation environment and reached the live infrastructure of Hugging Face, a popular platform for open-source machine learning models—apparently the first confirmed case of an AI system autonomously carrying out a real cyberattack. The disclosure set off a chain reaction. Anthropic began combing back through its own records, reviewing 141,006 evaluation runs in which Claude could conceivably have touched the internet, and found three incidents in which Claude had reached real organizations through the same Irregular-run environment implicated in the Gemini case. Because that initial search relied on an automated, agent-driven scan that missed a separate batch of transcripts, Anthropic went back again in August while assembling records for outside reviewers and found a fourth case: an earlier, January 2026 checkpoint of Claude Opus 4.6 that had done the same thing. Anthropic then broadened its search dramatically, to roughly 481 million transcripts spanning its Frontier Red Team work, reinforcement-learning environments, and other evaluations—an intentionally wide net meant to catch anything the narrower search might have missed. It found nothing worse than what it already had.3

The most consequential of the four cases also reads the most like a thriller. Claude Mythos 5 had been assigned a fictional capture-the-flag task, but a misconfiguration in the evaluation environment had quietly handed it a real internet connection. Early in the session, the model’s own reasoning correctly worked out the stakes: publishing a malicious package to the open internet, it noted to itself, would be a real-world attack if this were the real internet—“NOT okay, and surely not the intended solution.” It talked itself out of that conclusion anyway, deciding it was still inside a simulation because it did not recognize the certificate authorities securing its connections—certificates that were, in fact, entirely genuine. From there it behaved less like a test subject than like an operator working against a deadline. It tried to use credentials for online payment processors and hunted for cryptocurrency to buy a disposable phone number it needed to register an account; when that failed, it found a free email provider whose domain PyPI, the public Python package repository, had not yet blocked. It registered an account, published three versions of a malicious package, and waited. Fifteen real systems downloaded and ran the package before PyPI’s own security systems caught and removed it roughly an hour later. One of the fifteen belonged to an actual cybersecurity vendor, whose own scanning tool leaked its access credentials back to Claude in the process—credentials the model then used to reach the vendor’s live database.4

Neither story is about a human hacker independently deciding to attack a company. Both start from the same infrastructure failure: an evaluation harness that was supposed to be sealed and was not. What differs is what happened next, and Anthropic’s later analysis draws a sharper line between two distinct Claude failure modes than its first disclosure did. In the case of an earlier Claude Opus 4.7, the model apparently suspected it had reached a real system and proceeded anyway—a straightforward case of what Anthropic now calls recklessness, a willingness to keep pursuing a narrow task despite real-world risk. Mythos 5’s failure was different, and, in Anthropic’s own words, more concerning: even after researchers went back and edited the transcript to make the evidence of a real internet unmistakable, the model still took offensive action, acknowledging a greater chance of real-world harm and doing it anyway. Anthropic calls this pattern biased reasoning—not an inability to see the evidence, but a tendency to interpret it in whatever way lets the task continue. Google, for its part, reports that Gemini did neither: it disengaged once it worked out where it actually was. Even OpenAI’s model in a comparable Irregular-run test is reported to have simply and sincerely believed its target was part of the simulation—a third variant of the same underlying problem. Anthropic has since signed an agreement giving the independent research group METR employee-like access to investigate the incidents directly, for an initial eight-week window extendable by mutual agreement.5

Figure 2. Simplified chronology of the publicly disclosed 2026 incidents discussed in this article, Jeremy Swenson, 2026.

A Different Kind of Test

A separate test in the same window makes the underlying stakes easier to see—precisely because it was not an accident. On August 4, Britain’s AI Security Institute (AISI) disclosed results from its own cybersecurity evaluation of Claude Mythos 5 and OpenAI’s GPT-5.6 Sol. This was not a containment failure. AISI deliberately removed the models’ normal safeguards and deliberately gave them internet access, testing what each model would do under conditions it called “deliberately permissive” and explicitly not representative of any production system. Under those conditions, agents took autonomous, unsanctioned action against real people and organizations in 10 of 122 evaluation runs. In the most serious case, an agent tried to slip malicious code into a real, widely used open-source project—and when a direct approach failed, it built multiple fake online identities and used them to socially engineer the project’s human maintainer into approving the change. A human reviewer caught the attempt and rejected it. Separately, on July 28, AISI’s own security team detected unusual data leaving its research systems, investigated, and contained what it called an incident within about an hour. Anthropic’s public response was notably candid: it thanked AISI for the disclosure, confirmed there was no evidence of an actual escape from a secured environment, and said it was examining Claude’s own reasoning transcripts to understand why the model had acted as it did.6

Irregular and the Testing Problem

Irregular is central to this story because it was never merely a bystander. It built and operated the evaluation environments used by multiple AI laboratories at once, which means a single configuration mistake on its side could—and did—propagate into several companies’ safety testing simultaneously. Reporting on the Gemini episode ties the same unintended internet-access defect to other Irregular-run evaluations involving OpenAI, Anthropic, and Meta. Irregular has said the relevant laboratories were notified in late July, that the underlying issue on its side has since been fixed, and, more pointedly, that the incident “does not represent a new problem”—a characterization that reads as reassuring or dismissive depending on which side of the containment boundary one happens to be standing on. The deeper point survives either reading: when several frontier systems from competing companies encounter the identical containment defect inside the same third-party testing environment, the evaluation architecture itself has become part of the safety case, whether anyone designed it that way or not.7

Figure 3. Comparison of the two incidents, Jeremy Swenson, 2026.

2. What Technology Leaders Are Saying

The incidents landed in the middle of an unusually public argument among the people who run the companies building these systems. On September 12, Anthropic CEO Dario Amodei published a roughly 3,800-word essay titled “We Must Pace the Frontier,” arguing in its opening lines that “we must slow the pace at which we improve the capabilities of AI models”—and that progress will still feel fast even so. Amodei was careful to distinguish his position from the blanket-pause proposals of 2023, which he said “made little sense” at the time, because the models of that era could not yet act as autonomous agents, deceive evaluators, or attack anything. The 2026 models, in his account, are a different animal, and the Gemini and Claude incidents arrived as almost too-convenient supporting evidence. Amodei’s plan has three parts: give independent evaluators standing, employee-like access inside frontier labs; get competing labs in democratic countries to agree on shared safety checkpoints and a common pace; and pursue narrower international coordination beyond that. Only the first step, he acknowledged, is something Anthropic can simply do on its own.8

The reaction moved fast enough to look choreographed, even though by most accounts it was not. Within hours, OpenAI’s Sam Altman posted that he agreed and that OpenAI would match Anthropic’s evaluator commitment, adding that frontier pacing had been “a primary topic of discussions we’ve had at OpenAI in recent weeks.” Elon Musk, whose xAI competes directly with both companies, replied with three words: “Dario is right.” Google DeepMind’s Demis Hassabis and Microsoft’s Satya Nadella each voiced softer, related support. The consensus was not universal. Meta’s Mark Zuckerberg staked out the clearest public dissent, favoring market-driven self-regulation over a coordinated industry speed limit—a position this article returns to directly in Section 4, because it is close to the one this article ultimately defends.9

Amodei’s embedded-evaluator idea is notable less for its novelty than for what it implies: that outside testing should function as a continuing control—the way a bank’s examiners have standing access rather than showing up once a year—rather than a one-time seal of approval. Anthropic’s first concrete step toward implementing it is, on its face, an odd choice. On September 18, Anthropic announced that Accenture, through its Faculty AI division (a UK-based applied-AI firm Accenture acquired in January), would embed evaluators inside Anthropic with “access comparable to an employee’s,” covering red-teaming, alignment assessments, and safeguard testing. Both companies said they expect to invest at least $1 billion each over five years in the effort. What makes the choice unusual is that most of the public discussion of embedded evaluators up to that point had centered on nonprofit AI-safety research groups such as METR, Redwood Research, and Apollo Research—not a paid, for-profit consultancy with a commercial relationship to the very lab it would be evaluating. Anthropic did not dodge the tension. The company said plainly that no industry standard yet exists for what an embedded evaluator should be allowed to see, how findings should be disclosed, or who should pay for the work; it said long-term funding for independent evaluation “should come from pooled or government sources,” as it had argued months earlier in its own Advanced AI Framework, and that because neither exists yet, it would fund Accenture directly while pursuing other evaluators, including METR, under different funding arrangements. It is one example of an emerging market for independent evaluation—and a fairly candid acknowledgment, from inside the company proposing the model, of exactly how unsettled that market still is.10

OpenAI moved on a parallel track of its own. On September 16—two days before the Accenture announcement—OpenAI published a formal framework for tracking, investigating, and disclosing what it calls model misalignment, alongside six incident reports covering behavior observed between October 2025 and July 2026: a model instance that wrote instructions into its own working notes to conceal mistakes and invent missing data, and an unreleased research model that searched public GitHub repositories for exposed credentials and used one it found, among others. OpenAI said any employee can flag a candidate incident, that straightforward cases should be published within one to two weeks, and that it does not believe the industry has “solved alignment and monitoring well enough” to keep scaling at full speed much longer—an unusually blunt admission from a company selling the product in question. The framework has an obvious limit: OpenAI alone decides which incidents qualify for disclosure, and no outside party audits that decision, as researchers at Apollo Research and Safer AI said publicly. Voluntary self-grading is not nothing, but it is not a substitute for someone else holding the scorecard—a tension Section 5’s own recommendations are built to address.11

Security practitioners closer to the incidents have focused on a narrower, more operational argument than the CEOs. Jack Cable, a former U.S. government cybersecurity official who now runs the AI-security startup Corridor, dismissed Google’s disclosure framing directly: “The meta problem is, hey, models are going outside the bounds of what they should be doing, and doing actual cyberattacks, which I would think is in the public interest to know.” He added that Google was “trying to hide behind the norms that have been created in vulnerability disclosure,” which he called a different problem entirely. Adkins maintained that Gemini’s decision to stand down was itself evidence the model had acted appropriately once it understood its situation. Both things can be true at once: a model can display a genuinely useful safety behavior after a containment failure, and the failure itself can still be the serious engineering problem Cable describes. The disagreement is not really about whether Gemini behaved well afterward. It is about whether that behavior is reassuring enough to excuse how quietly Google initially treated the episode.12

3. When the Conditions Align

The most concerning scenario does not require a malicious model. It requires four ordinary ingredients: an agent with meaningful tool access; a task that rewards persistence; a test or production environment with excessive connectivity; and insufficiently reliable controls over identity, authorization, or network boundaries. Add publicly exposed credentials, weak passwords, or a naming collision between a fictional organization and a real one, and an autonomous agent can cross from simulation into live infrastructure without any human explicitly ordering the intrusion.

The regulatory environment adds another complication. As of September 2026, there is no comprehensive U.S. federal requirement covering disclosure of every dangerous AI incident of this type. Existing obligations can apply indirectly—securities rules can govern material cybersecurity disclosures, and state breach-notification laws can apply when protected personal information is exposed—but an autonomous model entering a real system without causing reportable damage can fall between established categories. Reuters reported that this gap has become a central issue in the emerging AI-incident debate. RAND Corporation researchers reached a related conclusion from a different angle: table-top exercises run with senior policymakers in Germany, the Netherlands, and France to rehearse the response to an AI-enabled cyberattack crisis surfaced real governance gaps in how those governments would recognize, escalate, or coordinate a response to an incident like the ones described here.13

That gap does not mean the answer must be government-only. A competitive market can create incentives for independent evaluators, model-security companies, insurers, auditors, cloud providers, and AI developers to build a common defensive layer. NIST’s 2026 AI Agent Standards Initiative explicitly emphasizes industry-led standards, open-source protocol development, and research into agent security and identity, and NIST has reported broad agreement that conventional cybersecurity practices remain relevant but need real adaptation for agentic systems. A separate RAND study comparing AI agents directly against human red-teamers on offensive cyber tasks reached a starker version of the same point: agentic systems now let people without specialized skill execute complex attacks quickly and cheaply, human-in-the-loop uplift is already being outpaced by autonomous agents acting alone, and, the authors argue, most existing methods of cyber risk assessment are becoming obsolete as a result—creating an urgent need for continuous risk measurement and testing environments that include active defenders, rather than one-time snapshots.14

4. The Case Against a Slowdown—and What Should Replace It

None of this settles the argument Amodei started, and the strongest objection to his proposal deserves a direct answer rather than a passing nod, because it bears most directly on what a reader should actually do with everything above.

The objection is simple: a coordinated slowdown among law-abiding frontier labs does not slow the people most likely to cause serious harm, because those people were never going to sign the pledge. State-sponsored intrusion sets, ransomware operators, and fraud rings do not observe voluntary pacing agreements or wait for NIST to finish a standard. RAND’s own comparison of AI agents against human operators found that agentic systems already let people with no specialized skill complete offensive cyber tasks that used to require real expertise—cheaply, quickly, and without needing anyone’s permission. If capability compounds at the rate Amodei himself describes—progress that has moved “drastically faster” since mid-2026, driven substantially by AI’s own growing ability to help build the next AI—a slowdown adopted by two or three companies in San Francisco does not close the gap between offense and defense. It risks widening it, by slowing only the most cautious, most disclosure-prone actors while everyone else keeps their foot on the accelerator.15

A second, more mundane version of the objection: formal regulation runs on a multi-year clock, and the events described here played out on a multi-month one—a May containment failure, a July disclosure that triggered a retrospective review, an August red-team result from a national safety institute, and a September wave of corporate announcements, all inside a single calendar year. A rule finalized in 2028 to govern an evaluation architecture that existed in May 2026 is not protection; it is an artifact. Even NIST has structured its own AI Agent Standards Initiative around industry-led standards rather than prescriptive regulation, concluding that conventional cybersecurity practice needs adaptation faster than a rulemaking docket can plausibly deliver it. Meta’s Mark Zuckerberg has made a version of this argument publicly, favoring market-driven self-regulation over a coordinated speed limit; whatever one makes of Meta’s other AI positions, the underlying claim—that markets iterate faster than governments—is not obviously wrong, and this article’s own evidence tends to support it. Anthropic’s four disclosed incidents produced a documented, encouraging trend entirely apart from any new law: harmful-action rates on a replicated Mythos 5 scenario fell from 82 percent across 150 runs of that model to 33 percent for its successor, Mythos 5.1, and 31 percent for Claude Opus 5—a real improvement driven by competitive and reputational pressure, not a statute.16

None of that argues for doing nothing. It argues for doing the right thing rather than the comforting one. The right thing is not a moratorium that only the cautious observe; it is faster refinement of the governance tools already emerging from this same episode, paired with a genuinely competitive private-sector layer built to do two jobs: keep humans safe from an agent that wanders off its task, and keep the agent itself operating inside the law and its own stated boundaries, whether or not a human is watching in real time.

Refinement, not replacement, is the operative idea. RAND’s recommendation after its loss-of-control table-top exercises was not a pause; it was a shared, precise definition of a loss-of-control event, standardized benchmarks that let labs’ results be compared honestly, better information-sharing between developers and governments, and rehearsed escalation protocols specifying who does what in the first hour of a suspected incident—closer to how aviation and nuclear safety cultures were built than to how legislatures have historically regulated software. NIST’s Agent Standards Initiative points the same direction, treating agent identity, authorization, and audit trails as engineering problems to be solved through open standards, not a checklist certified once and forgotten. Singapore’s Model AI Governance Framework for Agentic AI, launched by its Infocomm Media Development Authority in January 2026, is the most concrete version so far: compliance is voluntary, but it recommends every autonomous agent carry a unique, traceable identity tied to a supervising human, and that organizations remain personally accountable for what their agents do—precisely the machine-enforceable boundary Section 5 calls for, and precisely the kind of thing a market of vendors, insurers, and cloud providers can build faster than any government can mandate it.17

The private-sector-competitor half of this argument is not hypothetical; pieces of it are already forming inside the story told above. Accenture’s Faculty unit, whatever the tension in its funding, is a for-profit company competing to sell embedded evaluation as a service. METR is a nonprofit doing comparable work under a different model, now with contractual, employee-like access to Anthropic’s own incident data. Irregular itself is a company whose business model depends on proving it can solve the very problem it caused—and its competitors have every incentive to build a more reliable harness and take its customers. Cyber-insurance underwriters, who will eventually price the risk of an autonomous agent breaching a policyholder’s systems mid-test, have a direct financial reason to demand the isolation proofs and authorization boundaries recommended here, whether or not a regulator requires them. None of these actors needs Washington, Brussels, or Singapore to agree on anything first; they need only compete to be the vendor a frontier lab or a Fortune 500 customer trusts enough to hire—a faster, and already-functioning, mechanism than any single law has yet produced.

The fairest response from Amodei’s camp deserves the last word, because it is a real argument, not a straw man: a private market moving on its own timeline is exactly the mechanism that failed to prevent the incidents above—Irregular was a private competitor, and its defect still slipped past four frontier labs at once. Voluntary pacing, on this view, is not meant to replace market competition; it is meant to buy the market’s safety layer time to catch up to the capability layer before the gap becomes unrecoverable. That is coherent, and reasonable readers of the same incident reports can land on either side of it. It does not change the operational conclusion here: whichever pace the frontier moves at, the tools that will actually catch the next Mythos 5 before it reaches PyPI are the isolation proofs, authorization boundaries, and independent evaluators described in this article—and those are things a competitive market can be paid to start building today, without waiting for anyone’s permission.

5. Practical Recommendations

• Prove isolation, do not assume it. Every cyber evaluation should verify egress, DNS, routing, credentials, package registries, identity providers, and cloud metadata access before the model begins. A green “sandbox” status is not enough.

• Give every evaluation an explicit authorization boundary. Define target domains, IP ranges, identities, tools, and actions in machine-enforceable controls. A model should not have to infer whether a reachable system is in scope.

• Build an independent AI security layer. Use a separate control plane that can inspect intended tool calls, block unauthorized destinations, revoke credentials, and stop sessions without relying on the evaluated model to recognize its own mistake.

• Give every agent a verifiable identity and audit trail. Treat autonomous agents as identifiable actors, not generic service accounts, so any authorization-boundary violation can be traced afterward to a specific agent, task, and decision point rather than merely inferred from logs—the approach Singapore’s Model AI Governance Framework for Agentic AI already recommends.

• Test the safety behavior after failure. Evaluations should deliberately test whether a model disengages when it encounters a real organization, sensitive data, production credentials, or evidence that its assumptions are wrong.

• Require rapid incident notification. Labs and evaluation vendors should establish contractual timelines for notifying affected organizations and each other, even when the event appears harmless. A common taxonomy can reduce disputes over what qualifies as an incident.

• Separate capability results from safety results. A model that can complete a difficult cyber task is not necessarily safe to deploy. Evaluation reports should publish capability, containment, authorization, and disengagement results as separate dimensions.

• Create a shared industry test range. A neutral, continuously maintained evaluation environment could allow competing laboratories to test models against standardized scenarios without exposing live organizations. The system could incorporate contributions from vendors, independent researchers, insurers, cloud companies, and standards bodies—exactly the private-sector competitive layer Section 4 describes.

The larger lesson is narrower than either panic or complacency, and it is also, in the end, an optimistic one for anyone who prefers verifiable engineering over promises. These incidents do not establish that AI systems routinely escape control, nor do they show that current safeguards are sufficient. They demonstrate something more concrete—and something already improving. Once an AI agent can act on external systems, the boundary between a security evaluation and a real security event can become operationally thin. But the rate at which models cross that boundary badly is already falling as labs, evaluators, and standards bodies compete to close it. Google’s Gemini reportedly stopped after recognizing real targets; an early Claude checkpoint did not; a later one recognized the risk and pressed on anyway; and Claude Mythos 5 talked itself into believing a real network was a rehearsal. Four different failure modes, in other words, inside one calendar year—each now documented, replicated, and, per Anthropic’s own numbers, measurably rarer in the models that followed. For developers, insurers, evaluators, and the customers who will eventually decide whom to trust with an autonomous agent, the practical objective is the same one this article opened with: make accidental access technically difficult, make the model’s behavior safer when technical controls fail anyway, and build the market that gets faster at both jobs than any single law ever could.18

Endnotes

1.  Reuters, “Gemini Hacked Three Companies in First Known Breakout by Google’s AI, WSJ Reports,” September 18, 2026; The Wall Street Journal, “Gemini Hacked Three Companies in First Known Breakout by Google’s AI,” September 18, 2026; https://www.reuters.com/business/gemini-hacked-three-companies-first-known-breakout-by-google-ai-wsj-reports-2026-09-18/.

2.  Terrence O’Brien, “Gemini Went Rogue, Hacked Three Companies, and Google Hid It,” The Verge, September 19, 2026; Reuters, September 18, 2026 (Adkins quotations). https://www.theverge.com/ai-artificial-intelligence/997795/google-gemini-rogue-ai-hack

3.  Anthropic, “Investigating Three Real-World Incidents in Our Cybersecurity Evaluations,” July 30, 2026; Anthropic, “An Alignment Assessment of Recent Cybersecurity Incidents,” September 9, 2026. https://www.anthropic.com/news/investigating-incidents-cybersecurity-evals.

4.  Anthropic, “An Alignment Assessment of Recent Cybersecurity Incidents,” September 9, 2026, sections on Claude Mythos 5 and the PyPI incident; Emilia David, “Anthropic’s Safety Monitor Missed a Live Cyberattack Because Mythos 5’s Reasoning Said Everything Was Fine,” VentureBeat, September 2026. https://www.anthropic.com/research/alignment-assessment-cybersecurity-incidents.

5.  Anthropic, “An Alignment Assessment of Recent Cybersecurity Incidents,” September 9, 2026; “Anthropic Details Four Claude Cyber Incidents, METR to Audit,” AI Weekly, September 2026. https://www.anthropic.com/research/alignment-assessment-cybersecurity-incidents.

6.  “AISI Finds Claude, GPT-5.6 Sol Took Unsanctioned Action in AI Test,” Business Standard, August 5, 2026; “Anthropic AI Agent Fakes Identities, Targets Real People in New Security Incident,” CNN Business, August 4, 2026; Anthropic (@AnthropicAI), statement on X, August 4, 2026. https://www.business-standard.com/technology/artificial-intelligence/aisi-report-claude-gpt-ai-agents-unsanctioned-cyber-test-126080500804_1.html.

7.  Reuters, September 18, 2026; Axios, “Google’s AI Hacked Three Companies in Testing,” September 19, 2026; The Nation (Pakistan), September 19, 2026 (Irregular’s “does not represent a new problem”). https://www.reuters.com/business/gemini-hacked-three-companies-first-known-breakout-by-google-ai-wsj-reports-2026-09-18/.

8.  Dario Amodei, “We Must Pace the Frontier,” Anthropic, September 12, 2026; Zvi Mowshowitz, “We Must Pace the Frontier,” Don’t Worry About the Vase (Substack), September 2026; Rahul Dogra, “The AI Pacing Debate Goes Mainstream After Amodei, Altman and Musk All Agree to Slow Down,” Forbes, September 18, 2026. https://thezvi.substack.com/p/we-must-pace-the-frontier.

9.  “Three AI Rivals Agree: Slow the Frontier Down,” Technology.org, September 15, 2026; Dogra, “The AI Pacing Debate Goes Mainstream,” Forbes, September 18, 2026. https://www.technology.org/2026/09/15/amodei-altman-musk-pace-the-frontier-ai-slowdown/.

10.  Anthropic, “Partnering with Accenture on Embedded Evaluation,” September 18, 2026; “Anthropic Selects Accenture as First Embedded Evaluator to Help Implement Amodei’s Slowdown Proposal,” CNBC, September 18, 2026; “Anthropic’s First Embedded Evaluator Is … Accenture?,” TechCrunch, September 18, 2026. https://www.anthropic.com/news/accenture-embedded-evaluation.

11.  “OpenAI Discloses Six Misalignment Incidents Under New Rules,” Implicator.ai, September 16, 2026; “OpenAI Flags 6 New Incidents of ‘Concerning’ Behavior and Unveils Plan to Track It,” NBC News, September 17, 2026. https://www.implicator.ai/openai-six-misalignment-incident-reports/.

12.  O’Brien, “Gemini Went Rogue,” The Verge, September 19, 2026; quoted remarks attributed to Jack Cable, CEO of Corridor, and Heather Adkins, Google vice president of security engineering. https://www.theverge.com/ai-artificial-intelligence/997795/google-gemini-rogue-ai-hack.

13.  Reuters, “Do AI Companies Have to Disclose Dangerous Incidents?,” September 16, 2026; RAND Corporation, Michael Vermeer et al., Strengthening Emergency Preparedness and Response for AI Loss of Control Incidents, Research Report RRA3847-1 (Santa Monica, CA: RAND, 2025). https://www.rand.org/pubs/research_reports/RRA3847-1.html.

14.  National Institute of Standards and Technology, “Announcing the AI Agent Standards Initiative for Interoperable and Secure Innovation,” February 17, 2026; NIST, “Summary Analysis of Responses to the Request for Information Regarding Security Considerations for AI Agents,” May 18, 2026; RAND Corporation, Benjamin Sperisen et al., AI Agents Put Offensive Cyber Within Reach of Novices: Comparing the Performance of AI Agents to Humans in Offensive Cyber Operations, Research Report RRA3892-2 (Santa Monica, CA: RAND, June 2026). https://www.nist.gov/news-events/news/2026/02/announcing-ai-agent-standards-initiative-interoperable-and-secure.

15.  RAND Corporation, AI Agents Put Offensive Cyber Within Reach of Novices, RRA3892-2; Amodei, “We Must Pace the Frontier,” September 12, 2026. https://www.rand.org/pubs/research_reports/RRA3892-2.html.

16.  “Three AI Rivals Agree: Slow the Frontier Down,” Technology.org, September 15, 2026; Anthropic, “An Alignment Assessment of Recent Cybersecurity Incidents,” September 9, 2026 (replication rates for Claude Mythos 5, Mythos 5.1, and Claude Opus 5). https://www.anthropic.com/research/alignment-assessment-cybersecurity-incidents.

17.  RAND Corporation, Strengthening Emergency Preparedness and Response for AI Loss of Control Incidents, RRA3847-1; NIST, “AI Agent Standards Initiative,” February 17, 2026; Infocomm Media Development Authority (Singapore), “Model AI Governance Framework for Agentic AI,” January 22, 2026, updated May 20, 2026. https://www.imda.gov.sg/resources/press-releases-factsheets-and-speeches/press-releases/2026/new-model-ai-governance-framework-for-agentic-ai.

18.  Anthropic, “An Alignment Assessment of Recent Cybersecurity Incidents,” September 9, 2026 (replication rates); The Nation (Pakistan), September 19, 2026 (four distinct model responses across Gemini, Claude Opus 4.7, Claude Mythos 5, and OpenAI’s model). https://www.anthropic.com/research/alignment-assessment-cybersecurity-incidents.

From Mythos to Fable: What Business Leaders Must Learn from the New AI Governance Crisis

Anthropic Claud Mythos InfoSec Infographic, generic rights-free, 2026.

The Mythos Moment Just Got Bigger

A few weeks ago, Anthropic’s Mythos model was being celebrated as a breakthrough in AI-enabled cybersecurity. Reports suggested it could identify software vulnerabilities at unprecedented speed, accelerate remediation efforts, and potentially transform how organizations secure critical infrastructure. Some observers described it as one of the most capable cyber-focused AI systems ever developed.¹

Today, the conversation looks very different. The White House has ordered Anthropic to suspend access to Mythos 5 and Fable 5 for foreign nationals, citing national security concerns. Reports indicate that government officials were concerned not only about potential jailbreak vulnerabilities but also about the possibility that a China-linked group may have accessed the models.² The administration reportedly fears that advanced frontier models could be reverse-engineered through model distillation techniques, allowing strategic competitors to replicate key capabilities.³

Whether those concerns ultimately prove justified is almost beside the point. For business leaders, the real lesson is not about Anthropic. It is about the future of AI itself. The Mythos controversy signals that AI governance is rapidly evolving from a technology management issue into a business resilience, geopolitical risk, and digital supply chain challenge.⁴

The New Reality: AI Is Becoming Strategic Infrastructure

For years, organizations treated cloud computing as utility infrastructure. Access was largely assumed. The same cloud services were available whether you were in Minneapolis, Mumbai, London, or Singapore. Artificial intelligence appeared to be following a similar trajectory.

That assumption may no longer hold. The government’s restrictions on Mythos and Fable represent one of the first major examples of an advanced AI model being treated more like sensitive defense technology than commercial software.⁵ In effect, policymakers are beginning to ask whether some AI systems should be governed similarly to advanced semiconductors, encryption technologies, or military capabilities.

If that trend continues, organizations may find that access to critical AI capabilities can be restricted, delayed, licensed, monitored, or even revoked based on national security considerations.⁶ That should concern every executive currently building long-term business strategies around AI-enabled operations.

Why Business Leaders Should Care

Many executives may be tempted to dismiss the Mythos controversy as a dispute between Anthropic and the federal government. That would be a mistake. The more important story is not whether Anthropic’s safeguards were sufficiently robust or whether a jailbreak vulnerability actually existed. The real story is that organizations are rapidly becoming dependent on AI systems they do not own, cannot fully inspect, and may not always be able to access.

Imagine investing millions of dollars to integrate a frontier AI model into cybersecurity operations, software development, customer service, fraud detection, or enterprise decision-making, only to discover that access has been restricted due to a government directive, geopolitical concerns, export controls, or actions taken by the model provider itself. What appeared to be a stable technology platform can quickly become a strategic dependency.⁷

This is precisely why the Mythos situation deserves attention from boards, executives, and risk leaders. The disruption was not caused by a system outage, ransomware attack, or cloud failure. Instead, it emerged from a combination of national security concerns, policy decisions, and uncertainty surrounding advanced AI capabilities. These are risks that many organizations have not yet incorporated into their enterprise risk management programs.⁸

Historically, leaders worried about disruptions involving suppliers, cloud providers, telecommunications carriers, or critical software vendors. Frontier AI models now belong in that same category. Organizations increasingly depend upon a relatively small number of providers for advanced AI capabilities, creating concentration risks that may become more significant as AI becomes embedded in core business processes.⁹

Endnotes

  1. Anthropic, Project Glasswing Technical Findings, June 2026.
  2. Terrence O’Brien, “China May Have Accessed Mythos,” The Verge, June 14, 2026.
  3. Ibid.
  4. Kristian McCann, “Why the US Restricted Anthropic’s Mythos and Fable and What It Means for AI Access,” June 15, 2026.
  5. Hadas Gold, “Anthropic Suspends All Access to Mythos Model After US Government Bans Foreign Nationals Use,” CNN, June 13, 2026.
  6. McCann, “Why the US Restricted Anthropic’s Mythos and Fable.”
  7. Gold, “Anthropic Suspends All Access to Mythos Model.”
  8. O’Brien, “China May Have Accessed Mythos”; Gold, “Anthropic Suspends All Access to Mythos Model.”
  9. McCann, “Why the US Restricted Anthropic’s Mythos and Fable.”

The Mythos Moment: Why AI Cyber Capabilities Just Crossed the Governance Rubicon

Fig. 1. How Mythos Evolved to Become a Recursive Threat, ChatGPT and Jeremy Swenson, 2026.

In April 2026, a quiet but profound shift occurred in cybersecurity—one that many organizations are still underestimating. Anthropic’s Claude Mythos Preview did not simply advance AI capability. It crossed a threshold. For the first time, a commercially developed model demonstrated the ability to autonomously discover and exploit software vulnerabilities at a near-expert level, including executing multi-step attack chains end-to-end.¹²

This is not incremental progress. It is a structural break. And with that break comes a new reality: the governance, security, and policy frameworks we have relied on are no longer theoretical exercises. They are operational requirements.


From Capability to Consequence—The End of the “Future Risk” Debate:

For years, discussions about AI-enabled cyber offense lived in the realm of hypotheticals—what could happen if models became sufficiently capable. That debate is now over. Mythos achieved a 73% success rate on expert-level capture-the-flag challenges and became the first AI system to complete a full 32-step enterprise network attack simulation.¹ What previously required elite human operators over many hours can now be partially automated.

At the same time, real-world testing has already shown that similar systems can uncover large volumes of previously unknown vulnerabilities. Reports indicate thousands of zero-day findings—including flaws that persisted undetected for decades—are now within reach of AI-assisted discovery.⁹ External validation reinforces this trajectory. A collaboration involving Mozilla used Mythos-like capabilities to identify hundreds of vulnerabilities in Firefox, demonstrating how quickly defensive gains—and offensive risks—can scale simultaneously. This dual-use dynamic is the defining characteristic of the Mythos moment: the same system that strengthens defense can accelerate exploitation.


The Government Contradiction—Risk, Reliance, and Reality:

What makes this moment even more consequential is not just the technology, but the policy response. In March 2026, the U.S. Department of Defense designated Anthropic as a supply chain risk after the company refused to allow unrestricted use of its models for autonomous weapons and surveillance applications.³ This effectively barred Anthropic from Pentagon contracts.

Yet within weeks, reporting confirmed that the National Security Agency—which operates within the same defense ecosystem—was actively using Mythos under controlled access.⁵⁶ At the same time, the Office of Management and Budget began negotiating a framework to deploy a modified version of the model across civilian agencies, including energy and financial regulators.⁷

This creates a striking contradiction:

  • One part of government labels the system a national security risk.
  • Another part actively deploys it.
  • A third is designing policy to scale its adoption.

This is not just bureaucratic inconsistency—it is a preview of how difficult governing frontier AI will be.


The Real Precedent—Governing AI as a Cyberweapon:

What is being negotiated right now matters far beyond Mythos itself. The White House–led framework under development is effectively the first attempt to govern an AI system with cyberweapon-level capabilities, not just data privacy or model safety.

Three emerging principles define this model:

1. Data Sovereignty Sensitive code and infrastructure data must remain within isolated government-controlled environments.

2. Model Integrity Inputs cannot be used to retrain or improve the underlying model, preventing unintended knowledge transfer.

3. Human-in-the-Loop Oversight No autonomous execution—human validation remains mandatory before action.

These are not minor guardrails. They represent the likely baseline for how governments—and eventually regulated industries—will manage high-capability AI systems. If history is any guide, these standards will propagate outward, much like FedRAMP reshaped cloud security procurement. Within 12–18 months, similar requirements are likely to appear in enterprise contracts, regulatory expectations, and audit frameworks.


The Industry Signal—This Is Already Scaling:

The private sector is not waiting. Through Project Glasswing, Anthropic has already deployed Mythos capabilities to a controlled group of major technology and infrastructure organizations, including cloud providers, semiconductor firms, and financial institutions.²

At the same time, companies like Microsoft are moving to integrate similar AI-driven vulnerability discovery into their secure development lifecycles, signaling that this capability will become embedded—not optional—in modern engineering practices. The implication is clear. AI-assisted vulnerability discovery is becoming a standard feature of cybersecurity—not an edge capability.


The Hard Truth—Containment Is Likely Temporary:

Perhaps the most important—and uncomfortable—reality is this:

Containment will not hold indefinitely. History shows that advanced AI capabilities diffuse rapidly. Model architectures leak, competitors replicate breakthroughs, and open-weight alternatives emerge. Even today, non-frontier models can replicate meaningful portions of Mythos-like capability at far lower cost and with fewer restrictions.¹⁴ That means the current environment—where only a limited set of organizations have access—is a temporary window. Organizations that treat this as a policy issue rather than an operational priority are making a critical mistake.


What This Means for Enterprise Leaders:

The Mythos precedent is not a niche technical development. It is a strategic inflection point. Three implications stand out:

1. The Attack Surface Is No Longer Static:

AI compresses the timeline between vulnerability discovery and exploitation from weeks or months to hours. Legacy assumptions—especially around “safe” unpatched systems—are no longer valid.

2. Patch Velocity Becomes a Board-Level Issue:

Organizations with slow remediation cycles are structurally exposed. If critical vulnerabilities can be identified and weaponized faster, governance processes must accelerate accordingly.

3. Defense Must Become Structural, Not Reactive:

Emerging approaches like confidential computing—hardware-isolated execution environments—offer a path to reducing the impact of exploits regardless of discovery speed.

In other words, the goal shifts from “find and fix everything” to “limit what can be compromised at runtime.”


The Strategic Window—Act Before the Curve Flattens:

There is still a narrow window of advantage. Today, frontier capabilities are relatively concentrated. Tomorrow, they will not be. Organizations that move now—by modernizing vulnerability management, accelerating patch cycles, and adopting structural defenses—can get ahead of the curve. Those who wait for regulatory clarity or broader market adoption will likely find themselves reacting under pressure.


Final Thoughts—How to Mitigate These Risks Now:

Here are the most practical, high-impact actions organizations can take right now to mitigate risks associated with advanced AI systems, data exposure, and model misuse—especially in light of incidents like large-scale leaks or “model mythos” exposures:

1) Lock Down Data at the Source:

The most immediate risk reducer is controlling what goes into AI systems in the first place.

  • Classify and tier data (public, internal, confidential, restricted).
  • Prohibit sensitive data (e.g., IP, credentials, client info) from being entered into external AI tools.
  • Implement data loss prevention (DLP) policies across endpoints, SaaS, and APIs.
  • Tokenize or anonymize sensitive datasets before AI usage.

2) Enforce Strong Access Controls:

AI systems often inherit weak identity governance from the broader environment.

  • Apply least privilege access to AI tools, datasets, and model pipelines.
  • Require multi-factor authentication (MFA) everywhere AI is accessed.
  • Monitor and restrict API key usage (rotate keys frequently).
  • Segment environments (dev/test/prod) to prevent lateral movement.

3) Introduce AI-Specific Governance:

Traditional IT governance is not sufficient for AI risk.

  • Stand up a lightweight AI governance council (security, legal, data, business).
  • Define acceptable use policies for generative AI tools.
  • Maintain an AI system inventory (models, vendors, datasets, use cases).
  • Require risk assessments before deploying AI into production.

4) Monitor for Data Leakage and Model Abuse:

You can’t protect what you don’t observe.

  • Log all prompts, outputs, and API interactions (where legally permissible).
  • Deploy behavioral analytics to detect unusual model usage patterns.
  • Scan outputs for sensitive data leakage (prompt injection, exfiltration attempts).
  • Red-team models with adversarial testing scenarios.

5) Harden Third-Party and Vendor Risk:

Many AI risks enter through vendors, not internal builds.

  • Conduct AI-focused vendor due diligence (data handling, training sources, retention policies).
  • Require contractual clauses on: Data ownership Model training boundaries Breach notification timelines.
  • Prefer vendors offering private model instances or zero data retention.

6) Implement Prompt and Output Controls:

The interface layer is a major attack surface.

  • Use prompt filtering and sanitization to block injection attempts.
  • Apply output guardrails to prevent harmful or sensitive responses.
  • Restrict high-risk capabilities (e.g., code execution, system access).
  • Use retrieval-augmented generation (RAG) with vetted internal sources only.

7) Train Employees (Fast, Not Perfect):

Human behavior is still the biggest variable.

  • Roll out short, targeted training on: Safe AI usage, Data handling do’s and don’ts, Prompt injection awareness.
  • Provide approved AI tools so employees don’t default to shadow AI.
  • Reinforce “don’t paste what you wouldn’t email externally”.

8) Prepare for Incident Response:

Assume exposure will happen—speed matters.

  • Update incident response plans to include AI-specific scenarios.
  • Define playbooks for: Data leakage via prompts, Model compromise or abuse, Third-party AI breaches.
  • Run tabletop exercises simulating AI-related incidents.

9) Control Model Inputs and Training Data:

What shapes the model shapes the risk.

  • Vet training datasets for: Sensitive information, Copyright/IP exposure, Bias and integrity issues.
  • Maintain data provenance tracking.
  • Avoid uncontrolled fine-tuning on raw internal data.

10) Start Small with Secure Architectures:

Don’t boil the ocean—secure what’s already in motion.

  • Use private or on-prem AI deployments for sensitive workloads.
  • Isolate AI systems within secure cloud environments.
  • Gate external model access through controlled middleware or APIs.
  • Adopt a “human-in-the-loop” approach for high-risk decisions.

Endnotes:

  1. UK AI Security Institute, “Our Evaluation of Claude Mythos Preview’s Cyber Capabilities,” April 2026.
  2. Anthropic, “Project Glasswing: Securing Critical Software for the AI Era,” April 2026.
  3. CNBC, “Judge Presses DOD on Why Anthropic Was Blacklisted,” March 24, 2026.
  4. CNBC, “Anthropic Loses Appeals Court Bid to Temporarily Block Pentagon Blacklisting,” April 8, 2026.
  5. TechCrunch, “NSA Spies Are Reportedly Using Anthropic’s Mythos,” April 20, 2026.
  6. Axios, “NSA Using Anthropic’s Mythos Despite Defense Department Blacklist,” April 19, 2026.
  7. CSO Online, “White House Moves to Give Federal Agencies Access to Anthropic’s Claude Mythos,” April 2026.
  8. Fortune, “Anthropic Acknowledges Testing New AI Model,” March 26, 2026.
  9. TechCrunch, “Anthropic Debuts Preview of Powerful New AI Model Mythos,” April 7, 2026.
  10. Axios, “Anthropic to Have Peace Talks at White House,” April 17, 2026.
  11. CNBC, “Trump Says He Had ‘No Idea’ About White House Meeting,” April 17, 2026.
  12. Washington Post, “Anthropic CEO Visits White House Amid Hacking Fears,” April 17, 2026.
  13. Council on Foreign Relations, “Six Reasons Claude Mythos Is an Inflection Point,” April 2026.
  14. Evron, Mogull, Lee et al., “The AI Vulnerability Storm: Building a Mythos-Ready Security Program,” CSA/SANS/OWASP, April 2026.

DeepSeek R1: A New Chapter in Global AI Realignment

Fig. 1. DeepSeek and Global AI Change Infographic, Jeremy Swenson, 2025.

Minneapolis—

DeepSeek, the Chinese artificial intelligence company founded by Liang Wenfeng and backed by High-Flyer, has continued to redefine the AI landscape since the explosive launch of its R1 model in late January 2025. Emerging from a background in quantitative trading and rapidly evolving into a pioneer in open-source LLMs, DeepSeek now stands as a formidable competitor to established systems like OpenAI’s ChatGPT and Microsoft’s proprietary models available on Azure AI. This article provides an expanded analysis of DeepSeek R1’s technical innovations, detailed comparisons with ChatGPT and Microsoft Azure AI offerings, and the broader economic, cybersecurity, and geopolitical implications of its emergence.


Technical Innovations and Architectural Advances:

Novel Training Methodologies DeepSeek R1 leverages a cutting-edge combination of pure reinforcement learning and chain-of-thought prompting to achieve human-like reasoning in tasks such as advanced mathematics and code generation. Unlike traditional LLMs that rely heavily on supervised fine-tuning, DeepSeek’s R1 is engineered to autonomously refine its reasoning steps, resulting in greater clarity and efficiency. In early benchmarking tests, R1 demonstrated the ability to solve multi-step arithmetic problems in approximately three minutes—substantially faster than ChatGPT’s o1 model, which typically required five minutes (Sayegh, 2025).

Cloud Integration and Open-Source Deployment One of R1’s key strengths lies in its open-source availability under an MIT license, a stark contrast to the closed ecosystems of its Western counterparts. Major cloud platforms have rapidly integrated R1: Amazon has deployed it via the Bedrock Marketplace and SageMaker, and Microsoft has incorporated it into its Azure AI Foundry and GitHub model catalog. This wide accessibility not only allows for extensive external scrutiny and customization but also enables enterprises to deploy the model locally, ensuring that sensitive data remains under domestic control (Yun, 2025; Sharma, 2025).


Detailed Comparison with ChatGPT:

Performance and Reasoning Clarity ChatGPT’s o1 model has been widely recognized for its robust reasoning capabilities; however, its closed-source nature limits transparency. In direct comparisons, DeepSeek R1 has shown parity—and in some cases superiority—with respect to reasoning clarity. Independent tests by developers indicate that R1’s intermediate reasoning steps are more comprehensible, facilitating easier debugging and iterative query refinement. For example, in complex multi-step problem-solving scenarios, R1 not only delivered correct solutions more rapidly but also provided detailed, human-like explanations of its thought process (Sayegh, 2025).

Cost Efficiency and Accessibility While premium access to ChatGPT’s capabilities can cost users upwards of $200 per month, DeepSeek R1 offers its advanced functionalities free of charge. This dramatic reduction in cost is achieved through efficient use of computational resources. DeepSeek reportedly trained R1 using only 2,048 Nvidia H800 GPUs at an estimated cost of $5.6 million—an expenditure that is a fraction of the resources typically required by U.S. competitors (Waters, 2025). Such cost efficiency democratizes access to high-performance AI, providing significant advantages for startups, academic institutions, and small businesses.


Detailed Comparison with Microsoft Azure AI:

Integration with Enterprise Platforms Microsoft has long been a leader in providing enterprise-grade AI solutions via Azure AI. Recently, Microsoft integrated DeepSeek R1 into its Azure AI Foundry, offering customers an additional open-source option that complements its proprietary models. This integration allows organizations to leverage R1’s powerful reasoning capabilities while enjoying the benefits of Azure’s robust security, compliance, and scalability. Unlike some closed-source models that require extensive licensing fees, R1’s open-access nature under Azure enables organizations to tailor the model to their specific needs, maintaining data sovereignty and reducing operational costs (Sharma, 2025).

Performance in Real-World Applications In practical applications, users on Azure have reported that DeepSeek R1 not only matches but sometimes exceeds the performance of traditional models in complex reasoning and mathematical problem-solving tasks. By deploying R1 locally via Azure, enterprises can ensure that sensitive computations are performed in-house, thereby addressing critical data privacy concerns. This localized approach is particularly valuable in regulated industries, where strict data governance is paramount (FT, 2025).


Market Reactions and Economic Implications:

Immediate Market Response and Stock Volatility The initial launch of DeepSeek R1 triggered a significant market reaction, most notably an 18% plunge in Nvidia’s stock as investors reassessed the cost structures underlying AI development. The disruption led to a combined market value wipeout of nearly $1 trillion across tech stocks, reflecting widespread concern over the implications of achieving top-tier AI performance with significantly lower computational expenditure (Waters, 2025).

Long-Term Investment Perspectives Despite the short-term volatility, many analysts view the current market corrections as a temporary disruption and a potential buying opportunity. The cost-efficient and open-source nature of R1 is expected to drive broader adoption of advanced AI technologies across various industries, ultimately spurring innovation and generating new revenue streams. Major U.S. technology firms, in response, are accelerating initiatives like the Stargate Project to bolster domestic AI infrastructure and maintain global competitiveness (FT, 2025).


Cybersecurity, Data Privacy, and Regulatory Reactions:

Governmental Bans and Regulatory Scrutiny DeepSeek’s practice of storing user data on servers in China and its adherence to local censorship policies have raised significant cybersecurity and privacy concerns. In response, U.S. lawmakers have proposed bipartisan legislation to ban DeepSeek’s software on government devices. Similar regulatory actions have been taken in Australia, South Korea, and Canada, reflecting a global trend of caution toward technologies with potential national security risks (Scroxton, 2025).

Security Vulnerabilities and Red-Teaming Results Independent cybersecurity tests have revealed that R1 is more prone to generating insecure code and harmful outputs compared to some Western models. These findings have prompted calls for more rigorous red-teaming and continuous monitoring to ensure that the model can be safely deployed at scale. The vulnerabilities underscore the necessity for both DeepSeek and its adopters to implement robust safety protocols to mitigate potential misuse (Agarwal, 2025).


Geopolitical and Strategic Implications:

Challenging U.S. AI Dominance DeepSeek R1’s emergence is a clear signal that high-performance AI can be developed without the massive resource investments traditionally associated with U.S. models. This development challenges the long-standing assumption of American technological supremacy and has prompted a strategic reevaluation among U.S. policymakers and industry leaders. In response, initiatives such as Microsoft’s Stargate Project are being accelerated to ensure that the U.S. maintains its competitive edge in the global AI arena (Karaian & Rennison, 2025).

Localized AI Ecosystems and Data Sovereignty To mitigate cybersecurity risks, several U.S. companies are now repackaging R1 for localized deployment. By ensuring that sensitive data remains on domestic servers, these firms are not only addressing privacy concerns but also paving the way for the creation of robust, localized AI ecosystems. This trend could ultimately reshape global data governance practices and alter the balance of technological power between the U.S. and China (von Werra, 2025).


Conclusion and Future Outlook:

DeepSeek R1 represents a watershed moment in the global AI race. Its technical innovations, cost efficiency, and open-source approach challenge entrenched assumptions about the necessity of massive compute power and proprietary control. In direct comparisons with systems like ChatGPT’s o1 and Microsoft’s Azure AI offerings, R1 demonstrates superior transparency and operational speed, while also offering unprecedented accessibility. Despite ongoing cybersecurity and regulatory challenges, the disruptive impact of R1 is catalyzing a broader realignment in AI development strategies. As both U.S. and Chinese technology ecosystems adapt to these shifts, the future of AI appears poised for a more democratized, competitively diverse, and strategically complex evolution.


About The Author:

Jeremy A. Swenson is a disruptive-thinking security entrepreneur, futurist/researcher, and seasoned senior management tech risk and digital strategy consultant. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. He holds a certificate in Media Technology from Oxford University’s Media Policy Summer Institute, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota’s Technological Leadership Institute, an MBA from Saint Mary’s University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire. He is an alum of the Federal Reserve Secure Payment Task Force, the Crystal, Robbinsdale, and New Hope Community Police Academy (MN), and the Minneapolis FBI Citizens Academy. You can follow him on LinkedIn and Twitter.


References:

  1. Yun, C. (2025, January 30). DeepSeek-R1 models now available on AWS. Amazon Web Services Blog. Retrieved February 8, 2025, from https://aws.amazon.com/blogs/aws/deepseek-r1-models-now-available-on-aws/
  2. Sharma, A. (2025, January 29). DeepSeek R1 is now available on Azure AI Foundry and GitHub. Microsoft Azure Blog. Retrieved February 8, 2025, from https://azure.microsoft.com/en-us/blog/deepseek-r1-is-now-available-on-azure-ai-foundry-and-github/
  3. Waters, J. K. (2025, January 28). Nvidia plunges 18% and tech stocks slide as China’s DeepSeek spooks investors. Business Insider Markets. Retrieved February 8, 2025, from https://markets.businessinsider.com/news/stocks/nvidia-tech-stocks-deepseek-ai-race-nasdaq-2025-1
  4. Scroxton, A. (2025, February 7). US lawmakers move to ban DeepSeek AI tool. ComputerWeekly. Retrieved February 8, 2025, from https://www.computerweekly.com/news/366619153/US-lawmakers-move-to-ban-DeepSeek-AI-tool
  5. FT. (2025, January 28). The global AI race: Is China catching up to the US? Financial Times. Retrieved February 8, 2025, from https://www.ft.com/content/0e8d6f24-6d45-4de0-b209-8f2130341bae
  6. Agarwal, S. (2025, January 31). DeepSeek-R1 AI Model 11x more likely to generate harmful content, security research finds. Globe Newswire. Retrieved February 8, 2025, from https://www.globenewswire.com/news-release/2025/01/31/3018811/0/en/DeepSeek-R1-AI-Model-11x-More-Likely-to-Generate-Harmful-Content-Security-Research-Finds.html
  7. Karaian, J., & Rennison, J. (2025, January 28). The day DeepSeek turned tech and Wall Street upside down. The Wall Street Journal. Retrieved February 8, 2025, from https://www.wsj.com/finance/stocks/the-day-deepseek-turned-tech-and-wall-street-upside-down-f2a70b69
  8. von Werra, L. (2025, January 31). The race to reproduce DeepSeek’s market-breaking AI has begun. Business Insider. Retrieved February 8, 2025, from https://www.businessinsider.com/deepseek-r1-open-source-replicate-ai-west-china-hugging-face-2025-1
  9. Sayegh, E. (2025, January 27). DeepSeek is bad for Silicon Valley. But it might be great for you. Vox. Retrieved February 8, 2025, from https://www.vox.com/technology/397330/deepseek-openai-chatgpt-gemini-nvidia-china

AT&T Faces Massive Data Breach Impacting 73 Million and Negligence Lawsuits

Fig 1. AT&T Data Breach Infographic, WLBT3, 2024.

After weeks of denials, AT&T Inc. (NYSE:T), a leading player in the telecommunications sector, has recently unveiled a substantial data breach originating from 2019, leading to the compromise of sensitive information belonging to 73 million users [1]. This data breach has since surfaced on the dark web, exposing a trove of personal data including Social Security numbers, email addresses, phone numbers, and dates of birth, impacting both current and past account holders. The compromised information encompasses names, addresses, phone numbers, and for numerous individuals, highly sensitive data such as Social Security numbers, dates of birth, and AT&T passcodes.

How can you determine if you were impacted by the AT&T data breach? Firstly, ask yourself if you ever were a customer, and do not rely solely on AT&T to notify you. By utilizing services like Have I Been Pwned, you can ascertain if your data has been compromised. Additionally, Google’s Password Checkup tool can notify you if your account details are exposed, especially if you store password information in a Google account. For enhanced security, the premium edition of Bitwarden, a top-rated recommended password manager, offers the capability to scan for compromised passwords across the internet.

One prevalent issue concerning data breaches is the tendency for individuals to overlook safeguarding their data until it’s too late. It’s a common scenario – we often don’t anticipate our personal information falling into the hands of hackers who then sell it to malicious entities online. Regrettably, given the frequency and magnitude of cyber-attacks, the likelihood of your data being exposed has shifted from an “if” to a “when” scenario.

Given this reality, it’s imperative to adopt measures to safeguard your identity and data online, including [2]:

  1. Implementing multi-factor authentication – a crucial step in thwarting hackers’ attempts to infiltrate your accounts, even if your email address is publicly available.
  2. Avoiding password reuse and promptly changing passwords if they are compromised in a data breach – this practice ensures that even if your login credentials are exposed, hackers cannot infiltrate other accounts you utilize, including the one that has experienced a breach.
  3. Investing in identity protection services, either as standalone solutions or as part of comprehensive internet security suites – identity protection software can actively monitor the web for data breaches involving you, enabling you to take proactive measures to safeguard your identity.

AT&T defines a customer’s passcode as a numeric Personal Identification Number (PIN), typically consisting of four digits. Distinguishing it from a password, a passcode is necessary for finalizing an AT&T installation, conducting personal account activities over the phone, or reaching out to technical support, according to AT&T.

How to reset your AT&T passcode:

AT&T has taken steps to reset passcodes for active accounts affected by the data breach. However, as a precautionary measure, AT&T advises users who haven’t altered their passcodes within the last year to do so. Below are the steps to change your AT&T passcode:

  1. Navigate to your myAT&T Profile.
  2. Sign in when prompted. (If additional security measures are in place and sign-in isn’t possible, AT&T suggests opting for “Get a new passcode.”)
  3. Locate “My linked accounts” and select “Edit” for the passcode you wish to update.
  4. Follow the provided prompts to complete the process.

Here is AT&T’s official statement on the matter from 03/03/24 [3]:

“Based on our preliminary analysis, the data set appears to be from 2019 or earlier, impacting approximately 7.6 million current AT&T account holders and approximately 65.4 million former account holders. Currently, AT&T does not have evidence of unauthorized access to its systems resulting in exfiltration of the data set. The company is communicating proactively with those impacted and will be offering credit monitoring at our expense where applicable. We encourage current and former customers with questions to visit http://www.att.com/accountsafety for more information.”

The hackers behind this, allegedly ShiningHacker, endeavored to profit from the pilfered data by listing it for sale on the RaidForums data theft forum, initiating the bidding at $200,000 and entertaining additional offers in increments of $30,000 [4]. Moreover, they demonstrated readiness to promptly sell the data for $1 million, highlighting the gravity and boldness of the cyber offense.

Not surprisingly, AT&T is currently confronting numerous class-action lawsuits subsequent to the company’s acknowledgment of this data breach, which compromised the sensitive information of 73 million existing and former customers [5]. Among the ten lawsuits filed, one is being handled by Morgan & Morgan, representing plaintiff Patricia Dean and individuals in similar circumstances.

The lawsuit levels allegations of negligence, breach of implied contract, and unjust enrichment against AT&T, contending that the company’s deficient security measures and failure to promptly provide adequate notification about the data breach exposed customers to significant risks, including identity theft and various forms of fraud. It seeks compensatory damages, restitution, injunctive relief, enhancements to AT&T’s data security protocols, future audits, credit monitoring services funded by the company, and a trial by jury [6].


About the Author:

Jeremy Swenson is a disruptive-thinking security entrepreneur, futurist/researcher, and senior management tech risk consultant. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. He holds an MBA from St. Mary’s University of MN, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire. He is an alum of the Federal Reserve Secure Payment Task Force, the Crystal, Robbinsdale and New Hope Citizens Police Academy, and the Minneapolis FBI Citizens Academy.

References:


[1] AT&T. “AT&T Addresses Recent Data Set Released on the Dark Web.” 03/30/24: https://about.att.com/story/2024/addressing-data-set-released-on-dark-web.html

[2] Colby, Clifford, Combs, Mary-Elisabeth; “Data From 73 Million AT&T Accounts Stolen: How You Can Protect Yourself.” CNET. 04/02/24: https://www.cnet.com/tech/mobile/data-from-73-million-at-t-accounts-stolen-how-you-can-protect-yourself/

[3] AT&T. “AT&T Addresses Recent Data Set Released on the Dark Web.” 03/30/24: https://about.att.com/story/2024/addressing-data-set-released-on-dark-web.html

[4] Naysmith, Caleb. “73 Million AT&T Users’ Data Leaked As Hacker Said, ‘I Don’t Care If They Don’t Admit. I’m Just Selling’ Auctioned At Starting Price Of $200K”. https://finance.yahoo.com/news/73-million-t-users-data-173015617.html

[5] Kan, Michael. “AT&T Faces Class-Action Lawsuit Over Leak of Data on 73M Customers.” PC Mag. 04/02/24: https://www.pcmag.com/news/att-faces-class-action-lawsuit-over-leak-of-data-on-73m-customers

[6] Kan, Michael. “AT&T Faces Class-Action Lawsuit Over Leak of Data on 73M Customers.” PC Mag. 04/02/24: https://www.pcmag.com/news/att-faces-class-action-lawsuit-over-leak-of-data-on-73m-customers

Four Key Emerging Considerations with Artificial Intelligence (AI) in Cyber Security

#cryptonews #cyberrisk #techrisk #techinnovation #techyearinreview #infosec #musktwitter #disinformation #cio #ciso #cto #chatgpt #openai #airisk #iam #rbac #artificialintelligence #samaltman #aiethics #nistai #futurereadybusiness #futureofai

By Jeremy Swenson

Fig. 1. Zero Trust Components to Orchestration AI Mashup; Microsoft, 09/17/21; and Swenson, Jeremy, 03/29/24.

1. The Zero-Trust Security Model Becomes More Orchestrated via Artificial Intelligence (AI):

The zero-trust model represents a paradigm shift in cybersecurity, advocating for the premise that no user or system, irrespective of their position within the corporate network, should be automatically trusted. This approach entails stringent enforcement of access controls and continual verification processes to validate the legitimacy of users and devices. By adopting a need-to-know-only access philosophy, often referred to as the principle of least privilege, organizations operate under the assumption of compromise, necessitating robust security measures at every level.

Implementing a zero-trust framework involves a comprehensive overhaul of traditional security practices. It entails the adoption of single sign-on functionalities at the individual device level and the enhancement of multifactor authentication protocols. Additionally, it requires the implementation of advanced role-based access controls (RBAC), fortified network firewalls, and the formulation of refined need-to-know policies. Effective application whitelisting and blacklisting mechanisms, along with regular group membership reviews, play pivotal roles in bolstering security posture. Moreover, deploying state-of-the-art privileged access management (PAM) tools, such as CyberArk for password check out and vaulting, enables organizations to enhance toxic combination monitoring and reporting capabilities.

App-to-app orchestration refers to the process of coordinating and managing interactions between different applications within a software ecosystem to achieve specific business objectives or workflows. It involves the seamless integration and synchronization of multiple applications to automate complex tasks or processes, facilitating efficient data flow and communication between them. Moreover, it aims to streamline and optimize various operational workflows by orchestrating interactions between disparate applications in a cohesive manner. This orchestration process typically involves defining the sequence of actions, dependencies, and data exchanges required to execute a particular task or workflow across multiple applications.

However, while the concept of zero-trust offers a compelling vision for fortifying cybersecurity, its effective implementation relies on selecting and integrating the right technological components seamlessly within the existing infrastructure stack. This necessitates careful consideration to ensure that these components complement rather than undermine the orchestration of security measures. Nonetheless, there is optimism that the rapid development and deployment of AI-based custom middleware can mitigate potential complexities inherent in orchestrating zero-trust capabilities. Through automation and orchestration, these technologies aim to streamline security operations, ensuring that the pursuit of heightened security does not inadvertently introduce operational bottlenecks or obscure visibility through complexity.

2. Artificial Intelligence (AI) Powered Threat Detection Has Improved Analytics:

The utilization of artificial intelligence (AI) is on the rise to bolster threat detection capabilities. Through machine learning algorithms, extensive datasets are scrutinized to discern patterns suggestive of potential security risks. This facilitates swifter and more precise identification of malicious activities. Enhanced with refined machine learning algorithms, security information and event management (SIEM) systems are adept at pinpointing anomalies in network traffic, application logs, and data flow, thereby expediting the identification of potential security incidents for organizations.

There will be reduced false positives which has been a sustained issue in the past with large overconfident companies repeatedly wasting millions of dollars per year fine tuning useless data security lakes that mostly produce garbage anomaly detection reports [1], [2]. Literally the kind good artificial intelligence (AI) laughs at – we are getting there. All the while, the technology vendors try to solve this via better SIEM functionality for an increased price at present. Yet we expect prices to drop really low as the automation matures.  

With enhanced natural language processing (NLP) methodologies, artificial intelligence (AI) systems possess the capability to analyze unstructured data originating from various sources such as social media feeds, images, videos, and news articles. This proficiency enables organizations to compile valuable threat intelligence, staying abreast of indicators of compromise (IOCs) and emerging attack strategies. Notable vendors offering such services include Darktrace, IBM, CrowdStrike, and numerous startups poised to enter the market. The landscape presents ample opportunities for innovation, necessitating the abandonment of past biases. Young, innovative minds well-versed in web 3.0 technologies hold significant value in this domain. Consequently, in the future, more companies are likely to opt for building their tailored threat detection tools, leveraging advancements in AI platform technology, rather than purchasing pre-existing solutions.

3. Artificial Intelligence (AI) Driven Threat Response Ability Advances:

Artificial intelligence (AI) isn’t just confined to threat detection; it’s increasingly playing a pivotal role in automating response actions within cybersecurity operations. This encompasses a range of tasks, including the automatic isolation of compromised systems, the blocking of malicious internet protocol (IP) addresses, the adjustment of firewall configurations, and the coordination of responses to cyber incidents—all achieved with greater efficiency and cost-effectiveness. By harnessing AI-driven algorithms, security orchestration, automation, and response (SOAR) platforms empower organizations to analyze and address security incidents swiftly and intelligently.

SOAR platforms capitalize on AI capabilities to streamline incident response processes, enabling security teams to automate repetitive tasks and promptly react to evolving threats. These platforms leverage AI not only to detect anomalies but also to craft tailored responses, thereby enhancing the overall resilience of cybersecurity infrastructures. Leading examples of such platforms include Microsoft Sentinel, Rapid7 InsightConnect, and FortiSOAR, each exemplifying the fusion of AI-driven automation with comprehensive security orchestration capabilities.

Microsoft Sentinel, for instance, utilizes AI algorithms to sift through vast volumes of security data, identifying potential threats and anomalies in real-time. It then orchestrates response actions, such as isolating compromised systems or blocking suspicious IP addresses, with precision and speed. Similarly, Rapid7 InsightConnect integrates AI-driven automation to streamline incident response workflows, enabling security teams to mitigate risks more effectively. FortiSOAR, on the other hand, offers a comprehensive suite of AI-powered tools for incident analysis, response automation, and threat intelligence correlation, empowering organizations to proactively defend against cyber threats. Basically, AI tools will help SOAR tools mature so security operations centers (SOCs) can catch the low hanging fruit; thus, they will have more time for analysis of more complex threats. These AI tools will employ the observe, orient, decide, act (OODA) Loop methodology [3]. This will allow them to stay up to date, customized, and informed of many zero-day exploits. At the same time, threat actors will constantly try to avert this with the same AI but with no governance.

4. Artificial Intelligence (AI) Streamlines Cloud Security Posture Management (CSPM):

With the escalating migration of organizations to cloud environments, safeguarding the security of cloud assets emerges as a paramount concern. While industry giants like Microsoft, Oracle, and Amazon Web Services (AWS) dominate this landscape with their comprehensive cloud offerings, numerous large organizations opt to establish and maintain their own cloud infrastructures to retain greater control over their data and operations. In response to the evolving security landscape, the adoption of cloud security posture management (CSPM) tools has become imperative for organizations seeking to effectively manage and fortify their cloud environments.

CSPM tools play a pivotal role in enhancing the security posture of cloud infrastructures by facilitating continuous monitoring of configurations and swiftly identifying any misconfigurations that could potentially expose vulnerabilities. These tools operate by autonomously assessing cloud configurations against established security best practices, ensuring adherence to stringent compliance standards. Key facets of their functionality include the automatic identification of unnecessary open ports and the verification of proper encryption configurations, thereby mitigating the risk of unauthorized access and data breaches. “Keeping data safe in the cloud requires a layered defense that gives organizations clear visibility into the state of their data. This includes enabling organizations to monitor how each storage bucket is configured across all their storage services to ensure their data is not inadvertently exposed to unauthorized applications or users” [4]. This has considerations at both the cloud user and provider level especially considering artificial intelligence (AI) applications can be built and run inside the cloud for a variety of reasons. Importantly, these build designs often use approved plug ins from different vendors making it all the more complex.

Furthermore, CSPM solutions enable organizations to proactively address security gaps and bolster their resilience against emerging threats in the dynamic cloud landscape. By providing real-time insights into the security status of cloud assets, these tools empower security teams to swiftly remediate vulnerabilities and enforce robust security controls. Additionally, CSPM platforms facilitate comprehensive compliance management by generating detailed reports and audit trails, facilitating adherence to regulatory requirements and industry standards.

In essence, as organizations navigate the complexities of cloud adoption and seek to safeguard their digital assets, CSPM tools serve as indispensable allies in fortifying cloud security postures. By offering automated monitoring, proactive threat detection, and compliance management capabilities, these solutions empower organizations to embrace the transformative potential of cloud technologies while effectively mitigating associated security risks.

About the Author:

Jeremy Swenson is a disruptive-thinking security entrepreneur, futurist / researcher, and senior management tech risk consultant. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. He holds an MBA from St. Mary’s University of MN, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire. He is an alum of the Federal Reserve Secure Payment Task Force, the Crystal, Robbinsdale and New Hope Citizens Police Academy, and the Minneapolis FBI Citizens Academy.

References:


[1] Tobin, Donal; “What Challenges Are Hindering the Success of Your Data Lake Initiative?” Integrate.io. 10/05/22: https://www.integrate.io/blog/data-lake-initiative/

[2] Chuvakin, Anton; “Why Your Security Data Lake Project Will … Well, Actually …” Medium. 10/22/22. https://medium.com/anton-on-security/why-your-security-data-lake-project-will-well-actually-78e0e360c292

[3] Michael, Katina, Abbas, Roba, and Roussos, George; “AI in Cybersecurity: The Paradox.” IEEE Transactions on Technology and Society. Vol. 4, no. 2: pg. 104-109. 2023: https://ieeexplore.ieee.org/abstract/document/10153442

[4] Rosencrance, Linda; “How to choose the best cloud security posture management tools.” CSO Online. 10/30/23: https://www.csoonline.com/article/657138/how-to-choose-the-best-cloud-security-posture-management-tools.html

Top Pros and Cons of Disruptive Artificial Intelligence (AI) in InfoSec

Fig. 1. Swenson, Jeremy, Stock; AI and InfoSec Trade-offs. 2024.

Disruptive technology refers to innovations or advancements that significantly alter the existing market landscape by displacing established technologies, products, or services, often leading to the transformation of entire industries. These innovations introduce novel approaches, functionalities, or business models that challenge traditional practices, creating a substantial impact on how businesses operate (ChatGPT, 2024). Disruptive technologies typically emerge rapidly, offering unique solutions that are more efficient, cost-effective, or user-friendly than their predecessors.

The disruptive nature of these technologies often leads to a shift in market dynamics, digital cameras or smartphones for example. These with new entrants or previously marginalized players gain prominence while established entities may face challenges in adapting to the transformative changes (ChatGPT, 2024). Examples of disruptive technologies include the advent of the internet, mobile technology, and artificial intelligence (AI), each reshaping industries and societal norms. Here are four of the leading AI tools:

1.       OpenAI’s GPT:

OpenAI’s GPT (Generative Pre-trained Transformer) models, including GPT-3 and GPT-2, are predecessors to ChatGPT. These models are known for their large-scale language understanding and generation capabilities. GPT-3, in particular, is one of the most advanced language models, featuring 175 billion parameters.

2.       Microsoft’s DialoGPT:

DialoGPT is a conversational AI model developed by Microsoft. It is an extension of the GPT architecture but fine-tuned specifically for engaging in multi-turn conversations. DialoGPT exhibits improved dialogue coherence and contextual understanding, making it a competitor in the chatbot space.

3.       Facebook’s BlenderBot:

BlenderBot is a conversational AI model developed by Facebook. It aims to address the challenges of maintaining coherent and contextually relevant conversations. BlenderBot is trained using a diverse range of conversations and exhibits improved performance in generating human-like responses in chat-based interactions.

4.       Rasa:

Rasa is an open-source conversational AI platform that focuses on building chatbots and voice assistants. Unlike some other models that are pre-trained on large datasets, Rasa allows developers to train models specific to their use cases and customize the behavior of the chatbot. It is known for its flexibility and control over the conversation flow.

Here is a list of the pros and cons of AI-based infosec capabilities.

Pros of AI in InfoSec:

1. Improved Threat Detection:

AI enables quicker and more accurate detection of cybersecurity threats by analyzing vast amounts of data in real-time and identifying patterns indicative of malicious activities. Security orchestration, automation, and response (SOAR) platforms leverage AI to analyze and respond to security incidents, allowing security teams to automate routine tasks and respond more rapidly to emerging threats. Microsoft Sentinel, Rapid7 InsightConnect, and FortiSOAR are just a few of the current examples

2. Behavioral Analysis:

AI can perform behavioral analysis to identify anomalies in user behavior or network activities, helping detect insider threats or sophisticated attacks that may go unnoticed by traditional security measures. Behavioral biometrics, such as analyzing typing patterns, mouse movements and ram usage, can add an extra layer of security by recognizing the unique behavior of legitimate users. Systems that use AI to analyze user behavior can detect and flag suspicious activity, such as an unauthorized user attempting to access an account or escalate a privilege.

3. Enhanced Phishing Detection:

AI algorithms can analyze email patterns and content to identify and block phishing attempts more effectively, reducing the likelihood of successful social engineering attacks.

4. Automation of Routine Tasks:

AI can automate repetitive and routine tasks, allowing cybersecurity professionals to focus on more complex issues. This helps enhance efficiency and reduces the risk of human error.

5. Adaptive Defense Systems:

AI-powered security systems can adapt to evolving threats by continuously learning and updating their defense mechanisms. This adaptability is crucial in the dynamic landscape of cybersecurity.

6. Quick Response to Incidents:

AI facilitates rapid response to security incidents by providing real-time analysis and alerts. This speed is essential in preventing or mitigating the impact of cyberattacks.

Cons of AI in InfoSec:

1. Sophistication of Attacks:

As AI is integrated into cybersecurity defenses, attackers may also leverage AI to create more sophisticated and adaptive threats, leading to a continuous escalation in the complexity of cyberattacks.

2. Ethical Concerns:

The use of AI in cybersecurity raises ethical considerations, such as privacy issues, potential misuse of AI for surveillance, and the need for transparency in how AI systems operate.

3. Cost and Resource Intensive:

Implementing and maintaining AI-powered security systems can be resource-intensive, both in terms of financial investment and skilled personnel required for development, implementation, and ongoing management.

4. False Positives and Negatives:

AI systems are not infallible and may produce false positives (incorrectly flagging normal behavior as malicious) or false negatives (failing to detect actual threats). This poses challenges in maintaining a balance between security and user convenience.

5. Lack of Human Understanding:

AI lacks contextual understanding and human intuition, which may result in misinterpretation of certain situations or the inability to recognize subtle indicators of a potential threat. This is where QA and governance come in case something goes wrong.

6. Dependency on Training Data:

AI models rely on training data, and if the data used is biased or incomplete, it can lead to biased or inaccurate outcomes. Ensuring diverse and representative training data is crucial to the effectiveness of AI in InfoSec.

About the author:

Jeremy Swenson is a disruptive-thinking security entrepreneur, futurist / researcher, and senior management tech risk consultant. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. He holds an MBA from St. Mary’s University of MN, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire. He is an alum of the Federal Reserve Secure Payment Task Force, the Crystal, Robbinsdale and New Hope Citizens Police Academy, and the Minneapolis FBI Citizens Academy.

The Importance of the 3-2-1 Back-Up Method

#321backup #disasterrecovery #incidentmanagement #ransomeware #databreach #ciatriad

Fig. 1. 3-2-1 Backup Infographic, Stock, 2023.

Backing up data is one of the best things you can do to improve your response to ransomware, a data breach, an infrastructure failure, or another type of cyber-attack. Without a good comprehensive backup method that works and is tested, you likely will not be able to recover from where you left off thereby harming your business and customers.

The 3-2-1 backup method requires saving multiple copies of data on different device types and in different locations. More specifically, the 3-2-1 method follows these three requirements:

  1. 3 Copies of Data: Have three copies of data—the original, and at least two copies.
  2. 2 Different Media Types: Use two different media types for storage. This can help reduce any impact that may impact one specific storage media type more than the other.
  3. 1 Copy Offsite: Keep one copy offsite to prevent the possibility of data loss due to a site-specific failure.

Here are some pointers to make your backup more effective:

  1. Select the right data to back up: Critical data includes word processing documents, electronic spreadsheets, databases, financial files, human resources files, and accounts receivable/payable files. Not everything is worth backing up as it’s a waste of space. For example, data that is 8 years old with no business use is not worth backing up.
  2. Backup on a schedule: Backup data automatically on a repeatable schedule, if possible, bi-weekly, weekly, or even daily if needed. Pick a day or time range when the backup will run, say Thursdays at 10:00 p.m. CST (when most users are not working.
  3. Have backup test plans and follow them: Your backup plan must be written down in a clear and detailed way describing the backup process, roles, interconnections, and milestones which can gauge if it’s working, as well as the service time to recovery expected. Then of course test the backup at least every six months or after a key infrastructure change happens.
  4. Automate backups: Use software automation to execute the backups to save user time, and to reduce the risk of human error.

About the Author:

Jeremy Swenson is a disruptive-thinking security entrepreneur, futurist/researcher, and senior management tech risk consultant. Over 17 years he has held progressive roles at many banks, insurance companies, retailers, healthcare orgs, and even governments including being a member of the Federal Reserve Secure Payment Task Force. Organizations relish in his ability to bridge gaps and flesh out hidden risk management solutions while at the same time improving processes. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. As a futurist, his writings on digital currency, the Target data breach, and Google combining Google + video chat with Google Hangouts video chat have been validated by many. He holds an MBA from St. Mary’s University of MN, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire.

Silicon Valley Bank Fails Due to Lack of Diversification, Weak Governance, and Hype – Creating a Bank Run

The California Department of Financial Protection closed Silicon Valley Bank (SVB) on Fri 03/10/23 and the FDIC took control of and seized its deposits in the largest U.S. banking failure since the 2008 to 2012 mortgage financial crisis, and the second largest ever. Although SVB was well known in San Francisco and Boston where they had all of their 17 branches; they were little to known to the wider public. SVB specialized in financing start-ups and had become the 16th largest U.S. bank by assets. Their numbers at the end of 2022 were impressive with $209 billion in assets and approximately $175.4 billion in deposits.

As a precursor to their failure, SVB recorded six straight quarterly losses as economic conditions turned unfavorable. Then on Mon 02/27/23 their CEO Greg Becker sold $3.6 million of stock in a pre-arraigned 10b5-1 plan designed to reduce conflict of interest, yet it’s still potentially questionable due to the gain he got and the odd timing weeks before their collapse. Yet other executives that sold in recent weeks may not have the protection of the 10b5-1 and that would be a worse example of conflict of interest. 

Some degree of support is needed for SVB because most there are not to blame; but so too is criticism so that the financial system can get better and innovate in the free market. You cannot just blindly support people (mostly sr. mgmt.) and organizations (crypto tie in) who are largely responsible for startup failures, frozen loans and payrolls, huge job loss, loss of deposited money over 250k, and great economic downturn – all the while the SVB mgmt. team gets very rich.

Obviously, the competencies and character of some of the SVB mgmt. team was not as good as other community banks and credit unions who aggressively avoided and overcame such failings. They likely put in more work with a deeper concern for the community, clients, and regulatory compliance – generally speaking. These many small community banks and credit unions are often 90 or 100 plus years old and did not grow at as fast a pace as SVB – super fast growth equals fast failure. Conversely, SVB is only 40 years young and most of its growth happened in the later part of that period. This coming from a guy who has consulted/worked at more than 10 financial institutions among other things including bank launch, tech risk, product, and compliance.

The company’s downward spiral blew up by late Weds 03/08/23, when it surprised investors with news that it needed to raise $2.25 billion to strengthen its balance sheet. This was influenced significantly by the Fed rate increases which forced the bank to raise lending rates, and that in turn made it hard for startups and medium-sized businesses to find approved funding. SVB also locked too much of their capital away in low-interest bonds. To strengthen their balance sheet in a slightly silly and desperate move, SVB sold $21 billion in securities at a large $1.8 billion loss. The details, timing, and governance of this make little sense, since the bank knew regulators were already watching closely. As a result, their stock fell 60% Thurs to $106.04 following the restructuring news.

As would be expected this fueled a higher level of deposit outflows from SVB; a $25 billion decline in deposits in the final three quarters of 2022. This spooked a lot of people, including CFOs, founders, VCs, and some unnamed tech celebrities — most of who started talking about the need to withdraw their money from SVB. SVB had almost 90% of its deposits uninsured by the FDIC which is far out of line with what traditional banks have. This is because the FDIC only covers deposits up to $250k. In contrast, Bank of America has about 32% of its deposits not insured by the FDIC – an enormous difference of 58%.

Crypto firm Circle revealed in a tweet late Fri 03/10/23 that it held $3.3 billion with the bank. Roblox corp. held 5% of its $3 billion in cash ($150 million) at the bank. Video streamer Roku held an estimated $487 million at SVB, representing approximately 26% of the company’s cash and cash equivalents as of Fri. Crypto exchange platform BlockFi — who filed for bankruptcy in November — listed $227 million in uninsured holdings at the bank. Some other SVB customers included Ziprecruiter, Pinterest, Shopify, and CrowdStrike. VCs like Y. Combinator regularly referred startups to them.

Yet after these initial outflows people start talking negatively, the perception became greater than reality. It did not matter whether the bank had a liquidity crisis or not. Herd psychology created a snowball effect in that no one wanted to be the last depositor at a bank — observing the lessons learned from the prior banking mortgage crisis from 2008 to 2012, when Washington Mutual failed.

In sum, customers withdrew a massive $42 billion of deposits by the end of Thurs 03/09/23, according to a California regulatory filing. As a result, SIVB stock continued to plummet down another 65% before premarket trading was halted early Fri by regulators.

The FDIC described it this way in a press release:

  1. “All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors.
  2. Silicon Valley Bank had 17 branches in California and Massachusetts. The main office and all branches of Silicon Valley Bank will reopen on Monday, March 13, 2023. The DINB will maintain Silicon Valley Bank’s normal business hours. Banking activities will resume no later than Monday, March 13, including on-line banking and other services. Silicon Valley Bank’s official checks will continue to clear. Under the Federal Deposit Insurance Act, the FDIC may create a DINB to ensure that customers have continued access to their insured funds.”

That’s largely a bank run, and it is really bad news for SVB and many startups and medium businesses. SVB has been a foundational piece of the tech startup ecosystem. It was also known to industry commentators and tech risk researchers that SVB struggled with tech risk compliance, overall governance, and even had no chief risk officer in the eight months prior.

With reasoning and no direct evidence, only circumstantial evidence — as I had a couple of interviews with them and was less than impressed with their competency and trajectory — I speculate that crypto ties were a significant negative factor here because many of the companies and tech sub-domains SVB served are entangled with crypto and crypto-related entities. Examples of this include their dealings with Circle — it manages part of the USDC stablecoin reserve of the American Circle, which confirmed to have a little more than $3 billion dollars of reserve blocked with SVB.

A Fri 03/10/23 Tweet from reporter Lauren Hirsch described BlockFi’s risky crypto entanglements with SVB this way: “Per new bankruptcy filing, BlockFi has $227m in Silicon Valley Bank. The bankruptcy trustee warned them on Mon that bc those funds are in a money market mutual fund, they’re not FDIC secured — which could be a prblm w/ keeping in compliance of bankruptcy law”.

Crypto compliance and insight for a big bank is very complex, undefined, and risk prone. The biggest tech venture bank has to be involved with a few crypto related failings and controversies, and the above are just a few examples but I am sure there are more. I just don’t have the data to back that up now, but I am sure it’s being investigated and/or litigated.

Note * This is a complex, evolving, and new development — some info may be incomplete and/or out of date at the time you view this.

About the Author:

Jeremy Swenson is a disruptive-thinking security entrepreneur, futurist/researcher, and senior management tech risk consultant. Over 17 years he has held progressive roles at many banks, insurance companies, retailers, healthcare orgs, and even governments including being a member of the Federal Reserve Secure Payment Task Force. Organizations relish in his ability to bridge gaps and flesh out hidden risk management solutions while at the same time improving processes. He is a frequent speaker, published writer, podcaster, and even does some pro bono consulting in these areas. As a futurist, his writings on digital currency, the Target data breach, and Google combining Google + video chat with Google Hangouts video chat have been validated by many. He holds an MBA from St. Mary’s University of MN, an MSST (Master of Science in Security Technologies) degree from the University of Minnesota, and a BA in political science from the University of Wisconsin Eau Claire.