The Next Battle in Crypto Security: How to Rebuild the Authorization System Beyond Smart Contracts?

Recently, nearly half of the losses in crypto have stemmed from permission and operational failures, shifting the security focus from contract audits to identity, authorization, and operational trust.

Written by: Ken Wong (Founder of BitDATA PayFi Infra, former cybersecurity researcher)
Compiled by: AididiaoJP, Foresight News

For years, the crypto industry has primarily viewed security as a smart contract issue. This made sense for a long time. Smart contracts, private keys, audits, and wallet security remain indispensable.

However, a recent wave of incidents suggests that the next major security crisis may not stem from cryptography being compromised. It could be more insidious: the system is faithfully executing the operations it was authorized to perform, but the authorization itself should never have been trusted in the first place.

1. Loss Structure Has Changed: Nearly Half Is No Longer "Code Vulnerabilities"

According to Hacken's "Q3 2026 Security and Compliance Report," the industry experienced 107 incidents in that quarter, resulting in losses of $1.18 billion, a 55% increase quarter-over-quarter. More noteworthy is the structure of these losses: 48% came from smart contract vulnerabilities, while 40% stemmed from access control and operational failures.

This means that nearly half of the losses are no longer traditional code bugs, but rather issues with identity, permissions, signature processes, or broader operational trust boundaries.

This distribution is critical. Smart contract vulnerabilities can often be patched through better audits, formal verification, and stricter engineering discipline. However, access control and operational failures require a completely different approach.

It forces the industry to answer several more difficult questions: Who has the authority to move funds? Which systems inherit signing rights? What happens if a "trusted" service begins to act maliciously? How much damage can be caused if an identity is compromised?

This is no longer purely a Web3 programming issue, but a financial infrastructure problem.

2. Attack Surface Overflow: Usability Is Also Security

Crypto security is not isolated. It exists within a global network threat environment, where the scale, speed, and operational flexibility of attacks are all increasing.

Cloudflare's "Q3 2026 DDoS Threat Report" states that during the quarter, it mitigated 18.2 million network layer DDoS attacks and 14.4 trillion HTTP DDoS requests, averaging about 8,226 network layer attacks per hour. Short-term, low-bandwidth attacks surged by 208%, DNS amplification attacks increased by 215%, and UDP flood attacks rose by 122%. The targets of attacks are also becoming more dispersed.

This data means two things for crypto and PayFi.

First, network risks are no longer solely focused on high-value targets like exchanges. Banks, payment processors, internet infrastructure providers, telecom operators, and service providers are all on the same expanding attack surface.

Second, it reiterates a fact that many crypto projects still underestimate: usability, resilience, and operational continuity are also security issues.

A security system must not only prevent theft but also remain trustworthy under pressure, quickly curb abuse, and recover safely.

3. Key Details of the Binance Incident: Private Key Security Does Not Equal Transaction Security

In its security incident statement on October 29, 2026, Binance disclosed that approximately $6.34 billion in digital assets were affected, with about $2.85 billion frozen or intercepted; as of October 31, 98% of the affected token assets had been recovered.

However, from a security architecture perspective, the more critical aspect is the attack path: the attacker gained unauthorized access to the internal wallet transaction signing service, bypassing the conventional withdrawal process to initiate operations.

This detail is more important than the amount. It indicates that protecting private keys does not equate to protecting transaction permissions.

The system can lock keys in fortified infrastructure, set up internal signing processes, and implement wallet isolation. But as long as an attacker controls a system or service that already has legitimate transaction permissions, "cryptographically valid" is not enough.

A valid signature does not equal a valid business decision. This is precisely the distinction the industry must now take seriously.

4. Authentication, Authorization, and Transaction Legitimacy Are Three Distinct Matters

In digital finance, at least three questions must be separated:

• Who is initiating the request? This is identity authentication.
• What is this identity allowed to do? This is authorization.
• Should this specific transfer be allowed in the current context? This is transaction legitimacy.

Too many systems only answer the first two. If the API credentials are valid, the signer has approved it, and the workflow is technically authorized, the transaction is treated as trustworthy. This assumption is becoming increasingly dangerous.

Stolen session tokens can bypass password verification; compromised vendors can become entry points; overly permissive internal services can turn into transaction channels; legitimate signers can also approve illegitimate payments.

Thus, the next phase of crypto security must expand from asset protection to permission control. The question is no longer just "Can attackers enter the system?" but more importantly: What can a trusted identity do once compromised?

This is the more meaningful resilience metric.

5. The More Complex PayFi Becomes, the Clearer the Permission Boundaries Must Be

As digital assets become increasingly intertwined with banking channels, virtual accounts, OTC settlements, cards, merchant acquiring, and programmable payments, the trust boundaries will also become more complex.

In the modern PayFi tech stack, a transaction may pass through wallets or custodians, API gateways, orchestration layers, compliance or risk control engines, signing or settlement components, and one or more banks or payment partners. Each layer has its own permissions, dependencies, and operational assumptions.

The engineering challenge is no longer just "moving money faster" but ensuring that permissions, responsibilities, risk control, and auditability remain consistent throughout the payment lifecycle.

This becomes even more important when AI agents and automated services act on behalf of users or businesses. Machine identities may be allowed to initiate requests, but that does not mean they should be allowed to approve new payees, increase limits, or disburse funds without independent verification.

Machine identity does not equal financial permission. Delegated permissions should not become unlimited permissions.

6. Shifting from Asset Protection to Permission Control

The industry still needs better smart contracts, better audits, and better key management.

But the latest trends indicate that the next major security failure may not be due to cryptography being compromised, but rather due to trusted permissions being abused.

Therefore, the next phase of crypto and PayFi security should prioritize four things simultaneously:

• Permissions should be narrowed. Identities and services should only have the minimum necessary rights.
• Transaction-level controls must keep pace. High-risk actions require context-based reviews, limits, and independent checks.
• Operational resilience must be measurable. Security should not only look at what has been blocked but also what happens when trusted components fail.
• Auditing and accountability must be reliable. Systems must leave trails indicating who initiated, authorized, and executed the flow of funds.

This is precisely where cybersecurity, financial infrastructure, and programmable payments begin to intersect.

7. Questions the Industry Needs to Answer

If an attacker gains access to a trusted system identity or controls an authorized transaction service, how much protection remains?

Furthermore: In the next phase, what should be prioritized among smart contract audits, identity control, transaction-level authorization, and operational resilience?

My answer is that these are not mutually exclusive but rather complementary. However, the order is important because capital, engineering time, and management attention are limited.

The next security crisis will not wait for the industry to finish debating these issues.