Millions of dollars in bitcoin have been withdrawn from a settlement network used by cryptocurrency exchanges, marking the latest in a string of security breaches that have plagued the market this year. Bitcoin ($BTC) traded at $79,647.57 at the time of the report.

Liquid Network, a sidechain launched in 2018 by Blockstream, said purported "white-hat hackers" removed roughly 4,000 of the 4,200 bitcoin held in its federation wallet. The network is overseen by a federation of more than 80 exchanges, infrastructure firms and asset managers, a design in which trust is distributed among member institutions rather than resting on a single operator — a model now under strain with nearly the entire reserve gone.

"Liquid wallets will be impacted, and we're sorry for any inconvenience," Liquid Network said on X as it halted all new transactions. "Federation members are actively working on resolving this so we can restore normal network activity."

The sidechain warned that wallets would be disrupted while federation members work to restore service.

The episode matters because Liquid was built to solve a practical problem for exchanges: the slow speed of the Bitcoin blockchain. To solve that, the network issues L-BTC against bitcoin locked in reserve so trades can settle faster. A drain of nearly the entire reserve raises doubts about the security of that model, since L-BTC holds value only insofar as it is backed by bitcoin held in the federation wallet.

The theft did not occur because a password or private key was compromised — the method behind most crypto hacks this year. Instead, the stolen funds moved out through SideSwap, a normal and approved trading platform on the network.

Blockstream later found that a software bug had created some of the bitcoin involved in a system called Elements, the open-source codebase on which the Liquid Network is built. SideSwap said it could not tell which coins came from the bug and which were real, so it treated them all the same. Other types of assets on the Liquid network were not affected.

A white hat hacker is an ethical hacker who exploits a flaw in a protected system before malicious actors can. They typically exploit a flaw, move the money and seek a fee to return it. The claim of good intentions remains unverified, and similar claims in past incidents have not always ended with funds being returned. According to security specialists, the flaw in this case sits at the node level in Liquid's transaction software, not in a breach of keys or hardware modules.

The theft follows a $6 million drain last week from a lending platform linked to Crypto.com, as well as an August breach involving the Coldcard hardware wallet, extending a year of security incidents across the sector. Liquid has not said when the network will reopen or whether the bitcoin will be returned; those two questions will be the main markers to watch as federation members respond.

Source: CoinDesk