Bitcoin Wallet Flaw Exposed Users to Fund Theft Through Malicious Payment Servers

Attackers manipulated legitimate Bitcoin transactions by substituting fraudulent payments and waiting for users to approve higher fees. At least one user lost funds before developers released a security patch.

A vulnerability in the Electrum Bitcoin wallet allowed malicious servers to deceive users into signing transactions that transferred their funds to attacker-controlled addresses when they attempted to accelerate pending payments. Developers confirmed that the exploit had resulted in at least one reported theft.

Electrum, one of Bitcoin’s longest-running software wallets, revealed the security issue on Saturday, warning that some servers had already been exploiting the flaw. The development team received two reports in October, including one from a user who lost bitcoin after approving what appeared to be a standard transaction-fee adjustment.

The vulnerability stemmed from the way Electrum processes Bitcoin transactions that have not yet received network confirmation.

Unlike a full Bitcoin node, Electrum depends on external servers to retrieve transaction histories and broadcast payments. Before the vulnerability was fixed, the wallet accepted information about pending transactions from these servers without verifying their signatures.

A malicious server operator could exploit this weakness by intercepting a payment before it was broadcast to the Bitcoin network and replacing its entry in the wallet’s transaction history with a fraudulent version. The substituted transaction directed the user’s coins to an address controlled by the attacker, using invalid signatures that the wallet failed to identify.

Electrum then displayed the fraudulent payment as an unconfirmed transaction. The attack became effective when users attempted to increase its processing speed.

Bitcoin supports a mechanism called Replace-by-Fee (RBF), which allows an unconfirmed transaction to be replaced with another transaction carrying a higher fee. When a user selected this option in the vulnerable wallet, Electrum could take the fraudulent transaction and generate a valid, signed replacement that transferred the funds to the attacker.

In one reported incident, the malicious transaction had no transaction fee, making it appear as though the payment was simply stuck and needed a fee increase. Attackers also created destination addresses with the same final four characters as the legitimate recipient’s address, making the substitution more difficult to notice during a quick inspection.

The first report arrived on October 11 and involved a two-of-three multisignature wallet secured with two Trezor hardware devices. The user had verified the legitimate payment on both devices but later discovered a different outgoing transaction in Electrum’s history. That user did not report any financial loss.

A second report, submitted on October 18, described an incident in which a user increased the fee on a substituted transaction and subsequently lost funds. Developers have not revealed the amount stolen or identified the servers involved in the attacks.

Electrum addressed the vulnerability by releasing version 4.8.3 on October 24. The update introduced signature verification for unconfirmed transactions that spend coins belonging to the user’s wallet.

Previous versions remain susceptible to the reported attack when connected to malicious servers.

Developers advise users to upgrade to the patched version and carefully verify recipient addresses and transaction amounts before signing payments. Users who connected exclusively to trusted servers, including servers they operated themselves, were not exposed to this particular attack.

The security update arrived six days after the first reported theft, highlighting the risks associated with relying on untrusted infrastructure to manage Bitcoin transactions.

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