In a remarkable breach of security, an attacker siphoned off more than 1,367 bitcoin—valued at approximately $88 million—from a multitude of digital wallets over a span of just two days starting July 30. This incident, meticulously tracked by Galaxy Research, has raised serious concerns about the integrity and reliability of hardware wallets, particularly the Coldcard models manufactured by Coinkite, a Toronto-based company.
The genesis of this loss can be traced back to a firmware defect that was initially introduced in March 2021. Coldcard devices, which are designed to securely store the private keys necessary for controlling bitcoin holdings offline, utilize a hardware-based random number generator to create a recovery seed. This seed is a critical component; it acts as the master password for the wallet, and its security is paramount.
However, a code alteration in the firmware led to certain Coldcard models relying on a software-based random number generator instead of the intended hardware generator. As outlined in a technical review by Block, a payments company, this flaw significantly compromised the randomness of newly generated seeds. For Mk3 devices, the randomness plummeted to approximately 40 bits, a stark contrast to the 128 bits typically expected. Even more concerning, Mk4 and Mk5 devices generated seeds with about 72 bits of randomness before the defect was rectified. With such diminished randomness, the seeds could be reconstructed offline by an attacker, circumventing the need to access a wallet owner’s device or account directly.
Coinkite’s advisory specified that the defect affected various firmware versions across multiple models: Mk2 and Mk3 (versions 4.0.1 through 4.1.9), Mk4 and Mk5 (versions prior to 5.6.0), and Coldcard Q devices (versions earlier than 1.5.0Q). While the impact was notably lower on Mk4, Mk5, and Q devices, the company emphasized that the risk was significant enough to necessitate a migration to updated firmware.
On the day of the first wave of theft, Galaxy Research noted an astonishing 1,196 addresses were drained of 1,082.65 bitcoin in a mere 41-minute window, translating to about $70.2 million at that time. By August 1, the total count of stolen bitcoin had risen to 1,367.05, taken from over 4,585 addresses, with bitcoin trading around $62,900.
In response to the breach, Coinkite acted swiftly, releasing corrected firmware versions for all affected models between July 30 and July 31. However, crucially, the installation of the new firmware does not rectify the security of seeds generated under the flawed versions. Coinkite strongly advised that any wallet whose seed was created on the compromised firmware should be considered compromised unless bolstered by significant additional randomness from external sources or protected by a robust and unique BIP-39 passphrase.
As of August 1, none of the stolen bitcoin had been moved from the wallets controlling it, which is unusual given the typical behavior following such a significant theft. Galaxy Research speculated that the perpetrator may be waiting for scrutiny to diminish or lacks a reliable method for laundering such a large sum without detection. They identified a pattern indicating a single operator was responsible for the theft, further complicating the investigation. Clay Garrett, an engineer at Block, revealed that this operator had used a paid account at a blockchain-services provider to trace source addresses during the theft, a detail that has been forwarded to law enforcement for further action.
The incident has sparked a broader conversation about the vulnerabilities in hardware wallets. NVK, a co-founder of Coldcard, highlighted the growing capabilities of artificial intelligence in identifying software defects, suggesting that developers should assume their firmware is under constant scrutiny from both defenders and potential attackers. Additionally, Peter Todd, a Bitcoin Core contributor, raised concerns about multi-signature wallets that incorporate Coldcard devices, warning that the exposure of underlying transaction scripts before confirmations could provide attackers with the opportunity to exploit the vulnerability.
In summary, this incident serves as a stark reminder of the importance of rigorous testing and security measures in the rapidly evolving world of cryptocurrency. Hardware wallets, while generally considered secure, are not immune to flaws that can have devastating financial implications. As the landscape of digital finance continues to expand, the need for robust security protocols and continuous oversight becomes increasingly critical to protect users from similar breaches in the future.
Reviewed by: News Desk
Edited with AI assistance + Human research
