Kraken's CSO highlights a critical vulnerability in Coldcard wallets, raising concerns about the security of seed phrase generation.
Kraken's Chief Security Officer, Nick Percoco, has raised concerns about a critical vulnerability in Coldcard hardware wallets, highlighting the absence of independent testing for these devices.
“Users are asked to trust the manufacturer’s implementation of the most critical function of the system without independent verification that the claimed entropy path is indeed being executed,” Percoco stated.
The issue came to light after Coldcard's manufacturer, Coinkite, issued a warning on July 30 about problems with seed phrase generation, following significant fund withdrawals. The company traced the issue back to March 2021, when changes in the seed creation process led to the use of a pseudorandom number generator from MicroPython instead of the intended hardware true random number generator (TRNG).
This flaw means that the randomness of seed phrases generated during wallet creation may be predictable, with Coinkite admitting that a significant portion of the randomness was derived from the less secure pseudorandom number generator.
Percoco emphasized that merely verifying the presence of a TRNG in hardware does not guarantee security. He called for comprehensive audits that examine the entire process from randomness source to firmware execution.
Devices at Risk
Coinkite identified that seed phrases generated on certain firmware versions are at risk. This affects Mk2 and Mk3 devices running firmware versions 4.0.1 to 4.1.9, as well as Mk4, Mk5, and Q devices with pre-standard firmware versions. The risk is more pronounced for Mk2 and Mk3 devices, with estimated entropy as low as 40 bits.
Users are advised to update their firmware, create new seed phrases, and ensure they back up their new seeds before transferring funds, as updating does not rectify the vulnerabilities in already created seed phrases.
Other devices such as TAPSIGNER and OPENDIME are not affected due to their different codebases.
Mass Withdrawals Linked to Vulnerability
As of August 3, Alex Thorn from Galaxy Research reported a suspected fourth wave of attacks aimed at addresses associated with the vulnerable Coldcard wallets. Initial estimates indicated around 388.9 BTC was involved, expanding to approximately 448.7 BTC as the investigation continued. Prior to this, a significant withdrawal of 1,082.65 BTC occurred shortly after Coinkite's first warning on July 30.
Overall losses from these incidents have now surpassed $90 million, raising alarms about the security of funds stored in these wallets.
Coinkite Takes Action
In response to the discovered vulnerability, Coinkite halted shipments of Coldcard devices on August 2 and destroyed remaining units with the affected firmware. The company is also cooperating with law enforcement to investigate the attacks and has cautioned users against rushing to migrate their funds, which could exacerbate risks.
Calls for Higher Standards in Security Audits
Percoco argued that the incident highlights a broader issue in the industry regarding the lack of verification processes for hardware crypto wallets. He compared this to standards in the payment industry, where devices must undergo independent testing, emphasizing the need for similar protocols in the crypto space.
