Electrum, one of Bitcoin's oldest software wallets, has disclosed a vulnerability that allowed malicious servers to substitute fake pending transactions that users could unknowingly authorize while trying to raise fees. Developers confirmed at least one theft and released a patch on Oct. 24.
The wallet disclosed the flaw on Saturday and said some servers were already exploiting it. The issue affected how Electrum handles bitcoin payments that have not yet been confirmed by the network.
Unlike a full Bitcoin node, Electrum relies on outside servers to retrieve transaction histories and broadcast payments. Before the fix, the wallet trusted those servers to report pending transactions without checking whether their signatures were valid.
How the attack worked
An attacker controlling one of those servers could intercept a payment before it reached the Bitcoin network and replace it in the wallet's history with a fake transaction. That replacement spent the user's coins to an address controlled by the attacker, using invalid signatures that Electrum failed to detect.
The wallet displayed the fake payment as pending. The trap came when users tried to speed things up. Bitcoin allows unconfirmed transactions to be replaced with versions carrying higher fees, a feature called Replace-by-Fee. If a user selected that option, Electrum could take the fraudulent transaction and sign a valid replacement, sending the coins to the attacker.
In one reported case, the malicious transaction carried no fee at all, making it appear stuck. Attackers also generated receiving addresses whose last four characters matched the legitimate destination, making the substitution harder to spot during a quick check.
Reports and patch
Developers received two reports in October. The first, submitted Oct. 11, involved a two-of-three multisignature wallet using two Trezor hardware devices. The user had checked the legitimate payment on both devices but later noticed a different outgoing transaction in the wallet's history. That user did not report losing funds.
A second user reported on Oct. 18 that they had raised the fee on a substituted transaction and lost money. Developers have not disclosed the amount stolen or identified the malicious servers. The patch came six days after the first reported theft.
Electrum released version 4.8.3 on Oct. 24, adding signature checks for unconfirmed transactions spending coins from the user's own wallet. However, earlier versions remain vulnerable to the reported attack when connected to malicious servers.
What users should do
Developers recommend upgrading and checking receiving addresses and amounts before signing payments. Users connected only to servers they trust, including their own, were not exposed to this attack.
