Bitcoin and Internet security

For those of you who don't know (I didn't until recently), there are a bunch of nerds who are trying to create a cryptographically secure, anonymous, distributed Internet-based currency called BitCoin. For more information about Bitcoin, here are a couple of podcasts (one long and one longer).

For an amusing and informative fiction piece on digital currencies, please read and enjoy Neal Stephenson's "The Great Simoleon Caper"

Within the last few days, Bitcoin has suffered a major setback - someone hacked an exchange (where bitcoins can be exchanged for other currencies), and used large volume buy and sell orders to steal a bunch of money (presumably Dollars or Euro or Yen) and then drive the exchange rate for bitcoins to almost zero.

The first thought I had was that apparently Bitcoins are now officially at least worth stealing. And even if this sinks BitCoin beneath the waves, the open source code can go on to inspire and inform other efforts, so there's no way to put that genie back in the bottle.

Here are other some details I found interesting.

Bitcoin itself was allegedly not compromised. People's Wallet accounts at a popular (Mt.Gox, the most popular) bitcoin exchange were compromised. Apparently not all accounts at Mt.Gox were compromised.

Even the exchange was not hacked directly - apparently a copy of the encrypted password database held by the auditors got loose into the world and was used to launch the attack. It's not clear how the auditor's copy got outside *their* office network, but the lesson is that your security perimeter is almost certainly bigger than you think, and there are edges that are very difficult to watch. There is no setting on your corporate firewall that will protect a file that's at your auditors' offices.

The attack seems to have been a password discovery attack -- the attacker has a copy of everyone's passwords, but they are encrypted. The attacker runs the (known) encryption algorithm against either a dictionary of likely passwords (a semi brute force attack) or against a file of all possible passwords (a massively brute force attack) and see if any matches pop out of the encryption algorithm. If so, any account where a match is found is compromised. The variables are the quality of the encryption algorithm, the strength of the password, and the amount of time and compute resources that the forces of evil can devote to the attack.

Of these three variables, the one most directly under the exchange's control (besides not giving their auditors a copy of the password file) is the password algorithm. They had recently upgraded the algorithm, but some accounts that hadn't been logged into recently still had the old algorithm and were more vulnerable. In this case they did the right thing, but it took too long.

The factor most under the users' control was the strength (and freshness) of the password. If your password is "password", that'll be cracked in no time flat, as "password", "Password". "PassWord". "PASSWORD", and "P4ssw0rd" are probably the first five entries in the crackers' dictionary of possible passwords. In fact, if your password is this poor, a cracker doesn't even need an offline copy of the encrypted passwords. He can log directly into your live account with only 3 or 4 failures, which nobody is going to notice.

The big mistakes I saw reported were, first, letting the auditors have a copy of the encrypted password table (financial auditors don't need this at all, and data security auditors ought to work with it on site only if at all possible, and destroy any copies after the audit), and, second, the fact that that copy got out of the auditors' control and into the world.

The luxury of having a copy of the encrypted passwords, and being able to attack it in secret in the volcano lair of the bad guys allows them to bring vastly more resources to bear on the problem and prevents any notification that a password compromise is being attempted. If they'd been bouncing their millions of incorrect password attempts against the live authentication server, the resulting large number of login failures might have been noticed before any compromise was achieved, and they almost certainly would have activated any account lock-out mechanisms in place to foil just such an attack.


Lessons for the ordinary user are:

1. Only use strong passwords. This is so critically important that I'll devote a post to it ASAP, but in the mean time google "strong passwords" and review and learn...

2. Change your passwords periodically. Your bank may have mistakenly given a copy of your encrypted password to their auditors, just as bitcoin did. Assume it takes three months for that to get out and for your password to be compromised by the forces of evil. If you have changed your password in the interim, your bitcoins (or dollars) will be safe while others are compromised.

3. Don't use the same password for multiple sites, particularly where the risk factor is high. If someone breaks the password you used to use for the local dialup bbs account you haven't touched in three years, you don't care.... Unless you're using the same password for your bank.

This is all hard. Good security always is. There's no way you can implement this and still have a hope of remembering all these different, current, unique, difficult passwords, so all I'm going to say is: Password safe. Encrypted. With a darn strong password. That you absolutely will NOT forget.

My personal fave is KeyPass, but there are others, and I haven't seen a code audit of KeyPass anyway (not that you should trust my opinion even if I had).

Be safe.