ShapeShift Three Thefts

Notice: This page is a freshly imported case study from the original repository. The original content was in a different format, and may not have relevant information for all sections. Please help restructure the content by moving information from the 'About' and 'General Prevention' sections to other sections, and add any missing information or sources you can find. If you are new here, please read General Tutorial on Wikis or Anatomy of a Case Study for help getting started.

Notice: This page contains sources which are not attributed to any text. The unattributed sources follow the initial description. Please assist by visiting each source, reviewing the content, and placing that reference next to any text it can be used to support. Feel free to add any information that you come across which isn't present already. Sources which don't contain any relevant information can be removed. Broken links can be replaced with versions from the Internet Archive. See General Tutorial on Wikis, Anatomy of a Case Study, and/or Citing Your Sources Guide for additional information. Thanks for your help!

ShapeShift

ShapeShift hired a new security "expert" and gave them full access to hot wallet funds and unrestricted access to different computers. The employee then installed UDP on a few computers and stole from the hot wallet.

Without securing their system, they then proceeded to reopen the platform, not just once but twice. Even though the employee had been fired, he was able to use the UDP to provide details to another hacker - who accessed and withdrew more funds.

This exchange or platform is based in United States, or the incident targeted people primarily in United States.

About ShapeShift

"ShapeShift is a crypto platform, enabling customers to buy, sell, trade, track, send, receive, and interact with their digital assets." "ShapeShift calls itself the "safest asset exchange on Earth" and is used to convert between different virtual currencies." "ShapeShift is headquartered in Switzerland, but run out of Denver." "The company was founded July 1, 2014 in Switzerland by Erik Voorhees. In March 2015, it received a US$525,000 seed-stage investment by Roger Ver and Barry Silbert." "ShapeShift is a corporation organized and existing under the laws of the State of Delaware, with its principal place of business at 1624 Market Street, Suite 226 #29882, Denver, CO 80202."

"ShapeShift initially distinguished itself in the industry as a non-custodial exchange that did not require customers to register or open accounts. Its team also initially used pseudonyms, with Voorhees utilizing the name ‘Beorn Gonthier’ - a Tolkien reference - until 2015. Similarly, in 2015 ShapeShift announced that it would stop serving New York residents after the state implemented the BitLicense, a regulation that would have required it to collect identifying information about customers. However, in 2018, the company launched a membership program that it said would eventually become mandatory for all of its users. It remains a non-custodial exchange."

"[T]o many, ShapeShift appears to be a simple web service. It’s taken a lot of work by our engineers to keep up that appearance. Behind the scenes, the platform is complex. Over 1,400 direct asset trading pairs, integrations with half a dozen exchange API’s requiring real-time price information on all offered cryptocurrencies, low-latency service API’s to several dozen partners, the monitoring and calculation of constantly changing exchange rates and order book depth in some of the most volatile markets on Earth, and incorporation of what can only be described as alpha-level software in various states of disarray (coin daemons…bleh)."

"Since its inception in the Spring of 2014, ShapeShift has been an evolving creature. What began as a quick experimental way to swap between Bitcoin and Litecoin grew into an advanced engine for the effortless exchange of all major blockchain assets, each one into the other, with no user friction. No user accounts. No signup process. It is the Google Translate of cryptocurrency."

"And we’ve always been playing catch-up. Trying to build at the speed of this industry, not only along the vertical of Bitcoin proper, but along the breadth of all crypto, is a challenge."

"Last Fall, we realized the “minimum viable product” server architecture established originally for ShapeShift was insufficient. We needed a professional to join the small team, and craft a scalable, and secure, server apparatus upon which our technology could grow."

"We hired such a person, and patted ourselves on the back for our proactive decision. On paper, he looked great; the reference we called confirmed his prior role and responsibility. He’d even been into Bitcoin since 2011/2012 and had built miners in his room. Awesome."

"In 2016, ShapeShift lost around $230,000 in three thefts over the course of four weeks in March and April, which it claimed were carried out by [this] company employee." "According to the report, that employee stole $130,000 from ShapeShift in mid-March." "According to the report, the first incident took place on 14th March, the company said, resulting in the loss of 315 BTC. It was soon established that a ShapeShift employee was behind the incident." "Despite our note to all employees to come into the office urgently, our head IT guy, the one responsible for security and infrastructure, arrives at 11:30am."

"We ask [him] to join our discussion. We reveal the hack to him. We ask him if he had logged in at all that morning, to which he responded no (on several occasions). On the new[s] of the theft, he seems neither particularly shocked nor outraged, yet it was his security that failed us. Immediately, he starts pointing to red herring explanations, “It must be one of the exchanges that got hacked, that happens all the time.”"

“Well, look at the IP address, it happened somewhere off west Africa.” Umm, IP addresses on block explorers indicate only the first node that noticed a transaction, and are generally meaningless in the context of Bitcoin. (What kind of Bitcoiner doesn’t know that?)"

"After their dismissal, the ex-employee sold security information such as ShapeShift’s IP address to an outside hacker, who then stole 154 BTC, 5,800 ETH and 1,900 LTC in two further hacks."

"Thieves broke in three separate times over a time span of two weeks and cleaned out the hot wallets each time, totaling around $200K USD." "Digital currency exchange ShapeShift lost as much as $230,000 in three separate thefts over the course of a month, according to an incident report prepared by the service."

"Over the next days, we file the formal civil complaint. The address Bob had given us was a PO box, though we had his legal name, his bank info, and his social serfdom number. We hired a private investigator. We found his apartment within a couple days. Several attempts at service failed, though the investigator heard a dog barking behind the door. One of his cars was found; he drives two unmarked retired police cruisers."

"I have investors to whom I owe a level of protocol diligence, so, we also made arrangements for a criminal case, and herein the theft constitutes a Class 3 Felony, with 4-12 years in prison. Honestly, I don’t care whether he is punished. I care whether we are made whole, and whether he realizes his error and changes his life to become a better person. No sign yet, of that."

"We learn some more things. [The theif employee] has prior police records in Florida, where he’s from." "With civil and criminal cases proceeding against him, and with further discovery that [he] fled to Florida (leaving his dog to be temporarily cared for by his neighbor… who is now wondering where he is and hasn’t heard from him in weeks), we thought the case was basically closed. We’d get him somewhere, sooner or later. And, hopefully, we’d get our stolen property returned, or the fiat equivalent."

"The employee, who was not identified, later sold sensitive security information to an outside hacker after being fired from the exchange. Another $100,000 in funds denominated in bitcoin, ether and litecoin were stolen on 7th and 9th April." "The report goes on highlight the steps taken by the hacker to obscure his or her tracks. It also details two conversations between the hacker and CEO Erik Voorhees, during which it was claimed that the employee had sold key security data."

"On Thursday April 7th, around midday, we notice a bunch of Ethereum had left the hot wallet on the new infrastructure at [a new cloud service provider]. The NEW infrastructure. The infrastructure that was not even public yet. At first, we believed our code had done something weird, perhaps sweeping funds to a development server address or similar. Then we noticed a bunch of Bitcoin was also missing. And then Litecoin also."

"After several hours of fruitless investigation, we decide that one of the most likely explanations is that the cloud company itself was compromised. This has happened before in Bitcoinland. We thought [they were] reputable, but who knows? Clouds are very convenient and scalable, but on some level you’re trusting that company with your infrastructure. We decided we had to keep the site down for at least 24 hours, and bust our asses to prepare, yet again, an entirely new infrastructure on an entirely new set of servers."

"Despite that, we watched the blockchains for the hacked funds. We tracked some to an exchange account. We got profile information of the depositor." “Nice job on the hack. How did you do it? -Erik”

"The rest of that night, and into the next day (Friday, the 8th), the team worked feverishly to rebuild everything on new infrastructure, once again, in a wholly clean environment on a wholly separate host." "[A]fter herculean efforts, we had everything ready by Friday night, 24 hrs later. We launched the site on yet a new provider."

"Then it was Saturday 9am, and I start emerging from slumber. My phone rings. It was Greg." “We were hacked again. Bitcoin and Ethereum taken from the [new] hot wallets.”

"As I gather my thoughts, I decide it’s time to call in some professional resources." "Michael Perklin, Head of Security and Investigative Services at Ledger Labs, and chairman of the Steering Committee for the Board of CCSS, is first on my list. He’s in Toronto, and agrees to fly out to meet us that evening. He was on his way to the hospital; he had a toe broken in an event he’d prefer not to discuss. He changes course and heads to the airport. What a champion." "Amid a subsequent investigation conducted in partnership with Michael Perklin of Ledger Labs, a hacker contacted the exchange claiming to have purchased information, including the IP address of ShapeShift’s office and access details for the exchange’s admin interface, from that former employee."

"1500 ETH recovered, and exchanges are hunting for more. The thief is probably upset by this… it sucks to be stolen from, after all."

"While much of the logs were gone, we in fact recovered a great portion of them off the “empty” disk space itself using forensic techniques. This was just lucky. Perhaps the Ghost of Satoshi was looking out for us (could have used his help a week ago, of course!)"

"From the recovered data, we discovered the malware, if that’s the right term. There was a program, written in Go, installed on a crucial server which communicated with coins. This program had its dates changed to appear consistent with the setup of the server, and its filename made to look innocuous. But it was the direct tool by which funds were stolen." The thief employee "had installed an RDP (remote desktop protocol – basically a screen viewer or controller) on Greg’s computer. And perhaps on others, we must assume."

"The exchange says it has improved its security procedures, including how it goes about transmitting secure information between employees and manages access to its servers. In the wake of the hack. ShapeShift has also moved to draft and put in place formal security policies."

"Ledger Labs has worked with ShapeShift on new infrastructure for a vastly more secure platform going forward," Perklin told CoinDesk by email. "Even with internal sabotage from an employee, the company avoided any customer funds being lost."

"Legal action in the form of a civil lawsuit has also been taken against the former employee, though ShapeShift declined to comment on where the suit has been filed, citing privacy reasons."

"The exchange says it believes it can recover a “significant” amount of the lost funds." "Because ShapeShift is a non-custodial exchange, no customer funds were lost during the hacks."

"To our customers, I would like to personally apologize for our downtime. While we can ensure your funds are not at risk, I know many rely on our service, and it has been unavailable. Redundancy, even in the face of disaster, will be one of our primary development goals going forward."

"On June 30th, the stolen funds were moved to two separate addresses, one in a $205,666 chunk and the other in a $654 chunk. Each one of these addresses shows only two transactions: the receipt of the funds, and the subsequent transmission of those funds to two separate addresses. This continues on seemingly endlessly, as each new transaction is separated into two and sent to two new, empty addresses so as to cover the thief’s tracks."

This exchange or platform is based in United States, or the incident targeted people primarily in United States.

The background of the exchange platform, service, or individuals involved, as it would have been seen or understood at the time of the events.

Include:

• Known history of when and how the service was started.
• What problems does the company or service claim to solve?
• What marketing materials were used by the firm or business?
• Audits performed, and excerpts that may have been included.
• Business registration documents shown (fake or legitimate).
• How were people recruited to participate?
• Public warnings and announcements prior to the event.

Don't Include:

• Any wording which directly states or implies that the business is/was illegitimate, or that a vulnerability existed.
• Anything that wasn't reasonably knowable at the time of the event.

There could be more than one section here. If the same platform is involved with multiple incidents, then it can be linked to a main article page.

The Reality

This sections is included if a case involved deception or information that was unknown at the time. Examples include:

• When the service was actually started (if different than the "official story").
• Who actually ran a service and their own personal history.
• How the service was structured behind the scenes. (For example, there was no "trading bot".)
• Details of what audits reported and how vulnerabilities were missed during auditing.

What Happened

The specific events of the loss and how it came about. What actually happened to cause the loss and some of the events leading up to it.

Key Event Timeline - ShapeShift Three Thefts

Date	Event	Description
April 9th, 2016	Main Event	Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here.

Total Amount Lost

The total amount lost has been estimated at $230,000 USD.

How much was lost and how was it calculated? If there are conflicting reports, which are accurate and where does the discrepancy lie?

Immediate Reactions

How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?

Ultimate Outcome

What was the end result? Was any investigation done? Were any individuals prosecuted? Was there a lawsuit? Was any tracing done?

Total Amount Recovered

There do not appear to have been any funds recovered in this case.

What funds were recovered? What funds were reimbursed for those affected users?

Ongoing Developments

What parts of this case are still remaining to be concluded?

General Prevention Policies

Things started based on the lack of a background check on the employee - who had a known criminal record.

Hot wallet keys were generated on a single PC, outside of dedicated hardware. All transactions (large and small) were performed from the hot wallet.

While it is true that ShapeShift was dealing with a large volume of transactions, these would most likely have followed a 80-20 pareto distribution. By manually processing the largest transactions, the needed size of the hot wallet could have been drastically reduced.

A more secure structure would use a multi-sig, where the signatures of multiple employees are required to confirm larger transactions.

ShapeShift would have benefit extensively from gaining the opinions of various security experts on their setup early in the process, rather than relying on a single team member.

No customer funds were lost in this case, since ShapeShift does not store any customer funds.

Individual Prevention Policies

No specific policies for individual prevention have yet been identified in this case.

For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.

Platform Prevention Policies

Policies for platforms to take to prevent this situation have not yet been selected in this case.

For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.

Regulatory Prevention Policies

No specific regulatory policies have yet been identified in this case.

For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.