Another Bitcoin Wallet Service, Instawallet, Suffers Attack, Shuts Down Until Further Notice

Bitcoin’s wild surge in value has made it even more of an attractive target for hackers. Another wallet service called Instawallet said it is suspending itself indefinitely until it changes its security architecture. The crypto-currency, which currently trades at $129.90 to the dollar, has risen by almost fourfold in the last month, as new clarity in U.S. financial regulations and a banking crisis in Cyprus helped send Bitcoin’s value skyward.

But that’s also increased the load of hacking attacks on all of the major exchanges and Bitcoin service providers. The thing is that without a trusted third-party payments processor, Bitcoin transactions are irreversible and happen anonymously. So it’s almost impossible to reclaim losses after theft, making wallets for the crypto-currency an ideal target for online thieves.

It’s not clear how many customers Instawallet had or how much it is holding on behalf of others. Bitcoin Magazine said in late February that while Instawallet was one of the easiest services to use, it was also the least secure because it used a “URL as password” mechanism for protection.

Instawallet says it is going to open a claims process for any customers who stored funds with the service. If there are multiple claims for the same URL, they’ll presume that the first claim filed is the legitimate one. (Scary, indeed!)

INSTAWALLET SERVICE NOTICE

The Instawallet service is suspended indefinitely until we are able to develop an alternative architecture.

Our database was fraudulently accessed, due to the very nature of Instawallet it is impossible to reopen the service as-is.

In the next few days we are going to open the claim process for Instawallet balance holders to claim the funds they had stored before the service interruption.

Important information on claims submission:

For the first 90 days we will accept claims for individual Instawallets. Your wallet’s URL and key will be used to pre-populate a form to file the claim.
After 90 days, if no other claim has been received for the same url, your Instawallet balance under 50 BTC will be refunded. If several claims have been filed for the same url, we will process those claims on a case by case basis, under the presumption that the claim we received first belongs to the legitimate balance holder.
Claims for wallets that hold a balance greater than 50 BTC will be processed on a case by case and best efforts basis.

Instawallet is certainly not the first to have a major suspension. Two years ago, one of the oldest wallets, MyBitcoin, mysteriously went silent only to later claim that it had been hacked.

Today, one of the largest Bitcoin exchanges, Mt. Gox, also said that it was experiencing trading lags and delays in deposits.