Peer-to-peer bitcoin marketplace LocalBitcoins suffered a hack this week that resulted in the distribution of malware and a loss of customer funds.

Affected users will be granted refunds after taking steps to address security vulnerabilities, according to the company.

LocalBitcoins vice president Nikolaus Kangas acknowledged the hack on 27th January in a forum post, outlining how the intrusion took place through its LiveChat account, with an estimated 17 BTC lost from customer wallets.

The bitcoin marketplace has experienced security-related problems before, including an incident last year when a hacker gained access to its servers for a brief period of time, though according to LocalBitcoins no customer data was lost. Customers have also reported running afoul of fraudulent users in the past.

Kangas told CoinDesk that he believed the hackers used an unknown kind of malware that was able to bypass existing security measures, and took personal responsibility for the LiveChat intrusion.

He explained:

“The attacker used that LiveChat access to spread some kind of Windows executable, which probably was some new kind of keylogger software which is not yet detected by virus protection mechanisms. If the user got that executable installed, with some social engineering, the attacker managed to get access to different accounts of those victims.”

Customer postings on LocalBitcoins suggest that at least one user reportedly lost funds through other bitcoin-related accounts, but that user later reported that discussions with the company were underway on a possible solution.

Awareness prevented spread

According to the company, three users were identified as having lost funds during the hack. Reports indicate that a lack of two-factor authentication may have been to blame for the fraudulent withdrawals, and LocalBitcoins advised customers to ensure that they are using such security measures to protect their accounts.

Kangas said that thanks to the combined efforts of LocalBitcoins employees and users of the site, information about the LiveChat compromise was disseminated relatively quickly, noting:

“Due to fast actions by the Localbitcoins support staff and Localbitcoins.com community, the impact of the attack remained limited. The amount of users affected was fairly low due to general awareness of the users.”

Kangas added that the company is looking at how they can improve their internal security protocols to avoid similar incidents in the future, and suggested that the incident was illustrative of the costs and challenges of participating in a digital economy.

“This is not only a challenge to bitcoin users, but to all Internet services and users in general, about how to make those attacks equally expensive for those attackers,” he said.

Malware image via Shutterstock