Submitted by 0xNineDec, also found by Franfran, neumo, oyc_109, pashov, and Ruhum
https://github.com/code-423n4/2022-07-fractional/blob/8f2697ae727c60c93ea47276f8fa128369abfe51/src/VaultRegistry.sol#L147
https://github.com/code-423n4/2022-07-fractional/blob/8f2697ae727c60c93ea47276f8fa128369abfe51/src/FERC1155.sol#L217
The secondary sales of a specific FERC1155 token can be charged with a certain amount of fees established by the controller of the FERC1155. Those royalties are meant to be sent to a receiver according to the current implementation. Currently the protocol intends users to deploy vaults via BaseVault.deployVault() which further calls VaultRegistry.create()  that uses the currently deployed fNFT instance which it is controlled by the protocol itself.
However, there is other path that allows users deploying a vault where they are also the controllers of the fNFT instance. This allows users to take control over how are the royalty fees changed. A user can easily change maliciously the amount of royalties (which are also uncapped) and steal a considerable (even the whole) amount of FERC1155 transferred.
In order to illustrate this, we will conduct a hypothetical scenario where Alice is a malicious vault owner that deploys her vault by directly calling VaultRegistry.createCollectionFor(), bypassing the need to call BaseVault.deployVault().
As a result of this process, Bob transferred the token to the buyer and received no payment in exchange and Alice got her hands on the whole payment.
It is showcased on the following code that Alice has control over how the fees are modified and when.
It is needed to define clearly how users are intended to deploy vaults under which privileges. The fact that a user can deploy a vault both from BaseVault and VaultRegistry having different privileges is an issue. If needed, the VaultRegistry key functions can be set as internal and have specific callers within BaseVault that control also the privileges of each creation in order to concentrate the vault creations within a single endpoint.
Also, it is extremely important to set a maximum cap for the royalties as soon as possible. Although this does not mitigate the fact that a malicious vault owner can frontrun others, it gives a maximum boundary. What will be a definitive solution is setting both a maximum cap for the royalties and timelock that function so that vault owners have to wait a certain amount of time before changing the royalties in order to bring predictability for the community.
aklatham (Fractional) disagreed with severity
HardlyDifficult (judge) decreased severity to Medium and commented:
