Submitted by OakSecurity, also found by gxh191, p0wd3r, and Egis_Security
The MsgSetBeforeSendHook in the tokenfactory module allows the token creator to set a BeforeSendHook tied to a CosmWasm contract address, which implements a custom logic from the Sudo handler that determines whether the transfer should succeed.
The issue is that a malicious token creator can force transfers to fail by simply setting the contract address to an invalid address (e.g., an externally owned account). If these tokens are intended to be transferred during important operations (e.g., staking hooks or ABCI phases), they will fail, and depending on the calling context, a denial of service issue may occur.
We have identified two impacts that can be triggered by the attacker.
The following proof of concept demonstrates the first impact identified above, where bonded tokens and rewards cannot be withdrawn.
Consider introducing a whitelist or access control mechanism to limit who can register a BeforeSendHook. Ensure only trusted users with appropriate permissions should be allowed to set a hook for a specific denomination. 
For example, Neutron only allows whitelisted users to use this feature: https://github.com/neutron-org/neutron/blob/5ff5272e0a920b6874036db292a0c8debba99102/x/tokenfactory/keeper/msg_server.go#L253
Note: this finding was redacted upon submission and was populated by C4 staff to proceed through the audit process.
3docSec (judge) commented:
Lance Lan (MANTRA) disputed and commented:
