Earlier quoted context omitted.
There are two potential attack scenarios, assuming some attacker A has full control of the PC connected to the Yubikey: 1. A somehow convinces the remote party that the actual public key is X' instead of X. Ciphertext comes in, attacker decrypts it. Done. 2. A intercepts ciphertext, feeds it to Yubikey for decryption, and gets the resulting plaintext over USB (or whatever). Note: this is assuming that the Yubikey doe…
I don't understand what option one has to do with any of this, if you can switch keys there's nothing any amount of extra hardware can do. In that case, just use the key you switched to. It is true that hardware tokens without an integrated external I/O (not through the PC it is plugged into) are vulnerable to this type of attack during initial key setup. Maybe they should support using the indicator LED to morse cod…
Take TLS/HTTPS as an example. The underlying assumption is that your browser's and/or OS certificate store are trusted. If an attacker compromises your machine and adds a new certificate to that "trusted" store, all secure communication is broken. That is the inherent weakness of public-key crypto.
Back to the Yubikey scenario. Let's say a remote server R wants to talk to the Yubikey Y on your PC. Y initially generates a key pair and then (somehow) securely delivers the public key to the remote server R. Clearly, whenever R sends something to Y, an attacker wouldn't be able to decrypt the message unless it has the private key which is securely stored on the HSM.
Scenario (1) above was looking at the case of an attacker who somehow "tricks" R into updating/replacing/revoking the original public key and inserting his own key into the remote key database. If successful, the attacker could then intercept all inbound communication from the remote server and decrypt it.
> The sales page promises the following, but I didn't quickly find any details on how it works:
It looks like marketing speak to me honestly. If the computer/server the Yubikey is talking to is compromised, there really is nothing stopping an attacker from using the Yubikey to perform arbitrary encryptions and decryptions.