diff --git a/Cargo.lock b/Cargo.lock
index 21e95d5c..4287ad9a 100644
--- a/Cargo.lock
+++ b/Cargo.lock
@@ -5289,8 +5289,8 @@ dependencies = [
 
 [[package]]
 name = "seahorse"
-version = "0.2.6"
-source = "git+https://github.com/EspressoSystems/seahorse.git?tag=0.2.6#9c99d795e3d31a576fdb6b8d7cc07efd3ec0b4ba"
+version = "0.2.7"
+source = "git+https://github.com/EspressoSystems/seahorse.git?tag=0.2.7#ae981e4c4acc09ff455c16ab1d0839bdd24b3b30"
 dependencies = [
  "arbitrary",
  "arbitrary-wrappers",
diff --git a/contracts/rust/Cargo.toml b/contracts/rust/Cargo.toml
index 04308c42..8986c28e 100644
--- a/contracts/rust/Cargo.toml
+++ b/contracts/rust/Cargo.toml
@@ -63,7 +63,7 @@ rand = "0.8.4"
 rand_chacha = "0.3.1"
 reef = { git = "https://github.com/EspressoSystems/reef.git", tag = "0.2.2" }
 regex = "1.5.5"
-seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.6" }
+seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.7" }
 serde = { version = "1.0.124", features = ["derive"] }
 serde_json = "1.0.67"
 sha3 = "0.9.1"
diff --git a/eqs/Cargo.toml b/eqs/Cargo.toml
index 6b754463..1d601523 100644
--- a/eqs/Cargo.toml
+++ b/eqs/Cargo.toml
@@ -32,7 +32,7 @@ net = { git = "https://github.com/EspressoSystems/net.git", tag = "0.2.2" }
 rand = "0.8.4"
 rand_chacha = { version = "0.3.1", features = ["serde1"] }
 reef = { git = "https://github.com/EspressoSystems/reef.git", tag = "0.2.2" }
-seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.6", features = ["testing"] }
+seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.7", features = ["testing"] }
 serde = { version = "1.0.123", features = ["derive", "rc"] }
 serde_derive = "1.0.118"
 serde_json = "1.0.61"
diff --git a/faucet/Cargo.toml b/faucet/Cargo.toml
index 3ab6f74b..14d5a5d1 100644
--- a/faucet/Cargo.toml
+++ b/faucet/Cargo.toml
@@ -53,7 +53,7 @@ net = { git = "https://github.com/EspressoSystems/net.git", tag = "0.2.2" }
 rand = "0.8.5"
 rand_chacha = "0.3.1"
 reef = { git = "https://github.com/EspressoSystems/reef.git", tag = "0.2.2" }
-seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.6" }
+seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.7" }
 serde = "1.0.136"
 serde_json = "1.0.67"
 snafu = "0.7.0"
diff --git a/faucet/src/faucet.rs b/faucet/src/faucet.rs
index 1c886573..d7896d42 100644
--- a/faucet/src/faucet.rs
+++ b/faucet/src/faucet.rs
@@ -458,6 +458,10 @@ impl FaucetQueue {
     }
 
     async fn fail(&mut self, request: UserPubKey) {
+        // Sleep a second before retrying to avoid creating a busy loop
+        // in case of unforeseen errors.
+        async_std::task::sleep(Duration::from_secs(1)).await;
+
         if let Err(err) = self.sender.send(request).await {
             tracing::error!(
                 "error re-adding failed request; request will be dropped. {}",
@@ -595,9 +599,23 @@ async fn worker(id: usize, mut state: FaucetState) {
                 .await
             {
                 tracing::error!("worker {}: failed to transfer: {}", id, err);
-                // If we failed, mark the request as failed in the queue so it can be retried
-                // later.
-                state.queue.fail(pub_key).await;
+                if let CapeWalletError::PubkeyNotFound { address } = err {
+                    // If the address is missing in the address book we can't
+                    // transfer. Drop the faucet grant.
+                    tracing::warn!(
+                        "worker {}: pubkey for {} not found, removing key from index",
+                        id,
+                        address
+                    );
+                    {
+                        let mut index = state.queue.index.lock().await;
+                        index.remove(&pub_key).unwrap();
+                    }
+                } else {
+                    // If we failed, mark the request as failed in the queue so it can be retried
+                    // later.
+                    state.queue.fail(pub_key).await;
+                }
                 continue 'wait_for_requests;
             }
 
diff --git a/wallet/Cargo.toml b/wallet/Cargo.toml
index b2ec8fd9..38d6dc75 100644
--- a/wallet/Cargo.toml
+++ b/wallet/Cargo.toml
@@ -54,7 +54,7 @@ rand_chacha = "0.3.1"
 reef = { git = "https://github.com/EspressoSystems/reef.git", tag = "0.2.2" }
 regex = "1.5.4"
 relayer = { path = "../relayer", features = ["testing"] }
-seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.6", features = ["testing"] }
+seahorse = { git = "https://github.com/EspressoSystems/seahorse.git", tag = "0.2.7", features = ["testing"] }
 serde = { version = "1.0.123", features = ["derive", "rc"] }
 serde_derive = "1.0.118"
 serde_json = "1.0.61"
diff --git a/wallet/src/backend.rs b/wallet/src/backend.rs
index cf5e8bfb..ff774532 100644
--- a/wallet/src/backend.rs
+++ b/wallet/src/backend.rs
@@ -425,18 +425,22 @@ impl<'a> WalletBackend<'a, CapeLedger> for CapeBackend<'a> {
             .map_err(|err| CapeWalletError::Failed {
                 msg: format!("error requesting public key: {}", err),
             })?;
-        if response.status() == StatusCode::Ok {
-            let bytes = response
-                .body_bytes()
-                .await
-                .expect("failed deserializing response from address book");
-            let pub_key: UserPubKey = bincode::deserialize(&bytes)
-                .expect("failed deserializing UserPubKey from address book.");
-            Ok(pub_key)
-        } else {
-            Err(CapeWalletError::Failed {
+        match response.status() {
+            StatusCode::Ok => {
+                let bytes = response
+                    .body_bytes()
+                    .await
+                    .expect("failed deserializing response from address book");
+                let pub_key: UserPubKey = bincode::deserialize(&bytes)
+                    .expect("failed deserializing UserPubKey from address book.");
+                Ok(pub_key)
+            }
+            StatusCode::NotFound => Err(CapeWalletError::PubkeyNotFound {
+                address: address.clone(),
+            }),
+            _ => Err(CapeWalletError::Failed {
                 msg: "Error response from address book".into(),
-            })
+            }),
         }
     }