Anonymity in Crypto Sounds the Alarm

For months, cryptocurrency enthusiasts poured hundreds of millions of dollars into a project called Wonderland, which purported to provide a trading system for the murky world of decentralized finance.

To participate in the project, the investors – calling themselves Frog Nation – entrusted their money to Wonderland’s treasury manager, a crypto developer they only knew under the profile name 0xSifu.

In late January, it was revealed that 0xSifu was an alias for Michael Patryn, who had served 18 months in federal prison for fraud. The price of the Wonderland token, $TIME, crashed overnight as the panicked residents of Frog Nation debated shutting down the project.

“I was like, ‘Oh man, this is going to get ugly,’” said Brad Nickel, a Florida-based Wonderland investor who runs the “Mission: DeFi” crypto podcast. “That was an immediate total loss of confidence.”

From the beginning, the crypto industry has been built on anonymity. Bitcoin was created over a decade ago by a mysterious figure who went by the pseudonym of Satoshi Nakamoto. For years, thieves and drug dealers have used cryptocurrencies to conduct business in the shadows.

The ability to work anonymously is a central tenet of crypto technology. All cryptocurrency transactions are recorded on decentralized ledger systems called blockchains, which allow users to transact anonymously, without registering a bank account or interacting with traditional financial gatekeepers.

As crypto transforms into an increasingly mainstream industry, even the seemingly legitimate actors – start-up founders, engineers and investors – are pushing for anonymity. A growing number of crypto entrepreneurs, many of whom manage hundreds of millions of dollars in investor funds, conduct business through mysterious Internet avatars that have been stripped of identifying information. Some venture capital firms back founders without ever learning their real names.

But Wonderland’s near collapse forces a reckoning as to whether this culture of anonymity undermines accountability and facilitates fraud. Last month, BuzzFeed News sparked another round of debate by identifying two of the pseudonymous founders of Bored Ape Yacht Club, a $2.5 billion collection of non-fungible tokens, the one-of-a-kind digital collectibles known as NFTs.

“This pseudonymous stuff is so dangerous,” said Brian Nguyen, a crypto entrepreneur who used a pseudonym last year before making his identity public. “They can be a good actor today, but they can get bad in two or three years.”

Mr. Nguyen once lost more than $400,000 in a common crypto scam called a back pull, in which an anonymous developer launches a project, solicits money from investors, and then disappears with the money. Victims of carpet pulling often have little recourse against nameless thieves.

Still, some of the industry’s most powerful companies have accepted that crypto engineers and startup founders often prefer to work anonymously. Crypto evangelists argue that this creates a more egalitarian market, where entrepreneurs are judged by their technical expertise rather than their academic or family background. The blockchain provides a public record of transactions, allowing savvy observers to gauge a public limited entrepreneur’s qualifications without consulting a resume.

Amy Wu, who heads the venture arm of the cryptocurrency exchange FTX, said she sometimes collaborated with anonymous investors she met online. One became famous running one Elon Musk Parodies Twitter Account that now has almost two million followers.

‘I don’t know who he is. I don’t know what company he worked for,’ said Mrs. Wu. ‘And you don’t have to. I know he is an expert in the industry.”

Last year, FTX recruited an influencer with the Twitter pseudonym Solana Legend to advise corporate clients interested in NFTs. An FTX employee introduced The New York Times to SolanaLegend, who declined to give his real name in an interview, saying he remains anonymous to protect his security and privacy. While revealing his true identity during an initial conversation with his FTX supervisors, he said, his company email address lists his pseudonym, which he chose as a joke.

At work, he makes one exception to the secrecy. During conversations with clients, he often uses his real first name to introduce himself, concerned that traditional business people would feel uncomfortable working with someone simply called Legend.

Over the past year, the venture capital firm Paradigm has also hired engineers and researchers who operate anonymously; they appear under pseudonyms on the company’s personnel page. The most recent hire was a crypto engineer who goes through Transmissions11 and attends high school “in his spare time,” according to his company bio. (Jim Prosser, a Paradigm spokesperson, said the employees’ bosses knew their identities.)

In interviews, anonymous crypto entrepreneurs and engineers gave various reasons for hiding their names. Some feared that a regulatory crackdown could put them in the crosshairs of law enforcement. Others said they disliked the attention or feared that their growing wealth could make them targets of thieves and hackers.

The nameless entrepreneurs often take extreme steps to keep their identities private, use voice changing software during conversations or require business partners to sign nondisclosure agreements.

Some venture firms are willing to invest in it anyway. Last year, 0xMaki, a developer who helped run the prominent crypto project SushiSwap, raised $60 million from a group of venture investors, including Ms. Wu, without disclosing his real name to them. (The deal fell through after members of SushiSwap — a so-called decentralized autonomous organization, or DAO, in which individual investors have significant influence — raised concerns about funding.)

Last summer, the anonymous founder of Alchemix, another major crypto project, raised $4.9 million from a group of venture firms led by CMS Holdings. Dan Matuszewski, a founder of CMS, said he never asked the project leader, who goes by the pseudonym Scoopy Trooples, to reveal his identity.

“Many of these guys have built up a reputation over the years,” Mr Matuszewski said. “It doesn’t seem logical for them to run off and go into hiding with the money.”

But for many people, it can be difficult to evaluate the credentials of an unknown developer working under a pseudonym. The anonymous founders of a crypto collective called AnubisDAO raised nearly $60 million in a matter of hours last year; less than a day later, the funds vanished in the second largest carpet draw of 2021, according to blockchain tracking company Chainalysis.

“Nobody ultimately controls,” said Jordi Alexander, the chief investment officer at crypto trading company Selini Capital. “Now you have anonymous people on the internet. Sometimes they turn out to be scammers.”

Today, crypto entrepreneurs using their real names sometimes advertise their startups as “fully doxxed,” meaning their background is public. And founders find it harder to keep their identities a secret. BuzzFeed analyzed publicly available company data to determine the identities of Bored Apes founders, Greg Solano and Wylie Aronow. (No one responded to requests for comment.)

Wonderland was founded in September by Daniele Sestagalli, a crypto entrepreneur who co-led the project with Mr. Patryn, using whimsical imagery from “Alice’s Adventures in Wonderland” to entice investors. In a blog post in January, Mr. Sestagalli that he had known since December that Mr. Patryn was an ex-fraudster, but decided not to take action because he believed in “second chances”. (Mr Sestagalli did not respond to requests for comment.)

His investors were not so forgiving. Like SushiSwap, Wonderland is run like a DAO. After a vote in January, Mr. Patryn is forced to resign from the project. (He did not respond to emails.) A second referendum calling for Wonderland to close was narrowly defeated.

Mr. Patryn’s identity would have remained a secret if not for the work of an influential crypto detective, who tweeted screenshots from a text conversation he had with Mr. Sestagalli. In those posts, Wonderland’s founder seemed to acknowledge 0xSifu’s real name.

Last month the sleuth was at it again, tweet proof that an anonymous leader of another crypto project had once been fined by the Securities and Exchange Commission.

The detective’s name? Unknown. He uses a pseudonym.

Eric Lipton reporting contributed. Kirsten Noyes contributed research.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *