Anonymity in crypto sounds alarm

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

In order to participate in the project, the investors – who called themselves Frog Nation – entrusted their money to Wonderland’s treasury manager, a crypto developer they only knew by the profile name 0xSifu.

In late January, 0xSifu was revealed to be the alias for Michael Patryn, who had served 18 months in federal prison for fraud. The price of the Wonderland token, $TIME, plummeted overnight as panicked Frog Nation residents debated scrapping the project.

“I was like, ‘Oh man, this is getting ugly,'” said Brad Nickel, a Florida-based Wonderland investor who runs the crypto podcast Mission: DeFi. “It was a total loss of confidence right away.”

From the beginning, the crypto industry was built on anonymity. Bitcoin was created more than a decade ago by a mysterious figure going by the alias Satoshi Nakamoto. For years, thieves and drug dealers have used cryptocurrencies to do business in the shadows.

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

Now that crypto is increasingly becoming a mainstream industry, even the seemingly legitimate players – start-up founders, engineers and investors – insist on anonymity. A growing number of crypto entrepreneurs, many controlling hundreds of millions of dollars in investor funds, are conducting business through mysterious internet avatars stripped of identifying information. Some venture capital firms back founders without ever knowing their real names.

But Wonderland’s near-collapse forces a reckoning on whether this culture of anonymity undermines accountability and allows for fraud. Last month, BuzzFeed News launched a new roundtable by identifying two of the pseudonymous founders of the Bored Ape Yacht Club, a $2.5 billion collection of non-fungible tokens, the unique digital collectibles known as NFTs.

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

Mr. Nguyen once lost more than $400,000 in a popular crypto scam called Rug Pull, in which an anonymous developer starts a project, solicits funds from investors, and then disappears with the money. Victims of rug pulls often have little recourse to nameless thieves.

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

Amy Wu, who runs the venture arm of cryptocurrency exchange FTX, said she sometimes worked with anonymous investors she met online. One became famous while walking Elon Musk parodied Twitter account which now has nearly two million followers.

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

Last year, FTX recruited an influencer using the pseudonym Twitter Solana legend to advise corporate clients interested in NFTs. An FTX employee introduced the New York Times to SolanaLegend, who in an interview refused to give his real name and said he was remaining anonymous to protect his security and privacy. While he revealed his true identity on an initial call with his FTX bosses, he said, his company email address includes his alias, which he chose for fun.

At work, he makes an exception to secrecy. When speaking to clients, he often uses his actual first name to introduce himself, concerned that traditional businessmen might feel uncomfortable working with someone known simply as Legend.

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

In interviews, anonymous crypto entrepreneurs and engineers gave a variety of reasons for obscuring their names. Some feared a government crackdown could put them in the crosshairs of law enforcement. Others said they didn’t like the attention or worried their growing wealth could make them targets for thieves and hackers.

The unnamed entrepreneurs often go to extremes to keep their identities secret, using voice-changing software when making calls or requiring business partners to sign non-disclosure agreements.

Some venture firms are willing to invest in them anyway. Last year, 0xMaki, a developer involved in running the well-known crypto project SushiSwap, raised $60 million from a group of venture investors including Ms. Wu without revealing 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 the 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, one of the founders of CMS, said he never asked the leader of the project, who uses the alias Scoopy Trooples, to reveal his identity.

“A lot of these guys have had good reputations over the years,” Mr. Matuszewski said. “It doesn’t seem like it makes very much sense for them to run away with the money and escape.”

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 almost $60 million in just a few hours last year; Less than a day later, the funds vanished in the second-biggest carpet pull of 2021, according to blockchain tracking company Chainalysis.

“No one is ultimately auditing,” said Jordi Alexander, chief investment officer at crypto trading firm Selini Capital. “You have anonymous people on the internet now. Sometimes they end up as scammers.”

Today, crypto entrepreneurs using their real names sometimes advertise their startups as “fully doxed,” meaning their backgrounds are public. And founders are finding it harder to keep their identities a secret. BuzzFeed analyzed publicly available business records to determine the identities of Bored Apes founders Greg Solano and Wylie Aronow. (None 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 lure investors. In a January blog post, Mr Sestagalli said he had known since December that Mr Patryn was a former scammer but chose not to take action because he believed in “second chances”. (Mr Sestagalli did not respond to requests for comment.)

Its investors weren’t so forgiving. Like SushiSwap, Wonderland operates as a DAO. After a vote in January, Mr. Patryn had to withdraw from the project. (He didn’t respond to emails.) A second referendum calling for Wonderland to close was narrowly defeated.

Mr. Patryn’s identity might have remained secret were it not for the work of an influential crypto snoop who tweeted screenshots of a text conversation he had with Mr. Sestagalli. In this news, the Wonderland founder seemed to acknowledge the real name of 0xSifu.

Last month the detective was at it again Tweet evidence that an anonymous leader of another crypto project was once fined by the Securities and Exchange Commission.

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

Eric Lipton contributed reporting. Kirsten Noyes contributed research.

https://www.nytimes.com/2022/03/02/technology/cryptocurrency-anonymity-alarm.html Anonymity in crypto sounds alarm

Ian Walker

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