What are the risks of investing in an anonymous crypto startup?

Original title: " What are the risks of investing in an anonymous crypto startup offering? "

Original Source: Public AccountOld Yuppie

The investor gave the money to the anonymous developer. Venture capitalists fund entrepreneurs without knowing their real names. And what happens when they learn their real names?

For months, cryptocurrency enthusiasts have asked a project called "Wonderland" (Wonderland) With hundreds of millions of dollars invested, the project claims to provide a transaction system for the dark world of decentralized finance.

In order to participate in this project, investors calling themselves "Frog Nation" entrusted their money to the financial manager of "Fairyland", a man they only know by the name of Cryptocurrency developer at 0xSifu.

In late January, 0xSifu was discovered to be the alias of Michael Patryn, who served 18 months in federal prison for fraud. Frog Nation residents panicked and discussed shutting down the project, and the price of the Wonderland token plummeted overnight.

“My reaction was, ‘Oh my god, this is going to be bad,’” said a Florida-based cryptocurrency podcaster called “Mission : DeFi” Wonderland investor Brad Nickel said, “I immediately lost confidence.”

From the beginning, the cryptocurrency industry has been built on anonymity superior. Bitcoin was conceived more than a decade ago by a mysterious figure named Satoshi Nakamoto. Thieves and drug dealers have been secretly using cryptocurrencies for business for years.

Michael Patryn, alias Omar Dhanani, leaves federal court in Newark in 2005. Source: Mike Derer/Associated Press

The ability to operate anonymously is a core tenet of cryptocurrency technology. All cryptocurrency transactions are recorded on a decentralized ledger system known as the blockchain, which allows users to transact anonymously without having to register for a bank account or interact with traditional financial gatekeepers.

Nowadays, as cryptocurrencies become mainstream, even ostensibly legitimate players—startup founders, engineers, and investors—are Remain anonymous. A growing number of cryptocurrency entrepreneurs, many of whom control hundreds of millions of dollars in investor funds, operate from shadowy, identity-scraped avatars. Some VCs start investing in founders without even knowing their real names.

But Wonderland's near-collapse has forced reflection on whether this culture of anonymity undermines accountability and fosters fraud. Last month, BuzzFeed News revealed the identities of the two anonymous founders of the Bored Ape Yacht Club, sparking fresh debate.

“This alias thing is so dangerous,” said cryptocurrency entrepreneur Brian Nguyen. He used a pseudonym before going public last year. "They might be a good actor today, but they might turn bad in two or three years."

Nguyen worked on a common encryption method called rug pull More than $400,000 was lost in currency fraud. In this scam, an anonymous developer starts a project, solicits money from investors, and disappears with the money. Victims are often helpless against unknown thieves.

Nevertheless, some of the industry's most powerful companies have accepted that cryptocurrency engineers and startup founders often prefer to operate anonymously. Cryptocurrency advocates argue that this creates a more egalitarian market in which entrepreneurs are judged by their technical expertise rather than their academic or family background. Blockchains provide a public record of transactions, allowing savvy observers to assess the credentials of an unnamed entrepreneur without having to consult a résumé.

Amy Wu, head of venture capital at cryptocurrency exchange FTX, said she sometimes works with anonymous investors she met online. One shot to fame for parodying Elon Musk's Twitter account and now has nearly 2 million followers.

“I don’t know who he is. I don’t know what company he works for,” Wu said. "And I don't need to know. Because I know he's an expert in his field."

Amy Wu, cryptocurrency exchange FTX risk Head of the investment department, she often works with anonymous investors. Source: The New York Times

Last year, FTX hired a Twitter influencer with the pseudonym SolanaLegend to advise corporate clients interested in NFTs. An FTX employee told The New York Times about SolanaLegend. SolanaLegend declined to give his real name in an interview, saying he remained anonymous to protect his safety and privacy. He said that while he revealed his real identity during the initial call with FTX executives, his corporate email address used his alias, which he chose as a joke.

At work, he has an exception for confidential work. In calls with clients, he often introduces himself by his real name, out of concern that traditional corporate executives might feel uncomfortable working with someone named "Legend."

Venture capital firm Paradigm has also hired a number of anonymous engineers and researchers over the past year; they appear on the company's employee page under pseudonyms. The most recent hire was a cryptocurrency engineer whose company resume lists his name as transmission11 and attended high school "in his spare time." (Paradigm spokesman Jim Prosser said the employees' bosses know their true identities.)

In interviews, anonymous cryptocurrency entrepreneurs and engineers raised All kinds of reasons to hide their names. Some worry that the regulatory crackdown could make them targets of law enforcement. Others said they didn't like the attention, or feared that their growing fortunes could be targeted by thieves and hackers.

These anonymous entrepreneurs often take extreme measures to protect the privacy of their identities, such as using voice-altering software during calls or requiring business partners to sign non-disclosure agreements .

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

Last summer, the anonymous founders of another large crypto project, Alchemix, raised $4.9 million from a venture capital firm led by CMS Holdings. CMS founder Dan Matuszewski said he never asked the project lead (who uses the pseudonym Scoopy Trooples) to reveal his identity.

“A lot of these guys have years of reputation,” Matuszewski said. “It doesn’t seem like a lot of sense for them to run away with money.”

But for many, it is difficult to assess the qualifications of an anonymous developer. Last year, the anonymous founder of a cryptocurrency collective called AnubisDAO raised nearly $60 million in a matter of hours; the funds were raised less than a day later in the second round of 2021, according to blockchain tracking firm Chainalysis. The big rug disappears in the pull.

“At the end of the day, nobody audits,” said Jordi Alexander, chief investment officer at cryptocurrency trading firm Selini Capital. "People who remain anonymous on the internet sometimes turn out to be liars."

Cryptocurrency entrepreneurs who use their real names these days sometimes advertise their startups Call them "fully doxxed," meaning their backgrounds are public. And founders are finding it harder and harder to keep their identities a secret. BuzzFeed analyzed publicly available business records to identify Bored Apes founders Greg Solano and Wylie Aronow. (Neither responded to a request for comment.)

Wonderland was founded in September by cryptocurrency entrepreneur Daniele Sestagalli, who runs the project with Patryn, using Fantastic imagery in "Alice in Wonderland" to attract investors. In a blog post in January, Sestagalli said he had known since December that Patryn had been a scammer but decided not to act because he wanted to give him a "second chance."

His investors were less forgiving. Like SushiSwap, Wonderland operates as a DAO. Patryn was forced to resign from the project after a vote in January. A second referendum calling for Wonderland to close narrowly failed.

If it weren't for the work of an influential cryptocurrency detective, Patryn's identity might have remained a secret. The detective tweeted screenshots of his text conversations with Sestagalli. According to screenshots, the founder of Wonderland seems to have acknowledged 0xSifu’s real name.

Last month, the sleuth struck again, tweeting another rumor that the anonymous head of a cryptocurrency project had been fined by the SEC. evidence.

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