For the past decade, Bitcoin has been the best performing asset class growing at an average annualized rate of 230%. It has handily beaten the stock market, real estate, gold, and commodities. Anonymity has been the basis of the cryptocurrency sector from the beginning. Satoshi Nakamoto is the pseudonym used by the mysterious individual who invented Bitcoin over a decade ago.
The crypto community believes that Bitcoin will survive the test of time compared to other cryptocurrencies, particularly since the founder is unknown. Nakamoto’s pseudonym inspired other cryptocurrency engineers to use screen names. But are there risks with pseudonymous founders in crypto?
The Difference Between Anonymous and Pseudonymous
There is a difference between anonymous and pseudonymous. An anonymous person can speak or operate without being identified because they use multiple identities every time. A pseudonymous person conducts business, but their actual identification and background are still hidden or unknown.
For example, if I’m not required to log in, I can comment on a website article and remain anonymous. However, if I had to log in using my username, I would be pseudonymous.
When I use the same username on different websites, others will identify me by my username, but no one will know my real name or anything about me.
Across the internet, I would retain my pseudonymous identity. The pseudonymous identity is similar to selecting a character as your avatar in the metaverse or writing under a pen name.
No one knows who Satoshi Nakamoto really is – or if their even one person, or a team of individuals who founded Bitcoin.
Contrast Bitcoin with Ethereum, where everyone knows the team behind ETH and Vitalik Buterin as the face of Ethereum is visible at conferences and vocal on social media.
Pseudonymous Crypto Entities
One of the first lessons you learn before investing in anything is to do your due diligence and know everything about the investment. For example, before investing in stocks, you research the company, the product, the potential market, and sales.
Likewise, you learn about the fund manager and their track record before investing in a mutual fund. Similarly, when investing in real estate, you evaluate the rental property and verify the ownership of the land using a title company.
But there are times when we have no idea who is behind a cryptocurrency or project. At first, this did not seem like a problem. It did not bother anyone that the founder of Bitcoin was pseudonymous.
Of course, at first, no one took Bitcoin or cryptocurrency seriously until around 2017, when it started to climb in value.
Risks With Pseudonymous Founders in DeFi
The risk with pseudonymous founders is that an unscrupulous person could act like a founder.
DeFi stands for Decentralized Finance and is a term that covers financial services such as borrowing money, earning interest, trading assets, or lending money using blockchain technology.
Compared to a cryptocurrency token, DeFi has a broader impact since it attempts to recreate the entire financial system on the blockchain. For example, if someone launches a scam token, only the people who bought the token will lose money. However, since DeFi involves borrowing money, staking, trading assets, and lending, the ramifications of an unscrupulous individual could have broader impacts.
The SEC is suitably concerned about any link between pseudonymity and manipulation of the DeFi markets.
The DeFi community likes their anonymity, but the Securities Exchange Commission believes investors are more interested in returns. Accordingly, SEC Commissioner Caroline Crenshaw has published a statement on DeFi Risks, Regulations, and Opportunities asking DeFi participants to address transparency and pseudonymity.
Commissioner Crenshaw also raised concerns about the link between pseudonymity and market manipulation. When market participants operate anonymously, it becomes more challenging to track and counteract manipulation using bots and collusive trading.
She pointed out that when typical signs, such as trading volumes and momentum, become deceptive, investors are most at risk of losing money due to market manipulation.
Price manipulation in the NFT market is a big area of concern. No one is sure if there is a genuine demand for a particular NFT or the same individuals buying and selling NFTs between themselves to raise the prices.
The SEC is also concerned about the use of decentralized exchanges for security-based tokens. Crenshaw worries about investors not relying on the same protections they would receive when investing in a regulated exchange.
There are also other risks with pseudonymous founders. For example, these founders could work with dishonest people. She feels that DeFi projects should have conversations with the SEC to find answers to the conundrum of how pseudonymity might satisfy existing regulations.
The Collapse of Wonderland
The SEC Commissioner’s fears are not unfounded.
The Wonderland project is an excellent example of how a pseudonymous founder with nothing known about their past could be risky to investors. The investors who called themselves Frog Nation entrusted their money to Wonderland’s CFO and co-founder, known only by the profile name of 0xSifu. Unknown to everyone, 0xSifu had a murky past.
In February 2022, on-chain sleuth, ZachXBT revealed that 0xSifu is Michael Patryn, who had spent 18 months in a U.S. prison for his part in an online identity theft ring in 2005.
According to “The Globe and Mail,” a Canadian news outlet, this founder also had ties with Canada’s infamous crypto exchange QuadrigaCX. In 2013, Mr. Patryn and Gerald Cotten helped launch Quadriga’s trading platform. However, since Mr. Cotten died under unusual circumstances in India last November, users have criticized Quadriga. As a result, the exchange’s users could not access $250-million in cash and cryptocurrency.
A Canadian court had to appoint an accounting firm to find a resolution. As per the Ontario Securities Commission report, when Quadriga filed for creditor protection, it owed its clients assets worth collectively $215 million. The Monitor only recovered or identified $46 million of assets, leaving a $169 million shortfall.
Before ZachXBT revealed the actual name of 0xSifu, no one had any idea that the person behind the pseudonym was Patryn or that the person had a criminal record. As Frog Nation panicked with a vote to shut down the project, the price of Wonderland token, $TIME, plummeted overnight.
Will Pseudonymity Survive in Crypto?
Proponents of blockchain technology claim that pseudonymity allows individuals to be judged only based on their reputation and technical capabilities, eliminating any biases, resulting in a more equitable marketplace. Given the widespread discrimination in hiring and funding when founders are publicly visible, the anonymous system provides a level playing field to everyone.
Many of the anonymous crypto entrepreneurs have valid reasons for hiding their identities. Some might be talented engineers living in regions where working on crypto projects is prohibited. Others fear becoming a target for criminals and kidnappers. On-chain detective ZachXBT who unmasked 0xSifu, is themselves pseudonymous.
Even celebrities prefer to be pseudonymous in the crypto world. Only recently did everyone learn that the NFT influencer CozomoMedici is Snoop Dogg.
As with any investing, it is essential to understand the investment and the risks associated with it. There are plenty of cryptocurrencies, DeFi projects, and NFT marketplaces that are completely transparent. Investors today have a choice between pseudonymous founders and public entities.
The ability to operate anonymously is at the heart of crypto ethos. However, the crypto community now has to debate if the risks of pseudonymous founders are worth the reward.
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