Over the past decade, Bitcoin has been the best performing asset class growing at an average annual rate of 230%. It handily beat the stock market, real estate, gold and commodities. Anonymity has been the foundation of the cryptocurrency industry since its inception. Satoshi Nakamoto, a pseudonym, was used by a mysterious person who invented Bitcoin more than a decade ago.
The crypto community believes that Bitcoin would survive the test of time compared to other cryptocurrencies as its founder is unknown. Nakamoto’s pseudonym inspired other cryptocurrency engineers to use screen names. But are there any risks with pseudonymous founders in crypto?
The difference between anonymous and pseudonym
There is a difference between anonymous and pseudonym. An anonymous person can speak or operate without being identified as they use multiple identities each time. A pseudonymous person conducts business, but their actual identification and background are still hidden or unknown.
For example, if I don’t have to log in, I can comment on a website article and remain anonymous. If I had to log in with my username, I would be a pseudonym. 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. On the internet I would keep my pseudonymous identity. The pseudonymous identity is similar to selecting a character as your avatar in the metaverse.
The pseudonymous founder of Bitcoin is Satoshi Nakamoto, but no one knows the real name behind Satoshi. And it is not even known if Nakamoto was the sole founder behind Bitcoin or if it was a team of individuals.
Compare Bitcoin to Ethereum where everyone knows the team behind ETH and Vitalik Buterin as Ethereum’s face is visible at conferences and vocal on social media.
Pseudonymous crypto entities
One of the first lessons most of us learned before investing in anything was to do our due diligence and know everything about the investment. Before investing in stocks, we would research the company, product, potential market and sale. We will learn about the fund manager and their track record before investing in a mutual fund. Likewise, when investing in real estate, we will evaluate the rental property and verify the ownership of the land using a title company.
There are times when we have no idea who is behind a cryptocurrency or project. At first this didn’t seem like a problem. It didn’t bother anyone that Bitcoin’s founder was a pseudonym. Of course, no one took Bitcoin or cryptocurrency seriously at first until about 2017, when it started to appreciate 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 related to financial services such as borrowing money, earning interest, trading assets or borrowing money using blockchain technology.
Compared to a cryptocurrency token, DeFi has a broader impact as it tries to recreate the entire financial system on the blockchain. If someone launches a scam token, only the people who bought the token will lose money. However, since DeFi involves borrowing, putting out, trading and lending money, the consequences of an unscrupulous person can have broader implications.
The SEC is concerned about any link between pseudonymity and manipulation of the DeFi markets. The DeFi community likes their anonymity, but the Securities Exchange Commission believes that investors are more interested in returns. SEC Commissioner Caroline Crenshaw has released a statement on DeFi risks, regulations and opportunities asking DeFi participants to address transparency and pseudonymity.
Commissioner Crenshaw also expressed concern about the link between pseudonymity and market manipulation. When market participants operate anonymously, detecting and countering manipulation using bots and covert trading becomes more challenging.
She said that as typical signs, such as trading volumes and momentum, become deceptive, investors are most at risk of losing money as a result of market manipulation. We have heard concerns about price manipulation in the NFT market. No one knows for sure whether there is a real demand for a particular NFT or whether the same individuals are buying and selling NFTs among themselves in order to increase prices.
In addition, Commissioner Crenshaw stated that the SEC is also concerned about the use of decentralized exchanges for security-based tokens. She is concerned about investors who do not rely on the same protections as investing in a regulated exchange.
There are also other risks with pseudonymous founders. These founders could be working with dishonest people. She believes DeFi projects should hold discussions with the SEC to find answers to the conundrum of how pseudonymity can comply with 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 who knows nothing about his past can be risky for investors. The investors calling themselves Frog Nation entrusted their money to Wonderland’s CFO and co-founder, known only by the profile name 0xSifu. Unknown to all, 0xSifu had a dark past.
In February 2022, sleuth ZachXBT revealed that 0xSifu is Michael Patryn, who had spent 18 months in a US prison for his part in an online identity theft gang in 2005.
According to The Globe and Mail, a Canadian news outlet, this founder also had ties to the infamous Canadian crypto exchange QuadrigaCX. In 2013, Mr. Patryn and Gerald Cotten helped launch Quadriga’s trading platform. Since Mr Cotten passed away under unusual circumstances in India last November, users have criticized Quadriga. The exchange’s users were denied access to $250 million in cash and cryptocurrency.
A Canadian court had to appoint an accounting firm to come to a solution. According to the Ontario Securities Commission report, when Quadriga filed for creditor protection, Quadriga owed its clients assets worth a combined $215 million. The Monitor recovered or identified only $46 million in assets, leaving a deficit of $169 million.
Before ZachXBT revealed 0xSifu’s real name, 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 argue that pseudonymity allows individuals to be judged solely on their reputation and technical capabilities, eliminating biases, resulting in a more equitable market. Given the widespread discrimination in hiring and funding when founders are publicly visible, the anonymous system provides a level playing field for all.
Many of the anonymous crypto entrepreneurs have other reasons to hide their identities. Some may 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 exposed 0xSifu is also a pseudonym.
Even celebrities prefer to be pseudonymous in the crypto world. Only recently did everyone hear that the NFT influencer is CozomoMedici Snoop Dogg.
Not only pseudonymous founders pose a risk. Several tales of scams had rocked the crypto world, even when the founders were not anonymous.
As with any investment, it is essential to understand what the investment is and the risks associated with it. There are plenty of cryptocurrencies, DeFi projects and NFT marketplaces that are transparent with all information. Investors today have a choice between pseudonymous founders and public entities.
The ability to work anonymously is at the heart of crypto ethos. The crypto community must now debate whether the risks of pseudonymous founders are worth the reward.
Readers, where do you live in the debate between pseudonymous founders and public founders. Is it a factor when you decide to invest in a new crypto token or protocol?
John Dealbreuin came to the US from a third world country with only $1,000 without knowing anyone; led by an immigrant dream. In 12 years he reached his retirement number.
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