Investors are shaken after the co-founder of a multi-billion dollar cryptocurrency protocol was accused of being a serial scammer with a record of conviction and deportation, and the co-founder of a fraudulent Canadian exchange that imploded.
On Thursday, a Twitter user who goes by zachxbt.eth “with a track record of unmasking crypto scams and nefarious behavior,” according to CoinDesk, accused “Sifu,” a core member of the founding team behind the popular Avalanche-based Wonderland DeFi (or decentralized finance) protocol and its TIME token, of actually being Michael Patryn.
Patryn, who changed his legal name twice, was the co-founder of QuadrigaCX, a Canadian exchange that shut down after Patryn’s partner Gerald Cotten suddenly died in India in 2018 while owing users around $190 million in crypto at the time’s exchange rate. Patryn and Cotten reportedly parted ways in 2016. Later, investigators determined that Cotten was operating QuadrigaCX as a Ponzi scheme near the end of its life.
Patryn has been convicted of several crimes, including computer fraud and bank and credit fraud, as Bloomberg reported in 2019. After the original tweets that revealed Sifu is Patryn, Daniele Sestagalli, the founder of Wonderland, confirmed the allegation. Sestagalli is a prolific developer who is behind multiple DeFi projects, including Abracadabra’s Magic Internet Money (MIM) token.
“I want everyone to know that I was aware of this and decided that the past of an individual doesn’t determine their future. I choose to value the time we spent together without knowing his past more than anything,” Sestagalli wrote on Twitter.
He later posted a statement explaining that he found out about Sifu’s real identity a month ago, and has now decided to ask Patryn to step down.
“I am of the opinion of giving second chances, as I have mentioned on Twitter. I’ve seen the community very divided about my choice of maintaining him as the treasury manager after finding out who he was and his past,” Sestagali wrote. “Regardless, what has happened has happened. Now having taken some time to reflect, I have decided that he needs to step down till a vote for his confirmation is in place. Wonderland has the say to who manages its treasury not me or the rest of the wonderland team.”
QuadrigaCX was a popular Canadian cryptocurrency exchange co-founded by Patryn, who reportedly left in 2016. In 2018, one of the co-founders, 30 year-old Gerald Cotten, died in India due to complications from Crohn’s Disease, according to court documents filed by his wife. According to her sworn affidavit at the time, Cotten was the only one in control of the exchange’s private keys, meaning his death locked up all the users’ funds. Cotten allegedly had them in “cold storage,” meaning they were stored on an encrypted hard drive or USB drive.
As it turned out, QuadrigaCX couldn’t cover the demand for withdrawals when crypto prices crashed, and began operating as a simple Ponzi scheme, provincial regulators eventually determined. To make matters worse, Cotten was gambling users’ money himself, with $115 million being attributed to Cotten’s fraudulent trading, according to provincial regulators. Another $28 million was lost by Cotten on third-party crypto platforms, and only $46 million was recovered.
Since the revelation, sleuths have been working through accounts associated with Patryn’s known Ethereum address, helpfully labeled by Patryn himself as Sifu.eth. Taylor Monahan, CEO of MyCrypto, revealed that an address that received 15,000 ETH from QudrigaCX’s smart contract nearly five years ago—after Patryn dissociated from the exchange—was linked to the Sifu.eth address.
The QuadrigaCX episode was dramatic and painful, and emblematic of the worst parts of the cryptocurrency industry. Which is why the community was shocked to learn that the co-founder of QuadrigaCX went on to work on another crypto project. Wonderland’s token, TIME, is supposed to be a “stablecoin” in the DeFi ecosystem that is backed by a treasury of funds locked in by users. So, trust is an important element of that arrangement. In December, the total value locked into Wonderland’s treasury was nearly $2 billion USD.
“You better bail out of MIM and Wonderland TIME asap along with any other trash associated with sifu and those scammers and yeah this is financial advice,” the account of a crypto YouTube account tweeted.
The Wonderland incident raises further questions about the value of anonymity in the DeFi space versus the risks that it presents, and the amount of due diligence going on in the space. Indeed, a Reuters report this week revealed that Binance, one of the largest cryptocurrency exchanges in the world, kept only weak checks against money laundering despite publicly promising the opposite.
Currently, the Wonderland DAO (decentralized autonomous organization) is preparing for a vote about whether to keep Patryn in the project.
Disclosure: One of the authors of this story, Jordan Pearson, owns a small amount of AVAX, the Avalanche blockchain’s token.