The Perils of Crypto's Pseudonymous Economy

If crypto’s pseudonymous economy is to survive this era of NFT rug pulls and token Ponzinomics, then I’ve yet to see a reason why or how it should. We’re living through a massive digital whack-a-mole game. But these moles have mallets – Groucho Marx masks, too. Why, then, do we keep plunking quarters into their machine?

Take Thursday’s announcement of fraud charges against two organizers of the “Frosties” non-fungible token blowup. Federal prosecutors alleged 20-year-olds Ethan Nguyen and Andre Llacuna scammed investors in their million-dollar metaverse mumbo jumbo, a collection of cutesy JPEG PFPs (profile pics).

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Infected by FOMO (fear of missing out) and crypto hype culture, thousands of well-meaning if misguided victims didn’t know who was selling them a tin digital Spam. Some Frosties buyers eagerly dropped thousands of dollars on mint day. They didn’t start asking whodunit until after the rug had been pulled. Why bother vetting creators “Meltfrost” and “heyandre” in an ecosystem that lionizes the pseudonymous hack?

Therein lies the ... rug. Crypto and DeFi (decentralized finance) and NFTs and Web 3 have grown to adore pseudonymity’s romantic mystique. This makes perfect sense from a historical standpoint: Bitcoin’s Satoshi Nakamoto set a trillion-dollar precedent for keeping one’s real name under wraps. He or she or they created a financial disintermediation platform that didn’t know or care who used it. Years of open-source collaboration, auditing and innovation – and Satoshi’s early exit stage left – mean bitcoiners nary fret over the founder’s real name.

Bitcoin earned our respect over a decade of growth. Its pseudonymous precedent is now being exploited by a new generation of scam-happy thieves. Carnival goldfish have longer, happier lives than these ringleaders' phony names.

Convicted felon and QuadrigaCX co-founder Michael Patryn rebranded himself as the systemically important treasurer of crypto project Wonderland, which at its height held over $700 million in assets. People were fine with Sifu, the pseudonymous founder. When on-chain sleuths doxxed him, though, they balked, ultimately voting him out of the project. Sifu didn’t have to run off with their money to pull the rug, in their minds. His potholed past was indictable enough.

If people cared who Sifu was after his unmasking, then there’s no conceivable reason why they shouldn’t have demanded that information on opening day. You can’t blame Sifu, really: He was just following route procedure. We spin ourselves a tale of riches that charlatans – especially those with toxic pasts – inevitably embrace.

Crypto is beginning to grapple with its self-imposed fables. Perhaps spooked by billions of dollars in rug pulls, a growing number of pseudonymous founder-led projects are now taking steps to bolster their raison d'être. Some retain their outward-facing mystery by telling retail investors that the whales (large investors) know their real names. Others pay big bucks for boutique vendors to perform “know-your-customer” (KYC) checks in exchange for a pretty label that marks them as known privately.

Take RugDoc.io. In one year, the review website has built community trust by spotting and shaming shady DeFi projects. This service laudably warns users which products are programmed to rug and which appear safe. It’s a free service available on request.

The website also sells “RUGDOC KYC.” For $5,000-plus, it will perform “extensive real-time identity verification as well as professional vetting through our trusted third party vendor.” After verifying the founders’ identity (which it keeps under wraps) RugDoc awards them a “pristine KYC badge” to flaunt before RugDoc’s “100k+ monthly unique visitors.”

I’ve been around this industry long enough to know that “trusted third parties'' are anathema to the origins of crypto. We don’t know who runs RugDoc. We certainly don’t know who its “trusted third party” is. When asked in the project’s Discord, the mod Mr. Onion demurred. “Making them public could open up vulnerabilities,” the mod said.

See also: Why CoinDesk Respects Pseudonymity: A Stand Against Doxxing | Opinion

It is definitionally impossible to trust a third party when the party is unknown. Dozens of projects still pay big money to run their gamut, which RugDoc calls a deterrent. RugDoc’s own website admits at least two pulled the rug.

We’re dumping millions of dollars in an ecosystem whose solution to a problem of its own making is a banner ad antithetical to crypto’s philosophical core. Pretty words and self-principles are trouncing our own credulity. Then when it goes down the porcelain throne, we cry boo-hoo and move on to the next.

It’s only by a combination of sheer luck and post-teenage stupidity that the feds caught up with the alleged founders of Frosties. According to court documents, a federal investigator subpoenaed messaging app Discord, crypto exchange Coinbase, internet service providers and banks to quite speedily tie two real-world identities to “heyandre” and “Meltfrost.” Two months from crime to charges is a legal blitzkrieg, to be sure.

There was a good reason to move fast, the feds say. They allege Nguyen and Llacuna were days away from launching another scammy NFT rug pull-to-be.