Crypto Secrecy Makes DeFi a Wonderland to Felon Tied to Quadriga

(Bloomberg) -- A decentralized-finance project called Wonderland is being rocked by controversy following the disclosure that it was being run in part by a felon with ties to one of the biggest cryptocurrency scandals. 

Tokens related to the Avalanche blockchain-based protocol, one of the larger community-governed DeFi applications since its launch in September, have tumbled in value in the last 24 hours. Co-founder Daniele Sestagalli said Thursday that he asked Wonderland’s treasury head, who goes by the pseudonym Sifu, to step down because it has become more widely known that he was Michael Patryn, a co-founder of the failed Canadian crypto exchange QuadrigaCX. Patryn couldn’t immediately be reached for comment. 

Quadriga has captivated the crypto world since co-founder Gerald Cotten’s death in 2018 revealed a massive fraud that caused at least C$169 million ($133 million) in losses for 76,000 investors in Canada and abroad. Patryn, who also formerly went by Omar Dhanani before legally changing his name on two occasions, wasn’t accused of any wrongdoing related to Quadriga. He spent 18 months in U.S. federal prison and was deported to Canada after pleading guilty to conspiracy to commit credit-and-bank card fraud in 2005, and burglary, grand larceny and computer fraud two years later.     

The fiasco is another example of how investors in loosely-organized and under-regulated corners of the crypto market are being forced to reckon with growing pains as the industry matures. It also signals more headaches for the world of DeFi, which largely operates under a cloak of anonymity while facing increasing attention from regulators.

Aaron Lammer, a member of the DeFi team at crypto prop trading firm Radkl and host of the podcast ‘Exit Scam’ about the Quadriga debacle, said the community found it “shocking” that Sestagalli, had known about Sifu’s identity without changing tack.

“This is news to me, but this was not news to him and he chose to continue doing business with this person,” Lammer said. “It means that as TIME unraveled, Dani was aware that the person in charge of the treasury was a convicted financial criminal who spent time in prison.”

The unveiling of Patryn’s identity came about after days of speculation by traders and crypto fans on Reddit, a manhunt which coincided with mass liquidations of Wonderland’s TIME token. Sestagalli, who did not respond to a request for comment, had initially chosen to defend his choice to work with Patryn before caving to calls for his removal from Wonderland hours later.

“I found out about this 1 month ago, I am of the opinion of giving second chances,” said Sestagalli in a statement signed using his crypto wallet address. “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.”

TIME dropped to an all-time low of $335 on Thursday, according to data from CoinGecko, though it later recovered to around $440. Once a top 100 token on the data platform with a peak total market value of $2.6 billion recorded in November, TIME has since slid to a ranking of 163rd at $406 million. 

A crypto wallet identified as belonging to Patryn appeared to be rapidly offloading various tokens on Thursday, with its total net worth dropping from $450 million to  $70 million in a matter of hours, according to trackers DeBank and Zapper.

Meanwhile a separate address also linked to Patryn was similarly active. The address was traced to him by Taylor Monahan, chief executive of Ethereum tool MyCrypto, who has been keeping tabs on the wallet since she was a victim in Quadriga’s collapse.

“It’s probably a negative blow for anonymity in DeFi,” added Lammer. “If the anonymous nature of DeFi means that a person like Michael Patryn can be in charge of a major DeFi treasury, that’s a pretty big problem.” 

©2022 Bloomberg L.P.