Did One Man Really Cause the Entire 2022 Crypto Crash?

  • Many have focused on the role that Terra Classic (LUNC-USD) played in the 2022 crypto crash.
  • However, investors can trace the origins of the collapse back much further.
  • The role of one influential man highlights issues associated with privacy and centralization in cryptocurrencies.
crypto crash - Did One Man Really Cause the Entire 2022 Crypto Crash?

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Anonymity is a powerful force within the crypto space. Its so powerful, in fact, that it allowed one man called Sifu, known previously for his involvement in a multimillion-dollar crypto scheme, to commingle with one of the largest blockchain projects in the world. But in the months since this project caused a market-wide crypto crash, the conversation has shifted away from him.

For all of the woes that the crypto crash inflicted upon investors, financial experts are certainly slow to assign any blame. In the aftermaths of other crashes, Wall Street has been quick to point fingers. Richard Fuld’s Lehman Brothers in the 2008 housing crash, George Soros in the 1997 Asian financial crisis, Alan Greenspans Federal Reserve in the dot-com crash. Why is this not the case with crypto?

Sure, crypto is a speculative industry, but the bubble didn’t just pop overnight. It was a long process of falling dominos, leading all the way up to a failure of the market on a worldwide scale. Hedge funds went bankrupt, investors lost fortunes and faith in the industry saw setbacks that will take years to remedy. And as is historically the case in finance, all roads lead back to somewhere — or rather, someone.

There’s one person in a rotating cast of characters contributing to the crypto crash that has been controversial from the start. And seeing how he leveraged the markets obsession with anonymity to remain influential in crypto presents the industry with a point of reckoning.

From Mysterious Figure to Consequential Market Force

Michael Patryn, also known as “0xSifu” or just “Sifu,” is a blockchain developer involved in one of the biggest crypto mysteries ever. Taking on a number of different pseudonyms – including several alleged legal name changes – Sifu was also closely linked to a DeFi project which set the stage for the Terra Classic (LUNC-USD) crash that catalyzed a broader market plummet.

For better or for worse, the cryptocurrency industry is very private. There are almost no public crypto companies on Wall Street. Aside from Coinbase (NASDAQ:COIN) and a few miners, crypto companies have the opportunity to operate in a completely opaque manner. Digital currencies also enable companies to completely obfuscate who is even in charge.

There are no Securities and Exchange Commission licensures required to create a cryptocurrency, these projects can take various liberties. Oftentimes, projects will even have anonymous developers and contributors. Bitcoin’s founder, for example, is still not known even 13 years after its launch. The creator of the largest crypto in the world decided to produce the protocol under the pseudonym “Satoshi Nakamoto.” 

While Bitcoin has turned out just fine so far, other crypto projects have exploited their anonymity for unethical purposes. Take the “Squid Game” crypto scam from November 2021; its creators – completely anonymous – were able to offload millions of tokens on unwitting investors before conducting a rug pull and escaping without retribution.

By taking a look at Sifu’s career with the infamous QuadrigaCX exchange, as well as his proximity to the Terra project in the months leading to its crash, we can see what a single person is capable of influencing in a market that’s hugely unregulated and ripe for illicit activity. His story provides ample ammunition for those opposing anonymity in the crypto world.

A Walk Through Sifus Past

Even before his involvement in crypto, Sifu was already involved in white-collar crime. Amid changing his name from Omar Dhanani to Omar Patryn and moving to the U.S. from Canada in the early 2000s, Sifu involved himself in Shadowcrew.com. This group committed many counts of banking and credit fraud between 2002 and 2004 by selling stolen credit card information. When Shadowcrew was dismantled in 2004, Sifu continued to commit various acts of banking fraud until his arrest which led to his imprisonment, deportation and subsequent second name change to Michael Patryn in Canada.

Fast forward to 2013, when Sifu entered the crypto market by co-founding the QuadrigaCX exchange with Gerald Cotten. Quadriga is in itself so infamous that it has spawned a Netflix documentary detailing its mysterious history. In its early years, the exchange operated solely on paper, and ran only local crypto trades. As it began to expand its reach, more investors witnessed Sifu and Cotten’s project unfold.

Between 2013 and its bankruptcy in 2019, Cotten and Sifu caught a considerable amount of flak from both the Canadian government and the project’s many investors. As early as 2015, Quadriga inexplicably lost a large sum of money; the 850,000 CAD raised to help QuadrigaCX toward a public listing vanished without explanation. In June 2017, it lost an additional 17 million CAD worth of Ethereum (ETH-USD), with founders chalking the massive losses up to a smart contract error.

QuadrigaCXs Questionable Final Chapter

Things ramped up considerably toward the end of Quadriga’s run. In 2018, the first controversy to touch the crypto mainstream came as the Canadian Imperial Bank of Commerce (CIBC) froze 28 million CAD in funds. Customer complaints about slow transaction times shifted the bank’s attention toward Quadriga. After the company could not identify the owner of these funds, the CIBC froze and would go on to repossess them.

From November 2018 to April 2019, things became extremely mysterious. Cotten, just before taking off on a honeymoon in India, changed his will to leave 9.6 million CAD to his wife, Jennifer Robertson. Less than two weeks later, Cotten died in India. The details surrounding his death elicit uncertainty; his body was taken from the hospital to a hotel before being embalmed, and a death certificate misspelled his name. 

A month later, Cotten’s death was made public, and Robertson called an emergency meeting in which she named herself and some close associates the directors of the company. Robertson notified shareholders of this meeting by courier, so they didn’t learn about it until after she had taken the director position.

All in all, the company owed customers as much as 215 million CAD. Robertson claims that the majority of these funds are locked in cold wallets to which only Cotten had access. During Quadriga’s bankruptcy proceedings, creditors could only recover 46 million CAD of this missing total.

From QuadrigaCX to Wonderland

Sifu had, during most of this period, taken a step back. His alleged past criminal activity became public, and he attempted to distance himself from Quadriga. He denies that he is Omar Dhanani, although reports by the Canadian Globe and Mail cite legal documents to the contrary. He also says he left the company back in 2016 prior to Cotten’s death, though a number of crypto insiders remain skeptical, like Kraken CEO Jesse Powell. 

Then, investors learned that he was involved in another project  – one that had been building steam rapidly – there’s no wonder the news caused a scene.

In September 2021, a new dapp ecosystem emerged on the Avalanche (AVAX-USD) network, centered around a dapp called Wonderland. Wonderland and its many companion dapps like Abracadabra and Popsicle Finance are the brain children of developer Daniele “Sesta Sestagalli. 

Sesta built up a following, dubbed “Frog Nation,” through this group of dapps built on the Avalanche network. Wonderland is perhaps one of its biggest projects yet, bridging together a multitude of DeFi products into a single package. Abracadabra, the stablecoin venture for Wonderland, teamed up with Terra in late 2021 to bridge its Magic Internet Money token with what is now TerraClassicUSD (USTC-USD). At the time, the dollar-pegged stablecoin traded as TerraUSD, or UST. Neither party at the time knew that their stablecoins’ algorithmic models would be behind a full-on market meltdown.

Doxing Sifu and the First Terra Crypto Crash

Unbeknownst to many, though, was that Sifu was the treasurer of the Wonderland project, tasked with managing all of its assets, including those of users. That is, until a Twitter user exposed Sifu’s identity in late January 2022. Sesta initially denied knowing about Sifu’s identity until just before this news broke.

Users were furious, and many wanted out of Wonderland as soon as possible. The rapid outflows of liquidity didn’t just spell disaster for Wonderland tokens, either.

The price of Terra’s stablecoin rapidly depleted as well. This is because Abracadabra had two UST-linked products, including one which heavily collateralizes MIM with UST. As investors flooded out of MIM, the UST algorithm could not deal with its own liquidity crisis, leading to the Terra network’s first, brief crash of the year. Sifu made a quick exit from the failing Wonderland platform, but not before laundering hundreds of ETH through the now-sanctioned Tornado Cash mixing service.

Indeed, Terra had been unwittingly working with Sifu, and the partnership rattled the very core mechanism by which its coins retained their values. The Terra stablecoin lost its $1 peg as the Wonderland network melted down, throwing the entire project into disarray. This event is what led to the creation of the Luna Foundation Guard – the non-profit organization tasked with maintaining a new reserve of funds meant to backstop the Terra stablecoin.

Wonderland Held a Great Role in the Crypto Crash

Of course, we now know about the May 2022 crypto crash which started with another exit of liquidity that threw Terra’s stablecoin from its peg. However, adding to Terra’s woes and helping to start the broader market crash was the Luna Foundation Guard itself. The organization oversaturated the market with its sales of $3 billion in crypto reserves – a decision which ultimately failed to help stabilize the network.

The dominos between Wonderland and the broader crypto crash keep stacking up, too. The Terra crash directly correlated with the bankruptcy of several crypto institutions. Three Arrows Capital, a crypto investment fund based in Singapore, confirmed $200 million in losses linked directly to Terra’s meltdown. Three Arrows would shortly thereafter go bankrupt. Celsius, another company bankrupted by the Terra collapse, was exposed to Three Arrows Capital via two loans worth $75 million.

As for Sifu, he is still working in the DeFi space. Although, he is not hiding his role in his newest project. The “Sifu’s Vision” investment fund, and its accompanying Sifu Vision (SIFU-USD) token, is unabashedly dedicated to making investors rich, but only on Patryn’s terms. Investors can learn more about the fund on the project’s emoji-laden FAQ page. Sesta’s Wonderland, meanwhile, is revamping itself, starting with a $25 million investment in Sifu’s Vision back in July.

Is Anonymity Viable for a Growing Crypto Industry?

Even since before the creation of cryptocurrency, bad actors have been leveraging the internet to churn profits. The advent of crypto, though, has created an infinite amount of new opportunities for criminals. Hacks, phishing scams and code exploits are easily the most common, but more sophisticated crime sagas like QuadrigaCX show what can be accomplished right in front of investors’ eyes. 

This leads to a major question in need of addressing: Why do crypto investors deal with anonymity in their financial space? It’s a market rife with misdeeds. And, investors passively enable these crimes when they put their money into projects without any knowledge of developers’ backgrounds. 

Early Tesla investors didn’t put their money into the company on any sort of whim. They knew of Elon Musk and his past successes in the financial space. They were therefore able to put faith into the company. Even lesser-known companies offer investors some safety through the framework of SEC regulations.

Some therefore would argue that the industry lets too much slide for the sake of “freedom.”

See, many crypto proponents argue that one of the main appeals of blockchain technology is how easy it is to mask one’s identity. With this power, one can ensure that companies aren’t using their personal data. They can also obscure the scope of their wealth, keeping the information under wraps and away from other users’ prying eyes. 

As Government Intervention Ramps Up, Privacys Future Remains Uncertain

Recently, this pro-anonymity argument has grown after the U.S. Department of Treasury levied sanctions against Tornado Cash. Coinbase is funding a lawsuit brought by six different investors against the Treasury as a believer in the privacy use-cases of crypto. In its memo on the matter, the company points out completely legal use cases for privacy tools, such as donating funds to Ukraine without fear of reconciliation from pro-Russia hackers, or obscuring the finances of a trader who receives their salary in crypto.

But, this argument is leading to massive problems. We can see through Sifu’s story just how much damage one individual can cause – both explicitly and indirectly – in the crypto space. 

How would things have played out if Sifu’s identity and past were known from the start? Terra might not have crashed. The Luna Foundation Guard might not have flooded the market with liquidity. QuadrigaCX investors might be spared the financial woes of never seeing their collective millions go missing. 

We will never know if Sifu is really that first domino in the crypto crash. But regardless, investors must now reckon with the reality of anonymity on the blockchain and its unintended consequences.

On the date of publication, Brenden Rearick did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Brenden Rearick is a Financial News Writer for InvestorPlace’s Today’s Market team. He mainly covers digital assets and tech stocks, with a focus on crypto regulation and DeFi.


Article printed from InvestorPlace Media, https://investorplace.com/2022/09/did-one-man-really-cause-the-entire-2022-crypto-crash/.

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