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Qtum Controversy: Patrick Dai’s exit from Bitbay

Recent accusations have dogged the Qtum project. ICOcountdown has compiled several days worth of relevant communication here, where we found much of the source material. Below is a highlight of our thoughts at this time. We provide a brief recounting of events, then explain our five takeaways. 

  1. There is not enough information to conclusively judge  Patrick Dai’s character, but his involvement in Bitbay and his attempt to hide it casts a shadow on his credibility.
  2. Given the high-profile third-party backing, it is unlikely Qtum is a scam.
  3. Qtum should improve its transparency, open up its Slack or explain why signups were stopped, and release some form of code or demonstration product.
  4. Interested parties should ignore several red herrings in this issue: PwC’s involvement, Dai’s multiple names, and Caspal’s Rubik’s cube record.
  5. The community should not expect this to be a fully decentralized project at launch.

We will update our thoughts if more information emerges. We have reached out to the Qtum team for an interview. If there are any issues this analysis does not address, please let us know.

What has happened?

First, project Lead Patrick Dai was once the Steven Dai associated with the Bitbay scandal in 2014. Joshua Bouw of Blockcoin exclaimed on February 21 in a series of tweets that Patrick Dai was the Steven Dai “that fucked #bitbay and David Zimbeck.” In 2014, Zimbeck posted an account of the scandal on reddit; in it, he frames Steven as the one who originally approached him about Bitbay but then got “pushed around” by other members of the team, who then go on to try to extort David. In a recent letter addressing the accusation, Zimbeck seems to slightly change the narrative in presenting Dai as a thief and possible scammer. He also says Dai did in fact steal both Bitcoin and BitBay when he left and never returned many inquiries from Zimbeck about repayment.

At first, Qtum appeared to ignore and resist the accusations that Patrick and Steven were the same. However, on February 25th, Patrick Dai admitted to using the pseudonym Steven Dai and being involved in BitBay, though he claims he returned all of BitBay’s funds before he left in 2015. Shortly thereafter, the Qtum foundation also released an official letter on the topic with the conclusion, “After studying the subject matter thoroughly, [we] see no fault in Mr. Dai’s past activities and regards the accusations as groundless.”

Since then, bitcointalk has erupted in accusations of scam and scandal. Qtum disabled signups to its slack channel, and beyond the letter posted in slack and reposted on bitcointalk, has not officially addressed the issue. While this controversy blankets English-language discussion of Qtum, it’s worth noting that at time of writing, neither major Chinese crypto media nor Qtum’s Chinese-language communities are discussing the issue. In addition, Qtum still has not released additional information about the sales terms less then twelve hours before the ICO is scheduled to launch on several exchanges.

Five key takeaways

  1. There is not enough information to conclusively judge Patrick Dai’s character, but his involvement in Bitbay and his attempt to hide it casts a shadow on his credibility. It’s not clear why Zimbeck’s initial account cast Steven as a victim while his recent one casts him as a thief and possibly a mastermind. It’s also not clear why he would lie about it now. Some accuse Zimbeck of trying to pump the BitBay price, but this is unlikely–he has spent years disproving the defamation campaign BitBay team members waged and it’s not plausible that he would consciously throw it away. Zimbeck likely didn’t know what went on behind the scenes of BitBay–if he witnessed a Dai-led conspiracy to oust him, he could have posted it. Based on the information that has been posted, there are multiple ways to interpret what actually happened behind the scenes at BitBay. One’s interpretation would color one’s judgement of Dai. Ultimately, only Dai really knows what his involvement was. But he should have disclosed his version of it and now, he should do something to rectify it.  
  2. Given the high-profile third-party backing, it is unlikely Qtum is a scam. Despite what one thinks of Dai’s character, it is not the only relevant consideration in evaluating Qtum as a whole. If Dai did intend to mislead investors, the list of people deceived would include Roger Ver, Anthony Di lorio, business professor and angel investor David Lee Kuo Chuen, and Bo Shen of Fenbushi Capital, among others1. Of course, that’s not unheard of: Elizabeth Holmes’ team presumably misled investors about Theranos for years. However, Theranos-level scandals are far more rare than random pump-and-dump schemes. Even scandals like BitBay lacked third-party endorsement. The DAO was certainly a third-party-endorsed debacle but it was not a scam.
  3. Qtum should improve its transparency, open up its Slack, and release its code or a public alpha. Dai should have disclosed his prior involvement to both his team and probably to the community. Dai’s recent success was also an opportunity to make things right with Zimbeck. Dai’s team members initially expressed surprise about the BitBay scandal and mocked the accusations. That looks bad, and Qtum should apologize beyond the formal letter it released. Finally, Qtum should also respond to accusations that there is no actual code. It’s not unheard of for teams offering enterprise-oriented software to keep code hidden from Github, but given prevailing concerns, they should make something available, even if it’s only snippets to show there is actually software. Overall, Qtum has an opportunity to apologize and course correct. It should take it.
  4. Investors should ignore several red herrings in this issue: PwC’s involvement, Dai’s multiple names, and Pascal’s Rubik’s cube record. PwC’s involvement is not surprising: a project like Qtum would seek out major corporate partnerships to help it interface with the business community, its target market. The retraction of mentioning PwC’s involvement is also not surprising: small companies with large partnerships lined up do mistakenly release the information before it’s been fully authorized. As for Dai’s multiple aliases, it’s not uncommon in Chinese culture for people to go by different names in different professional and social settings. Given names are generally only used by close family members and friends, while professional pseudonyms are often used in business settings. Many people use an English handle when dealing with foreigners. It’s a little unusual for Dai to use multiple English pseudonyms, but not altogether unheard of. Finally, a Coinjournal article has accused Qtum’s “Caspal” of lying about his rubik’s cube accomplishments. Caspal (the current English name for Yunqi Ouyang) has his Rubik’s cube record available here, which backs up a literal interpretation of the claims on his qtum profile. As with all the team bios, Qtum should have linked to it.
  5. The community should not expect Qtum to be a fully decentralized project right out of the gate. Qtum has emphasized a focus on blockchain industry applications and regulatory compliance. The Qtum economy white paper says that, “the design of the Foundation’s governance structure mainly considers sustainability, management effectiveness, and fund-raising security”. The token distribution will be more centralized than other projects. Given that only 51% of tokens will be distributed during the ICO, the team will be able to retain a controlling stake with only a modest investment. The governing foundation also won’t hold elections for two years. This shouldn’t be surprising. Taking a step back, one must acknowledge that this project is backed by many well connected people in one of the world’s most centralized advanced nations: releasing an early-stage fully decentralized project in the context of Chinese political and economic norms is probably not feasible. This could change in the future, but the team seemingly made all aspects of governance predictable and controllable for two years. Perhaps ownership of the network will become more decentralized over time as the foundation distributes its token holdings, but there is no guarantee it will. The revelations about Dai do not change any of these factors.

  1. Roger Ver has confirmed his involvement with Qtum in an interview with 8btc.com. Anthony Di Iorio confirmed his through twitter. Bo Shen of Fenbushi Capital signed the letter from the Qtum Foundation regarding issue of Patrick/Steven Dai. Other prominent members the project claims are involved have had plenty of time to deny involvement.
  2. Smith + Crown do not know either Zimbeck, Dai, or anyone involved in the BitBay scandal. We have no special or privileged information. Based on what has been posted, there are multiple ways to interpret what actually happened behind the scenes at BitBay. One’s interpretation would color one’s judgement of Dai. One plausible alternative interpretation is that Dai thought he was a minor character in the whole affair, fled when he saw it going south, and didn’t feel beholden to a group of people he met on the internet and concluded he couldn’t trust. Not defending Zimbeck would have been low but not nefarious. It would be undeniably human to feel ashamed of this and want to avoid it. It’s possible we will never get all the facts about what happened at BitBay.

9 Comments

March 09, 2017 at 1:26 am, Mike said:

You’ve compromised this organisation’s reputation by appearing to be taking qtum’s side on this report.

Reply

March 09, 2017 at 12:54 pm, Matt Chwierut said:

Hi Mike,

We appreciate the feedback. We have spent significant time looking at this issue from all angles, using publicly verifiable facts. We certainly don’t apologize for Qtum and offer several criticisms of how they’ve handled this. That said, we will always consider counter-arguments or new information that might not be included in this report. We have laid out our reasoning above. If there are specific points you disagree with, let us know.

Reply

March 09, 2017 at 10:44 pm, Freequant said:

I agree with Mike, I too start wondering how objective and uncompromising S+C actually is in its assessment.
A few examples of questionable statements:

> PwC’s involvement is not surprising: a project like Qtum would seek out major corporate partnerships to help it interface with the business community, its target market. The retraction of mentioning PwC’s involvement is also not surprising: small companies with large partnerships lined up do mistakenly release the information before it’s been fully authorized.

PWC is a corporate services company. They will work for whoever hires them. I have been working at multiple companies over the last decade, and all of them were using PWC. Even SMEs are using PWC. There is really nothing extraordinary having PWC involved in one’s business. Using this to claim a “major corporate partnership” is dishonest, and a clear sign that the project is grasping at straws and trying to appear more legitimate than it actually is. The subsequent reversal on this claim should be raising red flags, not “be ignored as a red herring” as you advise.

> If Dai did intend to mislead investors, the list of people deceived would include Roger Ver

That’s called appeal to authority, and it’s wrong. You are encouraging your readers to forego critical thinking and herd behind other investors? If only Roger Ver had a track record of investing in reliable startups… But that’s not even the case, a quick research would show you that Roger Ver has a track record of wrong decisions and endorsements, including handing over seed money to Christopher David of Arcade City (a known scammer) who blew it away immediately, and vouching for MtGox’s solvency just before they blow up. Roger Ver is infamous for his reckless “sprinkler” style of investment. Because this involves massive diversification, this may well end up being a winning strategy for him, but that also means that this backing of any particular project shouldn’t be interpreted as particularly meaningful. Trusting a project just because Roger Ver invested is very poor advice.

Reply

March 10, 2017 at 12:48 pm, Matt Chwierut said:

Hi Freequant,

You brought up good arguments, and I’ll discuss each in turn.

PwC is indeed a massive company. It had more than 223,000 people and pulls in gross revenues of $36 billion. (1) They claim to work with over 100,000 entrepreneurial and private businesses around the world (2). That seems like a big amount, and anyone that wants auditing services for taxes (most of them) would have at least inquired about their services.

Nonetheless, this is a small small fraction of total companies. In the US alone in 2014, there were 2 million businesses with an average payroll of around 500k USD: a plausible target PwC client. This was 27% of all registered businesses. (3) If we take that ratio and apply to all businesses in the OECD in 2014, that suggests around 440 million businesses. If all of PwC’s clients were in the OECD, they would have worked with .02% of them, or 2 out of every 1000. That’s honestly not a lot, especially given that it doesn’t include China, Russia, India, most South American countries, and any African countries–or smaller businesses. In addition, we haven’t seen many ICOs with partnerships outside of the blockchain space at all, so even if they were working with a small consulting firm in Shanghai, it would have set them apart.

As for removing the original reference, if they had anything to hide, they probably wouldn’t have ended up announcing it. (5) It’s not clear why they’d even try to hide it. This suggests it was just a matter of timing.

Your argument about appealing to the judgement of Roger Ver is a fair one, though the list includes other prominent investors in the industry who have been involved in many major legitimate blockchain projects. Nonetheless, your argument that investors get it wrong (or simply have a sprinkle strategy) would apply to them all. We do note this in the article and admit it doesn’t guarantee the project is legitimate, just that it reduces the likelihood. Also, Fenbushi Capital and David Lee (a prominent blockchain angel investor) serve on the Foundation Board, as specified in the white paper, so they have a deeper relationship than as a hands-off investor.

We hope no one foregoes their critical thinking. Anyone is free to disagree. We appreciate the feedback: it’s valuable and keeps debate sharp. We acknowledge that our decision to not label Qtum a scam has been controversial to some, but we stand by our reasoning given the information available at the time. There have been plenty of updates since then. We encourage everyone to read the full profile that includes them. Feedback on those points is welcome too. (https://www.smithandcrown.com/qtum-ico-building-first-utxo-proof-stake-smart-contract-platform)

Source: (1) http://www.pwc.com/gx/en/about/global-annual-review-2016/who-we-are.html
(2) http://www.pwc.com/gx/en/about/global-annual-review-2016/how-we-are-doing/our-clients.html
(3) US Census Bureau, County Business Patterns, Table CB1400A13. (4) OECD.Stat, Structural Business Statistics, All Businesses (Total Size Class) (5) https://qtum.org/en/blog/qtum-announces-support-from-pwc

PwC is indeed a massive company. It claims to serve over 100,000 entrepreneurial and private businesses around the world. It

Source: http://www.pwc.com/gx/en/about/global-annual-review-2016/how-we-are-doing/our-clients.html

Reply

March 14, 2017 at 9:51 am, Nicholas Saxlund said:

Hi Matt, you mention that “Roger Ver has confirmed his involvement with Qtum in an interview with 8btc.com”. When I click on the link it goes to LinkedIn profile. Could you please update the link, it would be interesting to read the interview.

Reply

March 14, 2017 at 4:08 pm, Matt Chwierut said:

Hi Nicholas, Thanks for pointing that out. We fixed the link, and it should go to the interview now.

Reply

March 18, 2017 at 3:06 am, Avi Hudson said:

Hey really well researched article. Dai being a scammer doesn’t necessarily discredit Qtum but now Qtum claims to have raised millions within minutes. That was the exact same strategy Dai used with Bobsurplus and BTERs Lin to trick investors in Bay.

Also you said David lied because originally painted Dai as a victim. You are very wrong about that. David never said Dai didn’t do anything wrong, David was originally grateful that Dai was claiming to want to set up an office, finance and continue to support Bitbay. But Dai left so David obviously felt betrayed.

You are probably not realized that Zimbeck posted on Reddit immediately after the scandal when Dai was telling David he would stay. David was aware of Dais guilt and involvement in the scandal but it was overshadowed by Bobsurplus(who was most likely pulling Dais strings)and Bobs FUD team so David was willing to give Dai the chance to honor his word and stay. Which obviously didn’t happen.

The other commenter is right. Rich investors doesn’t legitimize the project. Look at Enron and Bernie Madoff. If anything rich investors casts doubt because they are sharks looking for blood money.

Reply

March 20, 2017 at 4:04 pm, Matt Chwierut said:

Hi Avi,

Thanks for the feedback. I’ll respond to the two points.

re: BitBay, David, and Steven. We didn’t want to get too deep into this topic because there is so little record of it and it seems like each party didn’t really know what the other parties were doing. A clear picture of what everyone was doing and thinking is certainly not possible from written record and would likely take multiple honest interviews with each team member. We based our conclusion on the following quote from one of David’s original posts: “Of course I really wanted to protect investors at this point and Steven who i felt bad for seeing him get pushed around.” (https://www.reddit.com/r/blackcoin/comments/2p2e08/summary/?st=j0iimpx1&sh=cb9ccb21) If there is another quote from two years ago that contradicts that, please include it in a comment and it will become part of this discussion. David has certainly earned credibility in the community, as we note in our article. We also don’t call David a liar. We said “it’s not clear why he would lie,” and imply that he isn’t. If there is any confusion about that, hopefully this exchange can clarify to anyone else. Instead, we just note that there is a discrepancy in accounts, and that discrepancy is puzzling. We linked to David’s recent account, which includes the explanations you suggest, but as David notes himself, the account doesn’t have a written record to corroborate it. As such, it seems to boil down to a he-said/he-said about the extent of betrayal. If additional evidence materialized or if we missed something, let us (and people reading this) know.

You’re also right that rich investors don’t guarantee a project’s legitimacy. We note such in the article, pointing to the recent example of Theranos. Enron is another example, though in that case, the people perpetrating the deception had a clear incentive to do so: they had a net income of almost $1 billion in 2000 and stood to lose everything if they didn’t. It’s not clear that investors (which includes more than Ver and Di Iorio, who everyone points to) would make that kind of money while risking their reputation. Nonetheless, we also not that these factors reduce the likelihood, not offer a guarantee.

That said, we had been hoping that these investors would speak out publicly in support and explaining their due diligence given community skepticism about the team and the technology. They did not. If you’re interested, we posted an update on our main Qtum article that summarizes some of our thoughts after another week of information.

Again, thank you for the feedback!

Reply

March 30, 2017 at 2:59 pm, Justin Connelly said:

You should read the chat logs in the old BitBay thread that David posted. Dai is not innocent by any means. Dai was one of the architects of the original BitBay scam and he has totally ignored requests to produce addresses where the ICO money went to prove it actually happened. That’s all we need but, we are ignored. Sorry, scammers can’t change their spots. We think the obscure exchanges Qtum used simply bought the tokens themselves. This is a bad project. While the tech may work, I have little faith that the current team will be able to bring it to the public.

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