Cryptsy Founder Paul Vernon Disappeared, Along With Millions of His Customers' Cash
Update 7/5: After publication, Paul Vernon agreed to an email interview with New Times. You can read his responses here.
Two men burst into a suburban Delray Beach office park on a muggy weekday in August 2014, demanding to talk to the CEO. They were there to get answers.
In a beige office lobby decorated with abstract IKEA-style art, their target crossed his arms and smiled nervously. Dressed in an oversize navy polo shirt and dad jeans, he tilted his head, listening to the visitors' questions about his quickly growing tech company. As they filmed on a
"I'm Paul Vernon — Big Vern — of Cryptsy," said the CEO, whose company was an online marketplace where users could trade their Bitcoins — a virtual form of money — for a growing number of digital imitators with names like Litecoin and Darkcoin.
Business was booming. In barely a year, Cryptsy had amassed 250,000 users trading millions of dollars, and Vernon was flying cross-country to speak at conferences from New York to San Francisco. His firm had outgrown its first office and moved its dozen or so employees into this Mediterranean-style building. Soon, Vernon himself would upgrade to a million-dollar Delray Beach mansion.
But there were hints that something wasn't quite right at Cryptsy, which is why the cameramen had dropped by unannounced. Chris DeRose and Joshua Unseth are cohosts of a South Florida Bitcoin meetup group. They had come because online rumors that Cryptsy users couldn't withdraw their money had sparked a minor panic.
"There are some rumors today that maybe there was a problem here," DeRose said while Unseth filmed. "Do you maybe know the customer that's reporting this and what's going on?"
Vernon shifted from side to side. As he paced the lobby, the camera caught a small glint of light from the silver-toned wedding band on his left hand. "From what we've found so far, it's unsub — unsubstantiated," he answered, slightly tripping over his words.
DeRose gently pushed for more details, but Vernon insisted all was well. "We don't have anything to hide," he said, lowering his head and casting his eyes to the floor. "A lot of times, especially on Reddit, it gets blown out of proportion."
The two left the office that day
But in hindsight, they were right to question Big Vern about his company's solvency. Two years later, Cryptsy is out of business, at least $5 million has vanished, and Vernon himself has disappeared. The online exchange has been hit with a class-action lawsuit and a dozen complaints filed with Florida Attorney General Pam Bondi.
The story of Cryptsy's free fall is just one example of how the unregulated, pseudo-anonymous cryptocurrency scene has collided with law enforcement and regulators in South Florida and beyond. Local cops have cuffed at least five people in Bitcoin-related crimes in recent years, from a 65-year-old Palm Beach County school board member accused of money laundering to a 29-year-old Canadian who sold Bitcoins to an undercover cop in a boutique South Beach hotel.
Speculation runs rampant about where Cryptsy's cash went. Some think hackers took it. Others say Big Vern made off with the millions.
"At the end of the day, this is a crime story that's not over yet because the money is still missing," says David Silver, a Coral Springs attorney who has filed the class action against Vernon and Cryptsy.
Cryptsy's users are hopeful that at least some of their money might be recovered. Some lost tens of thousands of dollars, while others, like Michael Wilson, are out a couple of mortgage payments. What they really want is justice.
"I feel pissed off about the situation that Cryptsy put me in," says Wilson, a 41-year-old Portland-area manufacturing employee who lost about $2,700. "You're already
Cryptsy founder Paul Vernon answers questions from Chris DeRose and Joshua Unseth at his Delray Beach office in August 2014.
Photo courtesy of Chris DeRose
Before he was Big Vern, Paul Edward Vernon was a kid from Albuquerque looking for a way out. The blue-eyed, mousy-haired teenager joined the Army in 1991, six months after his 18th birthday, and served in the infantry for three years. In 1992, he spent four months deployed to the famine-ravished country of Somalia. At 21, he began working in intelligence and spent the next four years based out of Fort Hood, Texas, where he met his future wife, Lorie Ann Nettles, a counterintelligence agent.
Nettles joined the Army as a 24-year-old from Midwest City, Oklahoma, the daughter of a U.S. Air Force major and a Thai mother. Nettles was 3 when her parents moved the family to the States from Thailand, eventually settling in Oklahoma.
Born just ten days apart, Vernon and Nettles married shortly after their 26th birthdays in April 1999. That May, the newlyweds moved to Fort Buchanan in Puerto Rico when Nettles was reassigned by the Army.
Vernon, who had left the military three months earlier, wasted little time displaying the ambition and tech savvy that would define his career. Working remotely, he started a U.S.-based website hosting company called OnTime Online. He also showed he wasn't afraid to take a path that was different from his competitors': The new business specialized in hosting a variety of high-bandwidth pornographic sites at a time when most others ignored the industry. Vernon knew a good opportunity when he saw one.
"He got in early," says Heidi Kelley, one of the company's first employees, who was hired as manager of operations. "He's an entrepreneur. He was very young, very ambitious, very smart."
The company incorporated in 2000 in Phoenix. Early the next year, Nettles was discharged from the Army and the couple moved to Arizona.
Vernon was a hustler who did whatever it took to make his business ventures successful, Kelley says. He worked long hours but was also an understanding boss who happily worked around the schedules of his employees, most of whom were still students.
"He gave them opportunities to learn in their industry," Kelley says. "In the time I've known him, I never saw him do anything that could have been regarded as questionable. He's a decent guy."
In 2003, still just 30 years old, Vernon sold the company to concentrate on another startup he'd founded, an early Netflix competitor called DVD Barn. With a baby girl on the way, Vernon and his wife would stay up all hours of the night packaging DVDs to mail to their customers, Kelley recalls.
Their bet paid off. Within a year, a Florida company called Intelliflix bought DVD Barn. Vernon and Nettles bundled up their newborn daughter and relocated to Florida, where they bought a $280,000 home in Boynton Beach in August 2004. Vernon stayed on with the company as its vice president of technology and web development.
But as smart as he was as a businessman, he also showed early signs of financial mismanagement. Six years after the move to Florida, the family's comfortable middle-class lifestyle collapsed. Vernon and his wife filed for federal bankruptcy protection.
By then, Vernon had left Intelliflix and reported making about $90,000 a year working for a database company in Boca Raton, but his family was swimming in credit card debt, medical bills, and unpaid mortgage payments, with nearly a half-million dollars in liabilities. By their rough accounting, the combined value of the furniture in their living room was just $200.
It was there in the cheaply furnished living room that Vernon became interested in Bitcoin, a decentralized, digital form of money introduced in 2009. No one is in charge of Bitcoin, and no government backs it, making it popular with libertarians and anarchists. The currency was developed with privacy in mind; every transaction is listed on a public ledger called the blockchain, but no names or even usernames are included.
Advocates say Bitcoin could transform international money transfers because funds can be sent to anyone in the world in a matter of minutes. But even as Bitcoin is becoming a household name, its origin story remains a mystery. To this day, nobody has definitively identified Bitcoin's inventor, who used the
Because of Bitcoin's strict privacy, it has also become popular with criminals. On sites such as Silk Road, which the feds shut down in 2013, the cryptocurrency has been used to buy and sell everything from drugs and fake IDs to hacking services.
Big Vern jumped into this shadowy world in 2011. The then-38-year-old began by mining Bitcoins, a process where computer equipment converts electricity into digital currency. Back then, each Bitcoin was worth only a dollar or two, but to Vernon, it was an opportunity to be an early adopter. "It sounded exciting; it sounded new," he later told an audience in 2015. "I love computers; I love putting things together. I got to feel like a hacker."
Nettles, however, wasn't a huge fan. "The wife was complaining about the noise, about the heat," Vernon said at the conference. "She wouldn't even go in the living room anymore."
Vernon continued mining for a couple of months and then gave up, banishing his equipment to the garage. But in early 2013, Bitcoin began growing in value. Vernon realized the coins he had mined in 2011 were now worth about $100 each. He pulled the rig out of the garage and stuck it back in the living room.
Around the same time, developers began pumping out Bitcoin competitors. Known as altcoins, each offered different benefits, such as processing transactions more quickly or requiring less energy to mine. Vernon began mining one called Litecoin and then another called Feathercoin. But he noticed a problem: There was nowhere to trade them. In the paper-money world, it would be as if there was no way to convert U.S. dollars to euros or yen.
So he created an exchange, allowing users to trade Bitcoin with a number of other altcoins. He called it Cryptsy and launched it in May 2013.
For the first few months, Vernon ran the digital marketplace as a hobby. But as hundreds of new users came to the site every day, he made the operation his full-time gig. Around August 2013, he hired his first employee, an accountant, and set up shop in a two-story Delray Beach building, sharing space with an insurance company and a dermatology practice.
He was adding new altcoins to the exchange daily and within months introduced user-to-user transfers. That November, Cryptsy got a nod in the Wall Street Journal, where Vernon boasted that his company was processing as many as 33,000 trades per day. Vernon hired new employees, bought more servers, and moved Cryptsy into a bigger office.
Maak — who asked to go by only his online username — was hired for a customer support position that January. Cryptsy was a small but scrappy operation, now stacked with employees eager to support Vernon's mission: to "provide a safe environment for users to trade cryptocurrencies with other users in an efficient and easy-to-use manner."
"The majority of us were passionate about it. We put our hours in even when we weren't in the office," Maak says. "At no point were we ever worried at all."
Unseth (left) and DeRose cohost the Bitcoin of South Florida meetup group and the podcast Bitcoin Uncensored.
Photo by Ian Witlen
More than a thousand people jammed into a standing-room-only space inside the Miami Beach Convention Center in January 2014, double what organizers at the North American Bitcoin Conference had planned. In the
The crowd's roaring enthusiasm mixed with an underlying unease. Even as Bitcoin had hit an all-time high of about $1,200 on Mt. Gox the previous fall, rumors were swirling that the company was about to go under. And audience members were about to have a literal front-row view of a separate controversy: When an emcee at the conference announced that one of the headliners, a hotshot Bitcoin advocate named Charlie Shrem, had missed his flight, whispers flew. The rumormongers were right: Shrem had actually been arrested at JFK Airport, accused of laundering money for Silk Road users.
In that heady atmosphere of opportunity and danger, hundreds listened raptly when Cryptsy's founder took the stage as part of a Bitcoin startup panel, touting his site as both efficient and legally sound. He told the audience he welcomed regulations and hoped to bring digital currency to a wider audience.
"Making tools that allow non-techie people to get into this ecosystem is going to be the biggest thing," he told the Miami Herald.
Ben Best, an audience member who later invested thousands in Cryptsy, remembers being impressed by Vernon. "He seemed like a fairly reasonable, reputable guy," Best says. "My impression was he was probably on the up-and-up."
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Vernon's timing was impeccable. As Mt. Gox went bankrupt that February, many of its customers flocked to Cryptsy. By April, Vernon's company had racked up more than 130,000 users and brought on about a dozen employees. Cryptsy's job listings advertised flexible hours and vacation time, excellent health insurance, and 401(k) matching.
The office had a hip, collaborative culture. People wore jeans and sometimes took breaks to engage in company-wide Nerf battles. The team chatted about everything from customer issues to Friday-night plans on a secure platform that one of the programmers had specially designed to destroy the messages within 24 hours.
"Working there, you kind of get your name out there and you become friends with people," Maak says. "We hung out on weekends, everything like that."
Although he didn't report to Vernon directly, Maak says the boss seemed like he had a handle on things, delegating other responsibilities so he could focus on growing the business.
"He's a very laid-back person," Maak says. "It was very collaborative, very open-door-policy. He seemed really down-to-earth."
Maak's job was to keep customers happy, whether it was helping them with technical issues or working on requests for new coins to be added to the exchange. "We wanted to give everybody what they wanted," he says.
That customer service was what made Cryptsy different from other exchanges, Vernon liked to say. "We try to listen to the users, try to answer users' questions very quickly," he told a reporter at a 2014 Bitcoin conference in New York. "And I think a lot of people recognize this and appreciate it and have come to trust us."
Vernon also wanted Cryptsy to legitimize digital currency. So he sent four employees to become certified by the Association of Anti-Money Laundering Specialists, registered with the U.S. Treasury's Financial Crimes Enforcement
"I wanted to make people comfortable with dealing with me as a company and to have a reputation," Vernon said in another interview that year, "to be kind of like the de facto place for a comfortable and safe environment for trading your cryptocurrency."
Cryptsy users such as Best were swayed by those assurances. He eventually sank an eighth of his own net worth into digital currencies like Bitcoin, Dogecoin, and Ether. And realizing the risk, he distributed his coins throughout a number of exchanges, including Cryptsy.
Other users weren't as cautious. Ivan Fernandez Hernandez, who lives about an hour south of Madrid, says he deposited about 20,000 euros in Cryptsy. "I put all my eggs in the same basket," he says.
Many others went to Cryptsy skeptical but hopeful. "I was pretty content with Cryptsy," says Shane Mayer, a user who lives in Mount Dora in Central Florida. "It seemed real secure and offered two-factor authentication so no one could hack your account."
As business picked up and users like Best, Hernandez, and Mayer flocked to Cryptsy, Vernon graduated from postbankruptcy blues to an affluent lifestyle better suited to the founder of a tech startup.
He and his wife purchased new Infiniti SUVs and put their Boynton Beach house on the market. In March 2015, the couple moved their two daughters to a luxury gated community in Delray Beach, settling into a new five-bedroom, five-bath, $1.3 million home with a pool and a gourmet kitchen.
Optimism ran high
As Cryptsy's popularity grew, however, so did the storm clouds threatening to rain on Big Vern's parade. The darkest one yet blew his way in October 2014, when a process server handed Vernon notice that a customer who had lost 140 Bitcoins in a security breach was suing him for fraudulent business practices. The blogosphere quickly picked up the story.
In what would become a pattern over the next year and a half, Vernon used Twitter and the company's blog to forecast sunny days ahead, insisting nothing was amiss.
"We are not a fly-by-night operation; we are a company that plans to be around for a long time," he wrote. "Our desire is to be the model of how to operate a crypto business."
It mostly worked; even Cryptsy's own employees shrugged off the lawsuit. "Based on what we read, it seemed like there was truly no truth to what the person was saying," Maak says.
The lawsuit wasn't the first hint of problems at Cryptsy, though. The trouble had begun a few months
"I regret using Cryptsy every time and should really find a new exchange
Eventually, though, most users said their issues were resolved, and even with the lawsuit ongoing, Vernon seemed to have righted the ship by early 2015. The new year looked promising: Cryptsy launched version 2.0 with a new user interface and unveiled a prepaid MasterCard that allowed users to make purchases even from merchants that didn't accept Bitcoin. In March, just as Vernon closed on his million-dollar pad, he reached a confidential settlement with the plaintiff in the lawsuit.
But by midyear, new warning signs appeared. Cryptsy began quietly laying off employees, including Maak. Online, rumors grew that financial problems were mounting.
"I can confirm that not one but multiple Cryptsy developers have been interviewing for jobs at other South Florida tech firms," someone posted on Reddit. "Be warned that things might be shaky there in the weeks to come."
Citing an unnamed federal agent, a blog called
"My guess is that
But only three months later, a shocking email landed in the inboxes of thousands of Cryptsy users. Ahead of a terse, three-sentence message, the subject line told them: "Cryptsy is closed."
"Hi," the January 13 email said, "Cryptsy ceases its activities in the wake of the theft of most of
Vernon quickly wrote a blog post assuring users the email wasn't sent by his team, calling it a phishing attempt. His post ended with a cryptic promise that soon he would finally explain what in hell was going on.
"Regarding other issues that have been apparent at Cryptsy for the last couple months, I will be making another post
The next day, users clicked over to Cryptsy's blog with anticipation. But gone were Big Vern's usual calm assurances. Instead, he admitted he'd been lying to them for more than a year.
"Cryptsy has had problems for some time now, and it's time to let everybody know exactly why," he wrote. "These problems were NOT because of any recent phishing attacks, or even a DDoS attack, nor does it have anything to do with me personally."
What had happened, Vernon claimed, was actually much worse: The company had been hacked 18 months earlier. Vernon claimed that 13,000 Bitcoins and 300,000 Litecoins had been stolen from the exchange in July 2014. At the time of his blog post, the lost coins were the equivalent of more than $6.6 million.
"Some may ask why we didn't report this to the authorities when this occurred, and the answer is that we just didn't know what happened, didn't want to cause a panic, and were unsure about who exactly we should be contacting," Cryptsy's post read.
Vernon's carefully crafted image was imploding. A Cryptsy user had visited the Delray Beach office only to find it empty, and
Cryptsy's burned users were stunned. Where had their money gone? Many didn't buy Vernon's claims that a hacker was to blame.
"I wasn't expecting this, but after several weeks of confusion, it makes sense," says Fernandez Hernandez, the user from Spain. "It makes sense the way Paul and his associates prepared this exit scam. They took advantage of the trust of users to keep depositing money way after the exchange appeared to be insolvent."
As the divorce settlement leaked online, they realized it had been signed remotely: at the U.S. Embassy in Beijing.
Unseth and DeRose are both skeptics and fans of the cryptocurrency scene. "Bitcoin is sex, drugs, and rock 'n' roll," DeRose says.
Photo by Ian Witlen
As the sun sets in Wynwood, DeRose and Unseth are the first to arrive at the May meeting of Bitcoin of South Florida. Sliding onto a bench of a long picnic table inside Wynwood Brewing Company, they both wear their signature matching black ball caps; DeRose's reads "MERKLER," while Unseth's reads "BLERKCHAIN," both obscure jokes not even most Bitcoin users get. Eventually, a dozen guys congregate at the table, including Michell Espinoza, who is out on bail in a pending Bitcoin money-laundering case and wearing an "I'M IN MIAMI BITCH" T-shirt, the "B" replaced with the yellow Bitcoin logo.
Surprisingly, the leaders of the group turn out to be the biggest skeptics in the room. "Bitcoin doesn't make you any money unless you're doing something illegal," Unseth says. DeRose is also skeptical of new coins such as Ethereum; he famously sparred with a New York Times reporter on Twitter after the Gray Lady published a glowing
As the latest Cryptsy lawsuit inches through the court system and new clues emerge about what happened to the missing millions, true believers are still buying and trading digital currencies among one another — even as losing money on the exchanges has become somewhat expected.
Having lost access to their coins, users called on Silver, the Broward attorney, to find their cash. He filed the class action in federal court January 13, the same day the strange email went out about the exchange shutting down.
Silver soon discovered that Vernon's divorce records were a treasure trove of juicy details. In one affidavit, Silver learned the CEO had stopped taking a salary in December 2015, expecting the company to dissolve at any moment. In another, Nettles wrote that her husband had been having an affair with a woman from China and had apparently been living a double life for at least a year, even enrolling his girlfriend's child in the same private school as his own two young daughters. And he paid for it all from his joint bank account with Nettles.
"The wife, it appears, did not ever look at the bank accounts," Silver says. "You could literally see when he went to Publix, which Publix for which family, because he only used one account."
Months before Cryptsy closed, Silver found, Nettles had predicted it would go under. In a filing from October 2015, she expressed concern about a recent
Silver, however, believes Nettles' claims of being an innocent spouse are suspect. In February, he added her to the lawsuit as a
To Silver, what happened at Cryptsy is simple. "All he did was rob a bank," Silver says. "There's money missing, and he's absconded. I can tell a story, but the story kind of tells itself on this one."
As for Vernon's claims that a hacker stole the missing coins in July 2014, Silver says the facts just don't back up that story. If the company lost all of that money, how could Vernon buy a $1.3 million mansion eight months later? Silver also points to a divorce deposition taken before the company crumbled in which Vernon admitted the cash used to buy the house was "derived from Cryptsy's revenues."
"All you can call this is simple theft," Silver says. "I don't believe a legitimate business tells its clients a year and a half later that $5 million is missing and, while the money is allegedly missing, takes out $2 million to buy themselves a house in cash."
For now, it's unclear if the feds are pursuing a criminal case against Vernon. In Silver's civil suit, U.S. District Judge Kenneth Marra appointed Boca Raton attorney Jim Sallah as
"You can imagine, it's not like Vernon is in there helping us figure this all out," Sallah says. "Nothing in law school prepares you for when you're appointed by a federal judge to preside over a case involving fraud involving Bitcoin."
Sallah has been working with a forensic IT specialist who was able to transfer the contents of Cryptsy's servers in Miami onto a secure server, where they can be reviewed. Sallah also recommended in his last report, filed in May, that the court take possession of the Delray Beach home, which could help compensate some victims.
But trying to get hold of the company's financials and
Sallah says he's now come to the same conclusion Silver has reached about Big Vern's story.
"You do the math," Sallah says. "If you think someone hacked in, why would he have written that kind of confessional letter, posted it, and moved to China?... If it's not corporate looting, it's at least extreme corporate malfeasance."
Inside the Bitcoin world, a bit more credence has been given to the hacker tale. DeRose says that
DeRose offers another theory: Perhaps Cryptsy really was hacked in 2014, and to keep the ship afloat, Vernon made shady business deals to offset the losses.
"I do think that Big Vern making money with weird insider trading could be conceivable," he says. "I think that Paul Vernon probably started out wanting to run an honest business, but if people really look at the numbers, the margins are slim and you've got payroll to do. It's a slippery slope. You can just wake up one day and you're running a Ponzi scheme."
No one is quite sure exactly where Vernon is today, although former Cryptsy users have looked skeptically at a new Chinese exchange called BiteBi9 that has striking similarities to Cryptsy. Its website was registered by someone named Bao Luo — Chinese for "Paul" — with an email address from Project Investors, the parent company of Cryptsy.
"It's basically a mockup of Cryptsy, just operating in China," Silver says.
Some victims still hope they'll recover some of their money.
"It would be nice if they could hold him responsible, but it would be nicer if he just stepped up and said, 'This is what I did, here is why I did it, and here's a portion of what's
Though there's hope of solving the mystery behind Cryptsy's downfall, Big Vern himself remains a puzzle.
"This is a bizarre story, and it's been bizarre from the get-go," Silver says. "The guy went bankrupt in early 2010 to multimillionaire to absconded to China. It's been an interesting run."
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