A crypto trader’s fraud conviction for exploiting cryptocurrency exchange rules to steal $110 million is a strike against the “code is law” argument championed by some decentralized finance proponents.
But Avraham Eisenberg’s conviction last week also raises questions about the reach of US wire fraud laws, which target using electronic communications to defraud people and have increasingly been used in crypto cases.
“He didn’t lie to anybody,” Polsinelli PC attorney Jonathan Schmalfeld said, noting Eisenberg’s alleged fraud was carried out against an algorithm that runs Mango Markets. “He didn’t even lie to the machine.”
Along with wire fraud, Eisenberg was convicted of commodities fraud and commodities manipulation following a trial in the US District Court for the Southern District of New York. It was the first criminal case involving manipulation of crypto through open-market trades, prosecutors said.
During closing arguments, Eisenberg’s lawyer, Waymaker LLP’s Brian Klein, emphasized the 28-year-old’s trades were “fully compliant with Mango Markets contracts,” tapping into a theory in crypto that something is legal if a smart contract code permits it.
But the defense’s embrace of “code is law” didn’t persuade the New York jury.
The case took on the theory “head-on, and the attacker’s intent to deceive and manipulate with his trade is what carried the day,” Jessica Stansfield, an attorney at WeirFoulds LLP in Toronto, said in an email.
‘Tenuous’ Argument
Mango Markets is run by smart contracts: digital agreements that self-execute when certain conditions are met. And it’s overseen by a decentralized autonomous organization, or DAO.
Prosecutors said Eisenberg in October 2022 used two Mango Markets accounts to buy and sell futures contracts, which were based on the value of Mango’s token. Eisenberg was accused of pumping the token’s price by quickly buying large amounts of it on other exchanges.
He walked away with almost $50 million after negotiating a deal with Mango Markets to return a chunk of the money. Eisenberg on social media said he’d been part of a “highly profitable trading strategy.” Prosecutors called it a con.
“His deception may have been on a cryptocurrency platform,” Assistant US Attorney Peter Davis said during closing arguments last week. “But make no mistake—this was old-fashioned manipulation and fraud.”
Croke Fairchild Duarte & Beres LLC attorney Andrew Gilbert said the “code is law” argument was “tenuous at best.”
“The law is the law; code is the code,” Gilbert said.
Line-Drawing
Wire fraud has been a powerful tool for prosecutors in crypto cases.
FTX co-founder Sam Bankman-Fried was convicted of wire fraud after the exchange collapsed. Nathaniel Chastain, a former employee of non-fungible token marketplace OpenSea, was convicted of the same charge last year in a first-of-its kind prosecution for an insider trading scheme tied to digital assets.
Prosecutors used the wire fraud statute more than 1,300 times in 2023, up from about 900 in 2016, Bloomberg News reported, citing Justice Department data compiled by Syracuse University’s Transactional Records Access Clearinghouse. The uptick coincided with a swell of crypto cases.
Klein, Eisenberg’s attorney, said he plans to file a number of post-trial motions. Some observers expect any appeal to test the bounds of wire fraud, an admittedly broad statute.
The interesting issue “is when you can commit fraud against a protocol, not under the Computer Fraud and Abuse Act, but rather under a wire fraud claim,” said Schmalfeld, who works with blockchain technology clients.
Where to draw that line “is something that I think will be at issue on appeal,” he said.
‘Utopia Can Become Dystopian’
Eisenberg has other legal issues to contend with.
He also faces civil lawsuits from the Securities and Exchange Commission and the Commodity Futures Trading Commission, and he’s been sued by Mango Labs, which wants to recover $47 million for the exchange’s users.
Prosecutors at trial also noted that Eisenberg in July 2022, a few months before the Mango trades, sued the founder of the Waves blockchain protocol in federal court in Puerto Rico, alleging price manipulation of Waves’ token, among other things.
Eisenberg, who wants over $14 million in damages, said in a recent court filing that he “intends to resume prosecuting this matter aggressively” after his criminal trial.
Decentralized finance has a certain appeal, allowing parties to interact directly without intermediaries or burdensome contracts.
But WeirFoulds attorney Benjamin Bathgate said the trading exploitation of Mango Markets and Eisenberg’s criminal conviction are a reminder of “how quickly utopia can become dystopian when smart people with ‘winning trading strategies’ intersect with fallible smart contract code.”
Read More: Why ‘DeFi’ Utopia Would Be Finance Without Financiers: QuickTake
Bathgate and Stansfield of WeirFoulds represent a Delaware-registered company, Cicada 137 LLC, in a civil lawsuit in Canada against a teenager accused of exploiting a weakness in the Indexed Finance crypto platform to take millions of dollars worth of crypto.
“In the DeFi ecosystem, the very thing that makes financial trades so attractive and liberating to the crypto community—instantaneous, automated transactions on the blockchain—is what breaks their heart when the code performs in a way users did not intend,” Bathgate said. “Trading based on pure code at the frontier of finance is perfection, until someone loses their shirt.”
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