There have been assumptions in the blockchain, Crypto, and DeFi worlds that were never tested in the wider world of law and finance. One of them is the concept that code is law. Such is no longer the case as a crypto trader who manipulated Mango Markets and walked away with $110 million in crypto value in 2022 went to trial in New York. The defendant asserts that any actions within a decentralized autonomous organization like Mango Markets are legal if the system code allows it. He manipulated prices, drove them up, and then borrowed from his holdings according to the rules of the DAO (decentralized autonomous organization). The government says that this was fraud and is not made OK by the “code is law” excuse.
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Mango Markets
According to the Mango Markets website, they are a magical new way to interact with DeFi. Groundbreaking safety features designed to keep your funds secure. The easiest way to margin trade any token pair. All powered by flashloans. They tout themselves as offering deeply liquid markets, “lightning execution,” and competitive fees. This company is one of many that have developed niches in the world of decentralized finance. The problem they ran into with the crypto trader in 2022 was that their code was not infallible. We assume that the issue has been fixed. But, at the time, the trader set up two accounts, traded between the two of them (trading with himself) and drove the value of swaps in the futures market up to 13 times their previous price. At that point it seems that he then borrowed from his account, which was legal according to Mango Market rules. Then he flew from US territory in Puerto Rico to Israel the next day.
Restitution to Mango Markets Was Not Enough
Mango Markets were not happy with this and in order to avoid trouble down the line the crypto trader returned $67 million of his gains, In return, Mango Markets agreed not to pursue either civil or criminal legal remedies. The trader bragged about this, saying that he simply took advantage of a weakness in the code. The government saw this differently and said this was fraud. When the trader returned to US soil (Puerto Rico), two months later he was arrested and has been in jail ever since.
What Is Illegal Market Manipulation?
In the stock market insider trading is illegal as are spreading false information and manipulating trading volume, such as with wash trading. All of these tactics are meant to artificially inflate or deflate prices to the benefit those who are engaging in the manipulation. While the crypto trader in question strictly abided by the rules of Mango Market as embodied in its code, he nevertheless manipulated prices by fraudulent means according to the prosecution. What this case will be about is whether or not rules that govern the broader financial arena apply in the worlds of blockchain, crypto, and decentralized finance.
Was Greed the Sin in This Case?
One wonders. What if the trader in this case had made $50,000 or $100,000 and then closed he account. Would it have been noticed? What if he had not bragged about it? What if he had simply make $20,000 profits using this tactic once a month or so? We are reminded of Michael Milken who made billions of dollars dealing in junk bonds back in the late 1980s. The issues in the trial had to do with market manipulation but the most damning bit of testimony came when he admitted to making more than a billion dollars a year!
Crypto World Is Once Burned and Twice Shy
This old saying seems to apply to the world of crypto, blockchain businesses, and decentralized finance after the losses of crypto winter. Although Bitcoin has come back, many crypto tokens disappeared along with whole businesses, taking billions of dollars in equity with them. A big chunk of the crypto world changed its mind in regard to the need for regulation and dealing with fraudulent and criminal activity within crypto.
The criminal case is US v. Eisenberg, 23-cr-00010, US District Court, Southern District of New York (Manhattan). It ended with a conviction of Avraham Eisenberg for commodities fraud, commodities manipulation and wire fraud. He faces a maximum of twenty years for wire fraud and ten years on each of the other two charges. These could be concurrent or consecutive. Bottom line: the jury did not buy the “code is law” argument.