In a federal courtroom in New York, a groundbreaking trial began this week that could redefine the legal landscape for the decentralized finance (DeFi) sector of the cryptocurrency industry. Avraham Eisenberg, a crypto trader, stands accused of defrauding the DeFi trading platform Mango Markets out of $110 million worth of digital assets in October 2022.
TLDR
- Avraham Eisenberg is facing a high-profile U.S. criminal trial for allegedly defrauding the DeFi platform Mango Markets out of $110 million in cryptocurrency.
- The trial will test the legal boundaries of the “code is law” principle in DeFi, which holds that transactions permitted by a platform’s code should be considered legitimate.
- Prosecutors argue Eisenberg manipulated the price of Mango’s token to inflate the value of his futures contracts by 1,300% before draining the platform’s deposits.
- Eisenberg claims he simply exploited a loophole in Mango’s code and his actions were permissible, highlighting DeFi’s lack of clear regulations.
- The outcome could set a pivotal precedent for how U.S. laws against fraud and market manipulation apply to DeFi protocols built on blockchain smart contracts.
The charges stem from Eisenberg’s trading activity on Mango Markets, a DeFi application built on the Solana blockchain that allows users to trade cryptocurrency derivatives like perpetual futures contracts. According to prosecutors, Eisenberg used two anonymous accounts to manipulate the price of Mango’s governance token MNGO, causing the value of his futures positions to inflate by over 1,300% in just 20 minutes.
With his artificially inflated trading portfolio, Eisenberg then allegedly withdrew virtually all of the cryptocurrency deposits on the Mango platform, totaling around $110 million, without any intention of repaying what amounted to effectively an undercollateralized loan. Prosecutors assert this was outright theft achieved through illegal market manipulation tactics.
However, Eisenberg and his defense attorneys have mounted a provocative defense rooted in the core tenets of DeFi – that transactions validly executed according to a protocol’s code should be considered legitimate, regardless of their real-world implications. They claim,
Eisenberg simply took advantage of an existing vulnerability or loophole in Mango’s smart contracts in an opportunistic but legally permitted manner.
This “code is law” philosophy is central to the ethos of DeFi, which aims to create trustless, self-governing financial networks operating transparently according to inviolable programmatic rules without centralized oversight. But it has increasingly clashed with traditional legal frameworks against fraud as DeFi apps have interfaced with the real world and handled billions in asset flows.
The trial represents a critical test case for determining where U.S. regulations and prohibitions against market manipulation apply within this innovative but legally ambiguous arena. The government has taken an aggressive stance that existing financial laws still govern DeFi, even if protocols are designed to enable philosophically questionable economic behaviors.
This position aligns with prosecutors’ approaches in other recent prominent crypto cases like the fraud charges against Sam Bankman-Fried and the civil claims against Terraform Labs over the 2022 TerraUSD collapse. However, Eisenberg’s defense appears to be the first major legal challenge explicitly focused on the “code is law” premise underpinning DeFi.
Adding a further twist, Eisenberg previously reached an agreement with the Mango DAO community governing the protocol to return around $67 million of the disputed funds in exchange for not facing civil claims. But Mango’s corporate entity, Mango Labs LLC, has since gone back on the deal and is among the parties pursuing separate civil litigation against Eisenberg.
With so many factors at play, from debates over terms like “manipulation” when applied to DeFi to complex questions around the legal status of decentralized governance processes, the trial is shaping up to be a complicated exploration of DeFi’s philosophy encountering real-world financial laws.
Presiding over the case will be a jury including individuals from finance backgrounds as well as other vocations like music and book selling. Their task will be evaluating this novel set of circumstances through the lens of established legal concepts like criminal fraud statutes. Their conclusions could help shape the regulatory future for all of DeFi.
