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Mango Markets Trader's Trial: Spotlight on DeFi Legality and Crypto Regulation

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Robert Tavares

April 8, 2024 - 09:55 am

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High-Stakes Trial Begins for Trader Accused of $110 Million Crypto Heist

Manhattan

(Bloomberg) – In a significant move for the cryptocurrency industry, a former trader who allegedly orchestrated a heist to defraud the Mango Markets exchange of $110 million is now facing a criminal trial that aims to determine the extent to which US laws can govern digital currency exchanges.

A Glaring Act of Manipulation

The events in question unfolded on October 11, 2022, when the accused trader, Avraham Eisenberg, allegedly manipulated futures contracts on the Mango Markets exchange, inflating the price of swaps by an astonishing 1,300% within a span of 20 minutes. Following the artificial price surge, Eisenberg is accused of "borrowing" from the exchange using the overvalued contracts as collateral. This stand-off with the government puts the legitimacy of his actions in question – is it theft, or a clever exploitation of system weaknesses?

The Legal Battleground

As jury selection commences this Monday in the New York federal court – a proving ground for prominent crypto-related cases – the trial will set a precedent. This venue recently bore witness to the sentencing of Sam Bankman-Fried, the FTX co-founder, to 25 years in prison on account of his involvement in a fraud that cost billions. In addition, it was here that a civil trial concluded just last Friday, finding Terraform Labs Pte. and their co-founder Do Kwon liable for deceit in a collapse that erased $40 billion in investor wealth.

Eisenberg's Defense: The Ambiguity of 'DeFi' Transactions

Positioning himself as an "applied game theorist," Eisenberg posits that his maneuvers were within the bounds of legality, attributing his success to his expertise in identifying and exploiting flaws within the decentralized finance (DeFi) application. The case marks a first for the US, where a jury is to decide on the legality of specific DeFi activities, bringing to the fore a contentious debate within the digital currency world.

The Doctrine of 'Code is Law'

A core principle in the cryptocurrency sphere, "code is law," suggests that transactions not expressly prohibited by a platform's terms are beyond the reach of government intervention. Yet, prosecutors are contesting this notion, underscoring that the mere opportunity to exploit weaknesses doesn't equate to legality. “It touches on the big argument within crypto — is code law?”, comments Chris Janczewski, head of global investigations at TRM Labs, highlighting the divergence between crypto anarchists' view and the stap stance taken by the government.

Attacking the Mango Markets

Eisenberg took his chances with Mango Markets, a decentralized autonomous organization (DAO) offering users opportunities to borrow, lend, and trade in cryptocurrencies. The prosecution argues that this heist stands as one of the gravest criminal incidents involving a DAO.

Four days after his disruptive trades, Eisenberg turned to Twitter to imply his involvement in a "highly profitable trading strategy," maintaining the legality of all actions taken — a stance facing significant scrutiny amid these trials.

A Controversial Settlement

In a contentious arrangement with the Mango DAO, Eisenberg consented to returning $67 million obtained from depositors, securing his exemption from legal prosecution and claims. The unsettling nature of this deal, forged amid high tensions, is being re-examined.

Eisenberg's Flight and Capture

Seeking refuge, Eisenberg made his way to Israel from Puerto Rico, where he resided, only a day after the transactions. However, upon his return to the island on December 26, 2022, US enforcement agencies promptly arrested him. Since then, he has been held in custody, with a judge deeming him a substantial flight risk in anticipation of the trial. The slew of charges pinned on him includes commodities fraud, manipulation, and wire fraud, to which he has submitted a plea of not guilty.

A Moratorium on Civil Suits

Pending the outcome of the criminal proceedings before US District Judge Richard Berman, all associated civil lawsuits – instituted by the US Securities and Exchange Commission, the Commodity Futures Trading Commission, and Mango Labs LLC – are momentarily paused.

Demystifying Crypto Trading for the Jury

Jurors now face the daunting task of sifting through an intricate web of details entangling crypto trading, market machinations, and decentralized finance protocols.

Anonymous Accounts and Deception

The government's narrative suggests that Eisenberg craftily utilized two unnamed accounts on Mango Markets to engage in a deceptive circuit of buying and selling futures contracts to himself. These contracts, predicated on the price interplay between the Mango token (MNGO) and a stablecoin by the name of USDC, were anchored in value by automated programs or "oracles" that kept tabs on exchange rates across various cryptocurrency platforms.

On the noted afternoon of duplicity, Eisenberg is alleged to have injected $5 million in USDC into each of the two accounts to create an artificial trading vortex. He reportedly used one account to unload MNGO futures, while the counterpart snapped them up. This propelled a buying frenzy on MNGO tokens that disproportionately tilted their value against the USDC, culminating in a dramatic swell of the futures contracts by 1,300%.

Post-manipulation, Eisenberg purportedly capitalized on an exchange feature, exploiting it to allow significant "borrowings" against his holdings. Consequently, he extracted $110 million in cryptocurrencies from Mango Markets, allegedly without the slightest intention of repayment, as per the charges brought forth by the United States.

As the case unfolds, representatives for Eisenberg and federal prosecutors from the Southern District of New York have opted not to comment further on the ongoing legal proceedings.

Eisenberg's Background and Initial Defense

In December 2022, during a bail hearing held in Puerto Rico, Eisenberg's attorney, Manuel San Juan Demartino, characterized him as a crypto wunderkind and a savvy game theorist – skills supposedly honed during his time as a math major at Yeshiva University. Eisenberg, a dual citizen of the United States and Israel, embarked on his alleged escapade shortly after securing Israeli citizenship, only to return to Puerto Rico where the law caught up with him.

The Case at the Culmination

Currently, Eisenberg's fate is up for judgment as the case, denoted as US vs. Eisenberg, 23-cr-00010, is brought before the US District Court in the Southern District of New York. These proceedings unfold in the heart of Manhattan, with global attention squarely fixed on the outcome that could very well redefine the legal perimeters within which the decentralized financial ecosystem operates.

Expert Assistance to the Court

The trial is also receiving attention and expert insight from various corners of the crypto world, including from professionals like Olga Kharif, who have assisted the court in unraveling the complex workings of digital currencies and their associated trading environments.

As the jurors delve into the labyrinth of cryptocurrency lore, the Eisenberg trial will not only determine the future of one individual but could also significantly influence the interplay of law and decentralized digital finance, crafting new paradigms for the interpretation of "code as law."

The case against Avraham Eisenberg is set to unveil a new chapter in the annals of financial regulation, a narrative interwoven with the intangible threads of digital currency and the ironclad principles of justice. The unfolding events in Manhattan are more than just the judgment of a single man's actions; they are a litmus test for the future of financial technology, laying the groundwork for what could be a new era in global finance.

©2024 Bloomberg L.P. – This news report is brought to you from Bloomberg News, representing the flow and transformation of economic information throughout the globe.

Related Content:

For more information and insights into the world of cryptocurrency and finance, as well as detailed updates on the ongoing case:

Through the hyperlinks provided, readers can navigate for a detailed comprehension of the Mango Markets' interface and the expansive coverage that Bloomberg provides in the realm of cryptocurrency, reinforcing the transparency and depth of information available to the public.

As the trial progresses, Bloomberg promises to continue delivering essential updates and expert analysis, ensuring that its audience receives timely and accurate information on this landmark case and its implications on the wider financial world.