Criminal charges vs. crypto trader offer no shield vs. consequences of alleged fraud

Criminal charges against a crypto trader who claimed to have walked away with about $50-million worth of digital assets after exploiting a decentralized finance platform show that even as DeFi remains mostly unregulated, it offers no shield against the legal consequences of alleged fraud.

“There’s a difference between what’s regulated and what’s legal,” Neal Kumar, partner at Willkie Farr & Gallagher LLP, said in a phone interview. “Just because it’s not regulated doesn’t mean that you could do any activity you want,” he added, and “government can still pursue fraud and manipulation.”

Avraham Eisenberg was arrested in Puerto Rico this week and charged with fraud by the US Attorney’s Office in Manhattan in connection with the October exploit targeting Mango Markets. Before his arrest, the trader was outspoken on social media platforms about his “highly profitable trading strategy,” which he claimed was perfectly legal. Authorities allege it included market manipulation.

According to a criminal complaint unsealed Tuesday, Eisenberg allegedly used two Mango Markets accounts he controlled to manipulate the price of Mango perpetual swaps, which are futures that allow traders to keep their potions open. He then used his swaps to borrow and withdraw about $100 million worth of a number of tokens, which came from the deposits of other investors on Mango Markets.

Eisenberg has been highlighting his escapades to more than 40,000 followers on Twitter, all the while saying he’s putting pressure on the fledgling DeFi industry to implement better risk controls. Many of the strategies he uses, such as generating trades to inflate the price of a cryptocurrency and then borrowing against the now higher-valued asset, are typically viewed as manipulation in traditional markets and a crime.

The decentralized autonomous organization, or DAO, that runs Mango eventually agreed to let Eisenberg keep almost half of the more than $100 million in assets he pocketed in exchange for releasing the rest of the funds. Meanwhile, the self-declared exploiter of Mango Markets was convinced that he hadn’t done anything wrong.

“I’m a trader trying to make money, but I also point out issues I think should be fixed and advocate for them,” Eisenberg, wrote in a message to Bloomberg News in the days following the exploit. He couldn’t be reached for comment Wednesday, and he didn’t have a lawyer listed in court filings.

In claiming innocence, Eisenberg was likely tapping in to the “code is law” ethos of DeFi, a belief that the ultimate authority in crypto is the pieces of computer code that underly most projects. If the code allows for a trade to be implemented, for instance, it is the law as far as crypto believers are concerned – or so goes the theory.

“There is an objective opinion that ‘code is law’ with decentralized finance,” Steve Walbroehl, chief security officer and co-founder of blockchain security startup Halborn, wrote in a statement. “One can argue that the Mango hacker Avraham Eisenberg was just using the environment and the smart contract rules to play ‘the game.’”

But Tom Schmidt, partner at digital-asset venture capital firm Dragonfly, said that Eisenberg and his way of promoting his trades is not in the spirit of that ethos.

“Fraud is fraud,” Schmidt said. “I think people mistake ‘Code is law’ for ‘Code is above the law.’”

The case is USA v. Eisenberg, 1:22-mj-10337, US District Court, Southern District of New York (Manhattan).


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