Putting to rest a trial that had pitted the DeFi maxim that “code is law” against accusations of market manipulation, former Mango Markets trader Avraham “Avi” Eisenberg was convicted on Thursday.
As the dust settled on the week-long New York trial, crypto attorneys and traders began to parse potential implications, as well as possible precedents, of the outcome. Eisenberg was found guilty of wire fraud, commodities fraud, and market manipulation, three of several charges levied against him stemming from a $110 million disappearance of funds in 2022 from DeFi protocol Mango Markets.
Federal prosecutors accused Eisenberg of in short order rocketing up the price of Mango Market’s MNGO token, then borrowing against his suddenly inflated collateral to make off with the $110 million in various digital assets. His defense did not dispute those fundamental trading facts, but instead insisted that their client did nothing wrong, since this was how DeFi markets operate.
The trial’s outcome — Eisenberg now faces up to 40 years in prison at his upcoming sentencing — indicates DeFi traders may be held to more conventional standards.
Accountability Rises for DeFi Users
Complex smart contracts and less-than-intuitive user interfaces (UI) have guarded against retail traders piling into DeFi. And legal scrutiny or crackdowns, including the Eisenberg case, have presented fresh challenges to decentralized adoption.
The conviction could lead to more stringent standards for DeFi operators, which could be a good thing for the ecosystem, according to Stephen Allen, DeFi lead at RARI Chain.
“Avi Eisenberg’s conviction here will only lead to a higher level of accountability for all participants within the DeFi space, which is very positive news for both builders and users,” said Allen, who noted he was speaking in a personal capacity. “Maturing blockchain ecosystems will likely lead to regulators being more open to retail users entering the space more easily once again.
There are enforcement complications as to culpability on DeFi platforms — which often operate as leaderless entities, lacking the types of consumer protections put in place by centralized exchanges like Coinbase.
The white hat hacker known as Ogle, who helped Euler Finance recover stolen funds, said Eisenberg’s case was “in many ways more important than the SBF case” because if a court “accepts the ‘code is law’ argument, then it’d make it [very] hard to prosecute those who exploit contracts in ways they weren’t designed to be exploited.”
That outcome didn’t occur, though Eisenberg’s attorneys did make the argument.
Allowing for unfettered manipulation and exploitation of smart contracts could have been an “existential issue for the DeFi landscape in particular,” Ogle said, adding that the jury’s decision shut down the possibility.
Read more: Euler Hacker Returns All $200 Million Stolen in Exploit
The Law Still Applies to DeFi
In a blog post on LinkedIn on Tuesday, prior to Eisenberg’s guilty verdict, Stephen Hua Ca, an IT audit supervisor on KPMG’s cryptocurrency team, wrote that pinning down who should be held responsible in cases like Eisenberg’s is tricky.
“Should Eisenberg be found guilty, then surely there needs to be some sort of protection for the consumer, and someone will then need to be responsible for it,” he wrote. “However, with the nature of DeFi, no one can really be held responsible other than the platform itself, unless you hold all the token holders responsible as they vote on the quorum … but they are the consumers?”
Terrence Yang, managing director at Swan Bitcoin, which focuses exclusively on bitcoin, said the trial’s outcome actually points to the fact that additional laws may not be needed, considering the system worked this time around.
Pointing to DeFi offerings such as lending, derivatives or yield products, Yang said those “selling financial products or services or those using them” fall under “regulated financial activities in the US especially when US retail is involved.”
“Quite a few of these operators are clearly breaking the law or broke the law,” he said.
Sage D. Young contributed reporting to this story.
