After a busy few weeks for crypto bills in Congress, the week before Memorial Day provided a much-needed respite to catch up. The biggest legal development from last week was the ruling in the Mango Markets exploiter case, which could have huge implications for “code-is-law” advocates if appealed. There was also some guidance from the CFTC and SEC as those agencies seek to provide digital asset participants guidance while industry participants wait for market structure legislation that may or may not ever come.
Here’s everything that happened last week in Web3 legal:
District Court Judge Overturns Fraud Against Protocol Conviction
District Court judge Arun Subramanian has overturned the fraud convictions against Mango Markets exploiter Avraham (“Avi”) Eisenberg, ruling that venue was improper since there was no evidence the routing engine for Avi’s trades were in New York. The more interesting ruling, though, was finding there was insufficient evidence of falsity to support a wire-fraud charge (see ruling starting at pg. 26). The Court ruled that because the user terms and conditions didn’t make intent to repay a condition upon borrowing, and because Avi didn’t make any false representations about the value of his assets (he just exploited an oracle into making those false representations for him), the government could not support a fraud conviction, ruling “On a platform with no rules, instructions, or prohibitions about borrowing, the government needed more to show that Eisenberg made an implicit misrepresentation by allowing the algorithm to measure the actual value of his collateral.”
Tl;dr– This case raises important questions about what level of human interaction is needed for “wire fraud” in a protocol exploit like this, where the main fraud is being perpetuated against an algorithm. I will never be able to get past that Avi sued Numeris, Ltd. claiming it was fraud for others to do exactly what he did re: artificially increasing price of tokens to take out loan against knowingly false values. You can’t scream “code is law” when you do an exploit while asking for the government to save you when you get exploited. Avi is still going to jail on other charges he pled guilty to, so it will be interesting to see if the government appeals this which could create binding appellate level case law regarding the extent of “code-is-law” in the use of permissionless protocols.
OTHER STORIES
Circle Bidding War: After it was anticipated Circle would go public this year, there were rumors last week that both Coinbase and Ripple were in talks to purchase the stablecoin giant. Seems like more smoke than fire at this point, but worth monitoring as M&A activity in the space stays hot.
Reputational Risk Ban Passes House Committee: The House Financial Services Committee advanced on a 33-19 bipartisan vote a bill which would prohibit federal banking agencies from considering “reputational risk” when supervising, examining, or regulating depository institutions. Good to see, since “reputational risk” has just become code for “legal industries the party in charge doesn’t want banked” as of late.
SEC Crypto Task Force Updates: The SEC is set to release its first Crypto Task Force Report in the upcoming months, meanwhile Commissioner Peirce delivered a great speech about the importance of the SEC setting clear rules of the road for the space (including noting where the SEC doesn’t have jurisdiction). Also, labeling this submission regarding non-custodial trading interfaces (aka, DeFi exchanges) a must read.
DeFi Patent Lawsuit: Bprotocol Foundation (the development arm of Bancor Protocol) is suing Uniswap Labs and Uniswap Foundation alleging violation of Bancor’s automated market maker patents. Seems kind of crazy this lawsuit is being brought now considering Uniswap hasn’t been operating in stealth mode for the past ~seven years, but maybe there were things going on behind the scenes between the parties that we just aren’t privy to.
Emmer and Torres Reintroduce Right to Code Law: Tom Emmer (R-MN) and Ritchie Torres (D-NY) have reintroduced legislation which would protect the developers of non-custodial blockchain software developers and providers from being classified as money transmitters. Good Bill. Good Work. Good Stuff.
Hawk Tua Memecoin Update: Apparently “Hawk Tuah” girl Hailey Welch is talking about her memecoin disaster on her podcast? I will miss this type of headline/story when crypto gets corporate if market structure legislation is ever passed.
Death Certificate NFTs?: New York Mayor Eric Adams is creating a “digital assets advisory council” and exploring ways to use blockchain technologies including recording birth and death records onChain? Maybe get rid of the BitLicense regime first, then we can talk.
SafeMoon CEO Guilty of Fraud: Braden Karony, the former CEO of SafeMoon, was convicted on three counts of fraud after he was ruled to have diverted millions of tokens which he said were “locked” and sold those tokens for personal gain. The project as a whole was always ponzi-y, so not a surprising result.
Financial Privacy Ruling: No directly crypto related, but I am a financial privacy nerd and I write this, so I get to include other stuff if I want to! Loved this ruling agreeing that the recent transaction limit reporting changes for certain areas that border Mexico are unconstitutional. Nice little historical shout out as well, regarding Redcoats and General Writs which led to the 4th Amendment.
SUI DeFi Exchange Exploit: Cetus, the largest decentralized exchange aggregator on Sui, suffered a security breach that resulted in a theft of $220 million. The hacker was apparently able to trick the exchange’s oracles into believing worthless tokens had value, enabling them to withdraw essentially unlimited amounts using worthless tokens in exchange. Not great, Bob!
JPMorgan Will Buy Bitcoin: JPMorgan is apparently open to purchasing Bitcoin for customers but not holding it? Not sure why customers would need JP Morgan to just buy Bitcoin if it’s not being held on their behalf in a central custodian with their other investment assets, but OK.
CFTC U.S. Persons Guidance: The CFTC put out some helpful guidance on what they consider to be U.S. persons subject to CFTC jurisdiction in an internet age. Basically just puts into writing what a court would rule, which is for companies they will look at where the company’s high level officers primarily direct, control, and coordinate the company’s activities.
CONCLUSION
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Warpcast. As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.
Outro/Disclaimer: Since late 2022, I’ve prepared weekly updates for attorneys at my firm to stay abreast of the latest Web3 legal developments. The biggest stories are included in Bi-Weekly posts on the firm’s BitBlog, where we provide tl;dr overviews and insights into the biggest stories from the past two weeks. I post the weekly updates on my personal blog every Tuesday, where I also provide links to more obscure legal developments and otherwise discuss industry trends and stories. Please note, the views and opinions I express, both on BitBlog and my personal blog, are solely my own. They do not reflect the official stance or endorsement of my firm.
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