The big story last week was the criminal trial over against two (alleged) MEV exploiters ending in a mistrial, giving another datapoint on where the line is drawn between “code-is-law” and fraud. Additionally, people (including the Digital Chamber) had lots to say to Treasury on how the GENIUS Act should be implemented, and the first of the Samurai Wallet developers got a max 5-year sentence for his role in creating the crypto-mixing software at issue in his case.
Here’s everything that happened last week in crypto law:
Mistrial in Maximal (or Minor) Extractable Value (“MEV “) Exploiters Trial
The case brought against two brothers who were facing criminal charges related to an “exploit” they developed which targeted “sandwich attack” bots had that criminal trial come to an end last week in a mistrial after the jury failed to deliver a unanimous judgment. As a reminder, “sandwich attack” programs essentially watch transactions and when somebody tries to buy a (usually fairly illiquid) cryptocurrency with high slippage set, the bots “bribe” validators to let the bots buy the token first so those tokens can then be sold for a profit a fraction of a second later to the initial intended buyer. The brothers faced criminal charges of wire fraud, conspiracy, and money laundering for creating their own programs which got the sandwich bots to do the first part (bribe validators to make large buys in mostly illiquid crypto tokens) but made it impossible to do the second part (sell those tokens into an open order for a profit). Federal prosecutors will now need to determine if they want to let this case end here, or start the trial over again.
Tl;dr– Similar to the case against Avi, this raised an interesting issue on whether you can commit “fraud” against a non-human like a software application. Under the Computer Fraud and Abuse Act, it is illegal to access a computer or software without authorization or in ways which exceed that authorization (aka, “hacking”). However, in these “exploit” cases, there is no unauthorized access. Instead, these cases involve making third-party software act in ways which the software creator didn’t anticipate. I am far more sympathetic to these brothers, because unlike Avi, these brothers didn’t sue somebody else for doing exactly what they are claiming is not illegal. Also, to a degree, the sandwich bots who were “attacked” here are no different than what the brothers did (make people buy assets for more than anticipated or intended due to software exploit) so seems like a “no crying in the casino” situation in addition to being technically right. That said, the Computer Fraud and Abuse Act might need an update as people increasingly rely on autonomous software in their everyday internet use. I also wouldn’t be doing my job if I didn’t note the humor in the fact that just a week of trying to understand how the Ethereum Network/MEV works left jurors in tears and under duress. Which I think is most peoples’ reactions to trying to understand crypto topics like MEV.
OTHER STORIES
Advocacy Groups Comment on GENIUS Act Implementation: Obviously I have to highlight the Digital Chamber’s submission to the Department of Treasury’s Advance Notice of Proposed Rulemaking, which at 32 pages of actionable recommendations I personally think was the best submission I saw. But also worth highlighting the submissions from DeFi Education Fund and Coinbase and not highlighting the submission from the American Bankers Association who basically just spent a page arguing for Treasury to stifle competition (loved this clap back from J.W. Verrit, though).
Bad Week for DeFi: DeFi protocol Balancer was hit with a $128 million protocol exploit, and even though a DAO was able to use internet magic to recover $20 million of that, it still have ripple effects across DeFi as Balancer is a heavily utilized protocol. Which is a reminder that despite DeFi being a superior product in many cases, people need to understands each particular platform’s risks and exposure/reliance on other platforms in deciding the when/where/how in use of Defi.
First Samurai Wallet Developer Get Max Sentence: Prior to the Tornado Cash trial, both the developers of crypto mixing software Samurai Wallet pled guilty to conspiracy to commit unlicensed money transmission charges to avoid facing much more serious charges like the Tornado Cash developers were facing. Hate to see the first sentencing be a max 5 years, but this is a bad facts make bad law situation as these folks had some unfortunate texts where they joked about their software being used by criminals, which is suboptimal when facing charges related to knowingly assisting criminals.
SBF Appeal Update: SBF is back in the news trying to overcome his conviction on appeal, arguing that it’s not stealing if you plan to pay the person back eventually, assuming the risky venture bets you made with that money pay off (which they did for SBF! Yay for gambling!).
MEV Exploit Amicus: Really enjoyed this amicus submitted by CoinCenter in the sandwich bot attack criminal case discussed above. They make a compelling point: code is not law, but if you are using a technical exploit in the form of sandwich trades, you can’t cry to the government when somebody out bots your bots. “Here, there is no indication that anyone in the community accepts that validators must engage in a particular form of MEV, indeed MEV itself is understood as an inherently cut-throat competition with in-built and automatic protocol disincentives for otherwise unprohibited tactics.”
Bitcoin Mining for National Security: Loved this submission from the Digital Power Network explaining how digital asset mining and its support for clean energy/the United States power grid are critical to national security. As a reminder, states with large inflows of data centers such as those used for PoW mining actually had energy prices go down on average from the net gain of power creation and distribution as a result of those data center inflows.
1k(x) Onchain Revenue Report: Really interesting data from 1k(x) which projects onchain fees to reach $32 billion by next year. While this year isn’t quiet the fees from the gas war NFT-mania days, the fees being driven by protocols/consistent use seems more sustainable and great to see continue to grow.
Tokenization Explainer: The letter put out by Ribbit Capital (available here) titled Token Letter, is a great read and does an excellent job explaining how tokenization/AI/payments fit together explained as “tokenization is the process of rendering the world for computers.” Definitely something I will come back to and re-read a few times.
CONCLUSION
If you have any questions or would like me to write about anything else, let me know on Twitter (X?) or Farcaster. 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: In late 2022, while I was at Polsinelli, I started preparing weekly updates for attorneys at the firm to stay abreast of the latest Web3 legal developments. I now 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 are solely my own. They do not reflect the official stance or endorsement of the Digital Chamber or any of its members.
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