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CFTC Sues Mango Market Exploiter; GOP HFSC Members; Treasury Responds to Rep. Emmer; SEC Sues Gemini

CFTC Files Suit Against Mango Market Exploiter

What happened?

On Monday, the Commodity Futures Trading Commission (CFTC) filed a complaint against Avraham Eisenberg for engaging in fraudulent and manipulative actions in violation of the Commodity Exchange Act.

According to the CFTC, Eisenberg misappropriated over $100 million by exploiting Mango Markets, a decentralized exchange (DEX) protocol on the Solana blockchain. Mango Markets was a Solana-based DEX where users could swap, lend, and borrow crypto assets. Along with other cryptocurrencies, users could also trade with the DEX’s native token, MNGO.

In October 2022, Eisenberg acquired MNGO-USDC swaps worth $19 million on Mango Markets. He simultaneously bought large amounts of MNGO on exchanges used by a price oracle. Because MNGO was not actively traded on these exchanges and was relatively illiquid, the price of the token jumped significantly, causing Eisenberg’s swap position on Mango Markets to increase markedly.

Using the artificially inflated MNGO-USDC swaps as collateral, Eisenberg borrowed $114 million of digital assets from the DEX. Eisenberg did not repay the loan, causing the pledged collateral to liquidate. However, at the time, the collateral was worth much less than when Eisenberg borrowed funds, depleting the liquidity of Mango Markets.

Avraham Eisenberg was arrested in Puerto Rico in late December for similar charges of fraud and market manipulation.

What does this mean?

Interestingly, Avraham Eisenberg identified himself as the exploiter of Mango Markets soon after through his Twitter account, claiming his actions were legal. According to Eisenberg, he used the protocol as designed by its code. Technically, he was right, as all his actions were allowed by the protocol’s smart contracts.

Eisenberg’s position, which can be rephrased as "Code is Law,” is not new to the crypto community. The alleged attacker of the very first DeFi protocol, The DAO, made similar claims in their open letter.

However, CFTC’s actions demonstrate that the Commission does not believe that “Code is Law,” and it will charge future exploiters of DeFi protocols. In fact, the Commission made sure to make it clear by stating that “contrary to his [Eisenberg’s] purported belief that his actions were legal, in fact, they constituted blatant manipulation of spot prices and swaps.”

Chairman McHenry Announces Republican Members of HFSC

What happened?

Newly-appointed House Financial Services Committee Chairman Patrick McHenry (R-NC_ announced a list of the Republican House representatives that will join him in the majority over the next two years. This included several notoriously crypto-friendly members like Rep. Bill Huizenga(R-MI), Rep. Tom Emmer (R-MN), and Rep. Warren Davidson (R-OH), all of whom served on the Committee minority in the previous Congress.

The announcement also featured a short message from the Chairman that outlined some of the key policy matters the Committee will focus on in the upcoming session:

“From oversight of the Biden Administration, to enhancing capital formation opportunities, to developing clear rules of the road for digital assets—we have a lot of work to do. I have no doubt these Members from across the conference and country will provide invaluable insight to accomplish these goals.”

What does this mean?

While many on Capitol Hill are forecasting an uneventful year for crypto policy, it is encouraging to see the Chairman state his intention of addressing the unanswered questions that continue to loom in the wake of FTX.

Before the legislative break, Rep. Maxine Waters and the Chairman were working together to propose a bill regulating stablecoins. This legislation is one to keep an eye on in the near future with the Chairman determined to get off the ground running.

Treasury Responds to Rep. Tom Emmer’s Inquiry

What happened?

Soon after the U.S. Treasury sanctioned privacy-enhancing protocol, Tornado Cash, Rep. Tom Emmer (R-MN) sent a letter to Treasury Secretary Janet Yellen, requesting clarification on several critical questions such as identifying the manner in which “smart contracts with no agency” are able to appeal the OFAC sanctions.

Nearly five months later, the Treasury responded and refrained from answering the most important questions, citing active litigation as its reason. The Treasury mainly referred to the FAQs page published in September last year.

What does this mean?

As we stated in September, the FAQs clarify some confusion but don’t answer the most substantive issues surrounding the Tornado Cash sanctions. Therefore, by referring Rep. Emmer to the FAQs, the Treasury once again avoided responding to critical questions.

Fortunately, Rep. Emmer promised to discuss the Tornado Cash situation with Secretary Yellen in the coming Financial Services Committee hearings.

SEC Sues Gemini For Earn Program

What happened?

Late Thursday afternoon, the SEC filed an enforcement action against the crypto exchange, Gemini, and crypto lender, Genesis Global Capital, for selling unregistered securities to investors through the Gemini Earn lending program.

The program launched in February 2021 and allowed Gemini customers to lend their crypto assets to Genesis in return for a promise to pay interest.

The Commission’s complaint alleged that the two entities failed to register after engaging in a securities transaction with the customers that used the lending program. Specifically, it claimed that by exercising discretion over how to use and invest borrowed customer assets to generate a yield for the customers and revenue beyond that, the entities engaged in an unregistered securities transaction.

What does this mean?

This action does not have any broader implications for DeFi or the classification of crypto assets as securities. The decision was expected following the SEC’s decision to all but veto Coinbase’s attempt at launching a lending program earlier in 2022.

Although this case pertains to centralized exchanges, we remain critical of the SEC’s regulation-by-enforcement approach; the SEC must establish the rules of the road if they expect market adherence.


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