Prosecution of Mango Markets attacker cites commodity offenses but does not claim that MNGO is a commodity.
Mango Markets attacker Avraham “Avi” Eisenberg, who perpetrated the $110 million exploit of the trading platform, was arrested in Puerto Rico and charged with commodities fraud and market manipulation, fueling familiar debates around what is classified as a commodity in the digital asset space.
The Department of Justice announced the arrest, on charges of “market-manipulation offenses,” related to Eisenberg’s October attack on the exchange. A second filing signed by Assistant U.S. Attorneys Thomas S. Burnett and Noah Solowiejczyk specifically charged Eisenberg with commodities fraud and commodities manipulation, stating:
“AVRAHAM EISENBERG, the defendant, willfully and knowingly, directly and indirectly, used and employed, and attempted to use and employ, in connection with a swap, a contract of sale of a commodity in interstate and foreign commerce,” it stated.
However, those tired of the Securities Exchange Commission’s (SEC) regulation by enforcement approach and hoping that native token MNGO will set a useful regulatory precedent by being classed as a commodity might want to take a closer look.
Attack on Mango
Mango Markets is a Solana-based exchange governed by a decentralized autonomous organization (DAO) made up of holders of its native token, MNGO, allowing investors to lend, borrow, swap, and use leverage to trade digital currency.
Investors could buy and sell MNGO and other digital currencies on Mango Markets and, crucially for this case, also buy and sell perpetual futures (perpetuals) based on the relationship between the value of MNGO and the value of the stablecoin USDC.
On October 11, the project was drained of $110 million by a hacker, with Mango Markets tweeting at the time that an offender had exploited the platform’s price oracle—a source of price data streamed onto the blockchain that can be used to bridge the off-chain world with the blockchain.
Around 22:00 UTC October 11th the 🥭 protocol had an incident involving the following:
-2 accounts funded with USDC took an outsized position in MNGO-PERP
-Underlying MNGO/USD prices on various exchanges (FTX, Ascendex) experienced a 5-10x price increase in a matter of minutes
— Mango (@mangomarkets) October 12, 2022
Unusually, Eisenberg actually revealed himself as the person behind the attack on October 15 and stated he believed his actions were “legal open market actions, using the protocol as designed.”
Statement on recent events:
I was involved with a team that operated a highly profitable trading strategy last week.
— Avraham Eisenberg (@avi_eisen) October 15, 2022
Mango Markets later agreed to negotiate with Eisenberg and reached a deal in which he would return $67 million, keeping the rest.
Avoiding old debates
The DOJ was obviously not happy with this deal and disagreed that Eisenberg’s actions were legal.
However, the charges brought against him on December 27 have raised some eyebrows and reignited ongoing debates in the digital asset space, as the alleged ‘commodities’ crimes cited involve MNGO, a digital token. This is an asset class that has often been considered a ‘security’ for the purposes of regulation by the notoriously pro-active SEC.
In the case of Eisenberg, the DoJ filing states that “virtual currencies, such as USDC, are commodities under the Commodity Exchange Act (CEA)” and that the “perpetuals” in question are considered “swaps” under the CEA definition.
The filing also cites as precedent the case of the Commodities Futures Exchange Commission (CFTC) v. McDonnell, where it was deemed that a “commodity” encompasses virtual currency both in economic function and in the language of the statute.
What the filing doesn’t do is ever explicitly claim that MNGO is a commodity, which would have been the more controversial move. By focusing on USDC and the perpetuals angle, the DOJ may have made a specific choice to avoid dredging up the securities-commodities debate—or to avoid giving advocates of digital currencies a get-out-of-jail-free card for future run-ins with the SEC.
Another possible reason the emphasis has been placed on USDC and perpetuals could just be convenience, as this is an area where precedents and existing CEA rules on price manipulation exist, and thus the course of least resistance for a successful prosecution.
Either way, despite the wishful reading between the lines of some online observers, for better or worse, it appears prosecutors have carefully avoided classifying MNGO as a commodity in the case against Eisenberg.
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