WEBVTT - Crypto Hackers Face The Courts 0:00:02.920 --> 0:00:06.120 This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and 0:00:06.160 --> 0:00:09.680 I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. 0:00:10.160 --> 0:00:29.800 It's Thursday, February nine. One of the more interesting phrases 0:00:29.920 --> 0:00:34.360 used by folks in crypto is this one code is law. 0:00:35.240 --> 0:00:39.560 Think of it this way. Under the idea that code 0:00:39.600 --> 0:00:44.720 is law, what governs whether something, say, a transaction is 0:00:44.840 --> 0:00:48.480 valid or not isn't the whims or caprices of any 0:00:48.520 --> 0:00:55.600 individual regulator or government. Instead, what determines whether something is acceptable, permissible, 0:00:55.720 --> 0:00:59.960 or appropriate is what's written into the software that enabled 0:01:00.000 --> 0:01:03.920 that transaction in the first place. It's another way of 0:01:04.120 --> 0:01:08.000 thinking about the so called immutability of the blockchain. If 0:01:08.000 --> 0:01:10.720 the blockchain says it, then that's what's going to be true. 0:01:10.840 --> 0:01:15.120 That's what's going to remain. Sounds logical, right, But what 0:01:15.240 --> 0:01:17.440 happens when the code doesn't do what you're expecting it 0:01:17.520 --> 0:01:22.800 to do, or when someone or some party exploits loopholes 0:01:22.840 --> 0:01:26.119 in the logic of that software for their own personal 0:01:26.200 --> 0:01:29.119 financial gain. That's what we're going to talk about today. 0:01:29.440 --> 0:01:33.200 The interesting precedent set by a crypto trader named Abraham Eisenberg, 0:01:33.440 --> 0:01:36.640 who exploited the idea of code is law for millions 0:01:36.640 --> 0:01:40.600 of dollars and then was arrested and charged with fraud. 0:01:41.360 --> 0:01:43.559 Joining me now to break down what the latest charges 0:01:43.560 --> 0:01:47.520 mean is Bloomberg reported, Muya Chen and Bloomberg Lower correspondent 0:01:47.680 --> 0:01:59.640 Matthew Boltman. Matthew, Muya, Welcome back to the show, Muya, 0:01:59.760 --> 0:02:02.440 While come to the show, Matthew, So Mouel, I want 0:02:02.480 --> 0:02:07.000 to start with you. We have talked about this idea 0:02:07.320 --> 0:02:10.600 of code is law. We've actually had folks on the 0:02:10.639 --> 0:02:15.120 show previously talking about this Mango Markets hack. But what's 0:02:15.120 --> 0:02:18.160 been happening recently? Why does this continue to be a 0:02:18.200 --> 0:02:21.600 big deal as it were for players in crypto. I 0:02:21.600 --> 0:02:24.880 think let's just step back on what happened, as we 0:02:24.960 --> 0:02:29.000 all now that Einsberg was sort of involved in several 0:02:29.280 --> 0:02:33.640 I think criminal complaints right now, both SEC as well 0:02:33.680 --> 0:02:37.400 as I think the prosecutors in York has sort of 0:02:37.400 --> 0:02:40.480 suit him for several cases. And maybe we want to 0:02:40.520 --> 0:02:44.079 step back on what happened exactly and why it's important. 0:02:44.200 --> 0:02:47.720 The big part is that Einsberg sort of was suited 0:02:47.800 --> 0:02:51.160 for using to Mango Markets accounts that he controlled the 0:02:51.200 --> 0:02:55.760 manipulates the prices of Mango perpetro swaps, which are features 0:02:55.760 --> 0:02:59.400 that allowed traders to keep their positions open. And what 0:02:59.560 --> 0:03:02.000 is the man Gold market. It is a lending project 0:03:02.080 --> 0:03:06.320 that's based on Salona blockchain that allows people to post 0:03:06.600 --> 0:03:11.239 certain tokens in um. This example, we can post Mango tokens, 0:03:11.280 --> 0:03:15.320 which is a native token of Mango markets, to borrow 0:03:15.480 --> 0:03:18.720 other type of tokens for example stable coins and things 0:03:18.760 --> 0:03:22.400 like that. Now, what are some of the particular crypto 0:03:22.560 --> 0:03:24.680 issues that are at played here, Like how has this 0:03:24.760 --> 0:03:28.320 been playing with folks into centralized financer defied Because we're 0:03:28.320 --> 0:03:30.480 going to get into some of the more legal arguments 0:03:30.560 --> 0:03:34.520 very shortly for me um covering Mango markets hack. The 0:03:34.560 --> 0:03:38.240 biggest interesting part is that it's very big. Despite what 0:03:38.360 --> 0:03:42.200 he climbed himself, everything did in the past was like 0:03:42.480 --> 0:03:46.080 he was just following the code that was designed to supposedly. 0:03:46.200 --> 0:03:49.800 How it works that he has received very little support 0:03:49.840 --> 0:03:53.680 from DeFi community in general and Defamy as we know 0:03:54.120 --> 0:03:57.080 is they sort of have this belief in code is 0:03:57.200 --> 0:04:00.560 law essos, which is a belief that author in crypto 0:04:00.760 --> 0:04:04.880 is the pieces of a coat that underlies all the projects. However, 0:04:04.920 --> 0:04:09.120 as the court is designed and people were just following it, Matthew, 0:04:09.200 --> 0:04:13.560 How do regulators feel about this idea that someone can 0:04:14.000 --> 0:04:19.000 allegedly exploit a protocol a marketplace for you know, tens 0:04:19.000 --> 0:04:21.800 of millions of dollars and then say well, this is 0:04:21.839 --> 0:04:24.479 just what your software allowed me to do. The law 0:04:24.560 --> 0:04:29.240 enforcement and the regulators would disagree. I think that is 0:04:29.720 --> 0:04:33.120 maybe one of the big takeaways from kind of the 0:04:33.120 --> 0:04:36.080 the legal action that has has come of this is 0:04:36.200 --> 0:04:41.360 that if they view an action as as being fraudulent 0:04:41.560 --> 0:04:47.680 or market manipulation, they are going to aggressively pursue that behavior. 0:04:48.000 --> 0:04:52.040 What about this action is being viewed as potentially fraudulent 0:04:52.200 --> 0:04:55.240 or a manipulation of markets? And who are the players involved? 0:04:57.279 --> 0:05:01.160 So there are a few at this point. The Department 0:05:01.279 --> 0:05:08.040 of Justice has brought a case alleging wire fraud, commodities fraud, 0:05:08.040 --> 0:05:13.240 and commodities manipulation. The Commodity Future and Trading Commission has 0:05:13.279 --> 0:05:17.000 brought its own case, and the Securities and Exchange Commission 0:05:17.480 --> 0:05:21.520 late last month brought a case alleging securities fraud against 0:05:21.560 --> 0:05:25.240 Mr Eisenberg. That's a lot of people and a lot 0:05:25.240 --> 0:05:30.039 of allegations. Why are there so many players here? I think? 0:05:30.320 --> 0:05:34.480 I mean from the d j's perspective, those are criminal charges, 0:05:34.839 --> 0:05:38.039 and then you have the CFTC and the SEC are 0:05:39.000 --> 0:05:44.039 these regulatory agencies. Those are civil complaints where they could 0:05:44.040 --> 0:05:48.839 in theory, recoup some of the allegedly ill gotten gains 0:05:48.839 --> 0:05:52.440 from this alleged scheme. Their theory of the cases is 0:05:52.480 --> 0:05:56.680 all pretty similar that the idea is he artificially propped 0:05:56.760 --> 0:06:00.320 up the price of the mango token, increase, seen the 0:06:00.360 --> 0:06:06.920 price of these mango perpetual futures, and ultimately walked away 0:06:07.000 --> 0:06:09.680 with somewhere in the neighbor of fifty million dollars. When 0:06:09.680 --> 0:06:12.839 I was setting done, and it sounds to me like 0:06:12.880 --> 0:06:15.640 there's this interesting I don't want to use the word 0:06:15.680 --> 0:06:19.839 tension necessarily, but there's this interesting distinction between like the 0:06:19.880 --> 0:06:22.880 crypto perspective on this as Mouao is describing it, which is, 0:06:23.320 --> 0:06:27.160 you know, these contracts for this particular protocol were set 0:06:27.200 --> 0:06:30.200 up in a way that allowed what Eisenberg to be done, 0:06:30.800 --> 0:06:33.720 and the regulators are coming in and they're like, sure, 0:06:33.800 --> 0:06:36.600 but the spirit of the actual laws that play hair 0:06:36.880 --> 0:06:40.200 would scream that this looks to be something closer to 0:06:40.240 --> 0:06:45.000 fraud and market manipulation. How have regulators in your experience 0:06:45.240 --> 0:06:47.960 had to deal with sort of translating some of these 0:06:48.000 --> 0:06:53.360 crypto native concepts into policy, legislation, law enforcement. I think 0:06:53.360 --> 0:06:57.400 from the from the DJ's perspective, they describe this as 0:06:58.440 --> 0:07:01.960 the defied finance plan forms. This is a new frontier 0:07:02.480 --> 0:07:05.640 of old school financial crimes. I think from their perspective, 0:07:06.120 --> 0:07:09.480 if you did the types of actions that he is 0:07:09.480 --> 0:07:14.080 accused of doing in a traditional market, that is going 0:07:14.120 --> 0:07:19.120 to be market manipulation, and um wouldn't be a whole 0:07:19.120 --> 0:07:23.000 lot of debate. I don't think about from the DJ's perspective, 0:07:23.440 --> 0:07:26.200 um and that they pursue charges. I think for them 0:07:26.240 --> 0:07:29.880 it's it's simply a matter of the same type of 0:07:29.920 --> 0:07:34.160 conduct in a new platform. From their perspective, it's it's 0:07:34.240 --> 0:07:37.480 quite similar now we are. While we may have said 0:07:37.480 --> 0:07:39.440 at the beginning that you know, like this idea of 0:07:39.480 --> 0:07:42.360 code is law is very widespread, a lot of people 0:07:42.400 --> 0:07:45.200 believe in it, the actual reaction to what happened to 0:07:45.240 --> 0:07:49.160 Mango Markets was far from unanimous, right. You definitely had 0:07:49.200 --> 0:07:51.760 people who were like, Nope, this this is not acceptable 0:07:51.760 --> 0:07:54.520 and we can't keep allowing things and defied to go 0:07:54.680 --> 0:07:58.320 this way. In addition to of course Eisenberg himself who 0:07:58.400 --> 0:08:01.720 at the time was like, well, you know, this is 0:08:01.800 --> 0:08:04.320 this is what I was able to do. So how 0:08:04.360 --> 0:08:07.560 do you, as someone reporting on this attempt to reconcile 0:08:07.680 --> 0:08:12.360 these differing perspectives as that was very interesting Previously when 0:08:12.400 --> 0:08:17.040 there's any sort of charges from regulators or prosecutors on 0:08:17.480 --> 0:08:22.360 DeFi related behaviors, we often see sort of resistance from 0:08:22.400 --> 0:08:26.080 the community and you know, as again cold is law 0:08:26.120 --> 0:08:28.800 and they believe that this is out of out of 0:08:28.840 --> 0:08:33.160 the regulation, out of regulators, sort of like field. UM. 0:08:33.200 --> 0:08:36.120 I think today, given what happened in the past year 0:08:36.160 --> 0:08:40.560 in Town two, which not exactly they're the most beautiful 0:08:40.640 --> 0:08:43.680 year for crypto in general, we saw at all kinds 0:08:43.720 --> 0:08:47.120 of frauds happening, and I think cryptal in general is 0:08:47.200 --> 0:08:50.520 quite humbled from all the experience in two, and they 0:08:50.559 --> 0:08:54.120 realize that it is almost sort of like naive to 0:08:54.200 --> 0:08:57.800 think today that crypto is outside the law, and people 0:08:57.800 --> 0:09:01.880 are actually hoping there's more clear locations from regulators on 0:09:02.120 --> 0:09:05.240 what it should be, um, what's legal and what's illegal 0:09:05.360 --> 0:09:07.920 and things like that. And in I think in this 0:09:08.120 --> 0:09:13.640 case specifically, given Eisenberg's own personality and how he sort 0:09:13.679 --> 0:09:16.320 of like bragged about his all his like you know, 0:09:16.440 --> 0:09:20.319 highly profitable trade trades in the past. People are very 0:09:20.360 --> 0:09:23.760 happy about that, you know, like the prosecutors are going 0:09:23.920 --> 0:09:27.600 after him and showing kind of example that they also 0:09:27.640 --> 0:09:32.160 make a distinguistinguished between what he was doing versus you know, 0:09:32.240 --> 0:09:34.800 quote is law, because in I think a lot of 0:09:34.840 --> 0:09:39.240 defail advocates his behavior there isn't like a reflection of 0:09:39.400 --> 0:09:42.040 code's law in crypto and he's what he's trying to 0:09:42.080 --> 0:09:45.679 do is code is above law, which is different. Well, 0:09:46.000 --> 0:09:49.120 I've asked you this question before, but is there really 0:09:49.160 --> 0:09:53.520 a middle ground, like is it possible to have defy 0:09:53.559 --> 0:09:58.120 with trap FI characteristics or Matthew, is it possible to 0:09:58.200 --> 0:10:02.080 have different types of banking with some of the you know, 0:10:02.520 --> 0:10:05.000 perceived innovations of crypto or we're always going to be 0:10:05.040 --> 0:10:07.400 talking about two totally different languages and the people who 0:10:07.760 --> 0:10:09.640 just like look at each other like they're both aliens 0:10:09.640 --> 0:10:12.760 on either side of this from covering defy self. The 0:10:12.760 --> 0:10:16.120 trend I'm seeing today is that I think DeFi is 0:10:16.440 --> 0:10:20.800 getting more and more sort of similar to traditional finance. 0:10:21.280 --> 0:10:23.000 I think a good point is that a lot of 0:10:23.040 --> 0:10:26.439 people are talking about so called permission to defy, which 0:10:26.679 --> 0:10:31.200 is the DeFi projects. That's white listing certain players into 0:10:31.320 --> 0:10:35.840 participating projects while after they were I think they went 0:10:35.920 --> 0:10:39.439 through such as like a m L and uh other 0:10:39.559 --> 0:10:42.880 different rules before they can't do that. So I think 0:10:43.000 --> 0:10:45.480 at this point, first of all, we are in a 0:10:45.520 --> 0:10:48.600 bear market, that we are far away from the old 0:10:48.720 --> 0:10:50.800 like Defy summer, when there was a lot of interests, 0:10:50.840 --> 0:10:52.600 a lot of retail interests, a lot of money in 0:10:52.600 --> 0:10:55.840 the space, and right now they have little interests in 0:10:55.880 --> 0:10:58.640 space in general, and people are looking for real innovations 0:10:58.679 --> 0:11:02.400 also called like real yields, real high real returns in 0:11:02.440 --> 0:11:05.319 the space other than just a bunch of like random 0:11:05.360 --> 0:11:10.479 tokens and posting sort of like fun or like unrealistic 0:11:10.640 --> 0:11:13.760 like high numbers out there. But in order to bring 0:11:13.840 --> 0:11:17.800 real I think returns or yields into Defy, you have 0:11:17.960 --> 0:11:21.800 to have sort of regulations, regulatory framework around it for 0:11:22.280 --> 0:11:25.959 I think institutions to participate. I think defied people, as 0:11:25.960 --> 0:11:29.400 I mentioned earlier, they're they're really humbled by the experience 0:11:29.440 --> 0:11:34.359 in two and they're sort of more like proactively engaging 0:11:34.720 --> 0:11:37.400 I think regulators, not just in the US, I think 0:11:37.480 --> 0:11:40.000 around the globe, because you know, after crypto is like 0:11:40.000 --> 0:11:43.160 global even there's might be a litteral slowdown in the 0:11:43.280 --> 0:11:46.920 US in terms like having a regulatory framework around how 0:11:46.920 --> 0:11:49.720 to to D five, But I think in other parts 0:11:49.760 --> 0:11:52.640 of the world too, I saw defied people. They're talking 0:11:52.679 --> 0:11:56.120 to a lot of regulators around word about how they 0:11:56.160 --> 0:12:00.440 can sort of encouraging an environment that can allow more banks, 0:12:00.559 --> 0:12:04.240 allowing more investment banks as well to get into this space. 0:12:04.800 --> 0:12:08.040 Up next, more from Bloomberg Report Muya Shan and Bloomberg 0:12:08.080 --> 0:12:20.959 Log correspondent Matthew Boltman will be right back. How are 0:12:21.000 --> 0:12:25.840 you seeing regulators approach this question of whether traditional finance 0:12:25.880 --> 0:12:29.080 should take on any defied characteristics. I think one of 0:12:29.120 --> 0:12:33.000 the interesting things from this complaint in particular is the 0:12:33.040 --> 0:12:38.160 SEC's view that the kind of the governance of the 0:12:38.200 --> 0:12:42.000 mango markets actually was not decentralized, that the power was 0:12:42.040 --> 0:12:46.359 concentrated in the hands of a limited number of individuals. 0:12:46.600 --> 0:12:50.760 And it's not the first complaint that we've seen along 0:12:50.800 --> 0:12:55.600 those lines. I'm thinking of another CFTC case. But at 0:12:55.640 --> 0:12:59.760 least some of these projects that these regulators are pursuing, 0:13:00.960 --> 0:13:05.479 in their view, they're kind of decorated in this new technology, 0:13:05.559 --> 0:13:08.359 but a lot of it is from their their perspective 0:13:08.400 --> 0:13:13.040 traditional fraud, and it clothes itself is decentralized, but actually 0:13:13.080 --> 0:13:15.920 the power is kind of concentrated. So I'm hearing two 0:13:16.040 --> 0:13:17.959 very interesting things from you that I want to make 0:13:18.080 --> 0:13:21.760 sure to kind of like real. The reason emphasize the 0:13:21.800 --> 0:13:26.760 first is you're saying that from the SECS perspective, from 0:13:26.760 --> 0:13:31.400 the u S regulatory perspective, this thing that presents itself 0:13:31.520 --> 0:13:35.319 as you know, we are defied, We are decentralized. From 0:13:35.320 --> 0:13:38.520 the SEC's perspective, They're like, mmmm, you look very much 0:13:38.640 --> 0:13:41.360 like these other kinds of entities that we continue to 0:13:41.400 --> 0:13:44.920 be centralized. The ways that you make decisions are concentrated 0:13:44.920 --> 0:13:48.800 in the hands of a few people, and the services 0:13:48.880 --> 0:13:52.160 or the products that you're offering also look like things 0:13:52.200 --> 0:13:55.160 that we would traditionally have remit over. Is that correct? 0:13:55.160 --> 0:13:59.920 As the first part this Mango respect to the Mango markets, absolutely, 0:14:00.120 --> 0:14:02.080 with respect of this particular project. Yes. One of the 0:14:02.120 --> 0:14:05.000 things that they had talked about the Mango token, which 0:14:05.080 --> 0:14:07.840 is kind of the central token that's involved in this 0:14:08.000 --> 0:14:12.520 alleged scheme. There were governance rights attached to that token, 0:14:13.040 --> 0:14:16.640 which in theory would give any countless people a say 0:14:16.640 --> 0:14:19.160 and how the project is run as you see in 0:14:19.240 --> 0:14:23.440 its complaint, called those governance rights illusory and said really 0:14:23.520 --> 0:14:25.680 that the power is concentrated in the creators of the 0:14:25.680 --> 0:14:28.040 mango market. Got it, and moal, if I could just 0:14:28.040 --> 0:14:32.360 put the second piece to you, that's very different from 0:14:32.880 --> 0:14:35.920 how the folks and Defy are positioning themselves. Right, So like, 0:14:35.960 --> 0:14:40.200 even with this idea of permissioned or you know, things 0:14:40.200 --> 0:14:43.160 that are subject to a higher bar, their argument is 0:14:43.200 --> 0:14:45.720 still we couldn't be more different from the banks, We 0:14:45.760 --> 0:14:51.000 couldn't be more different from these traditional securities and lending providers. Yeah, 0:14:51.080 --> 0:14:54.040 I think I would agree with that based on everyone 0:14:54.200 --> 0:14:57.440 I talked to in the past few weeks. It's just 0:14:57.520 --> 0:15:00.920 like I think an easy example is if you're creating 0:15:00.920 --> 0:15:04.920 a doubt, which is a decentralized autonomous organization, which I 0:15:04.920 --> 0:15:09.080 think is like device way of a traditional corporate entasy. 0:15:09.400 --> 0:15:12.160 It sounds like you know it is, this is like 0:15:12.360 --> 0:15:15.240 nothing like a corporate and you know it is. You 0:15:15.240 --> 0:15:18.160 shouldn't be regulated. But as long as you have a 0:15:18.160 --> 0:15:21.040 group of people who are making money in this case, 0:15:21.520 --> 0:15:23.800 that you do need to set up a bank account 0:15:24.120 --> 0:15:27.000 and where exactly you're gonna stay set a bank account 0:15:27.240 --> 0:15:30.840 if it's onshore in the US, so offshore somewhere else. 0:15:31.120 --> 0:15:33.480 Wherever it is, you know, it has the entity, it 0:15:33.560 --> 0:15:37.600 has some sort of like regulations like being involved. And 0:15:37.640 --> 0:15:41.600 what I'm seeing today is that if you're defied project 0:15:41.760 --> 0:15:45.280 that do not have a lawyer, that you're definitely constantly 0:15:45.320 --> 0:15:48.520 looking for a lawyer or any sort of legal service 0:15:48.680 --> 0:15:53.360 around how you should managing your your protocol or how 0:15:53.400 --> 0:15:57.040 you should organize your doubt today, which I think will 0:15:57.120 --> 0:16:00.120 be a trend for twenty three. Yeah, if there's one 0:16:00.160 --> 0:16:01.480 thing we can take away from a lot of these 0:16:01.520 --> 0:16:03.960 episodes is that no matter what, the lawyers will make money. 0:16:04.440 --> 0:16:06.720 So on that note, thank you Muyal, and thank you 0:16:06.800 --> 0:16:08.480 very much, Matthew. It's been a pleasure having you both 0:16:08.480 --> 0:16:12.320 on the show. Thank you. That was Bloomberg Reports Muya 0:16:12.480 --> 0:16:16.280 Chen and Bloomberg Glow correspondent Matthew Boltman. You can find 0:16:16.280 --> 0:16:18.320 more of their reporting on the Bloomberg Terminal and on 0:16:18.360 --> 0:16:21.600 Bloomberg dot com and Bloomberg Law. For more, be sure 0:16:21.640 --> 0:16:29.600 to check out or twice weekly newsletter Bloomberg Crypto. This 0:16:29.680 --> 0:16:32.720 is Bloomberg Crypto, a daily podcast from Bloomberg and I 0:16:32.800 --> 0:16:36.040 Heart Radio. For more shows from I Heart Radio, visit 0:16:36.080 --> 0:16:39.120 the I Heart Radio app, Apple Podcasts, or wherever you 0:16:39.160 --> 0:16:43.160 get your podcasts. Send us your comments, questions, or suggestions 0:16:43.200 --> 0:16:48.880 for the show to Crypto at bloomberg dot net. The 0:16:48.920 --> 0:16:52.480 supervising producer of Bloomberg Crypto is Vicky very Galina. Our 0:16:52.520 --> 0:16:56.360 senior producer is Janet Babin. Our producers are Mohammed Faruke 0:16:56.400 --> 0:16:59.800 and Sharon Burriro. Our associate producers are Ty Butler and 0:17:00.040 --> 0:17:04.159 is This on desta wonder At is our engineer. Original 0:17:04.240 --> 0:17:09.040 music by Leo Sidron. I'm Stacy Marie Schmaal. We'll be 0:17:09.080 --> 0:17:09.639 back tomorrow.