Speaker 1: This is Bloomberg Crypto, a daily Bloomberg Ihad podcast, and
Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.
Speaker 1: It's Thursday, February nine. One of the more interesting phrases
Speaker 1: used by folks in crypto is this one code is law.
Speaker 1: Think of it this way. Under the idea that code
Speaker 1: is law, what governs whether something, say, a transaction is
Speaker 1: valid or not isn't the whims or caprices of any
Speaker 1: individual regulator or government. Instead, what determines whether something is acceptable, permissible,
Speaker 1: or appropriate is what's written into the software that enabled
Speaker 1: that transaction in the first place. It's another way of
Speaker 1: thinking about the so called immutability of the blockchain. If
Speaker 1: the blockchain says it, then that's what's going to be true.
Speaker 1: That's what's going to remain. Sounds logical, right, But what
Speaker 1: happens when the code doesn't do what you're expecting it
Speaker 1: to do, or when someone or some party exploits loopholes
Speaker 1: in the logic of that software for their own personal
Speaker 1: financial gain. That's what we're going to talk about today.
Speaker 1: The interesting precedent set by a crypto trader named Abraham Eisenberg,
Speaker 1: who exploited the idea of code is law for millions
Speaker 1: of dollars and then was arrested and charged with fraud.
Speaker 1: Joining me now to break down what the latest charges
Speaker 1: mean is Bloomberg reported, Muya Chen and Bloomberg Lower correspondent
Speaker 1: Matthew Boltman. Matthew, Muya, Welcome back to the show, Muya,
Speaker 1: While come to the show, Matthew, So Mouel, I want
Speaker 1: to start with you. We have talked about this idea
Speaker 1: of code is law. We've actually had folks on the
Speaker 1: show previously talking about this Mango Markets hack. But what's
Speaker 1: been happening recently? Why does this continue to be a
Speaker 1: big deal as it were for players in crypto. I
Speaker 1: think let's just step back on what happened, as we
Speaker 1: all now that Einsberg was sort of involved in several
Speaker 1: I think criminal complaints right now, both SEC as well
Speaker 1: as I think the prosecutors in York has sort of
Speaker 1: suit him for several cases. And maybe we want to
Speaker 1: step back on what happened exactly and why it's important.
Speaker 1: The big part is that Einsberg sort of was suited
Speaker 1: for using to Mango Markets accounts that he controlled the
Speaker 1: manipulates the prices of Mango perpetro swaps, which are features
Speaker 1: that allowed traders to keep their positions open. And what
Speaker 1: is the man Gold market. It is a lending project
Speaker 1: that's based on Salona blockchain that allows people to post
Speaker 1: certain tokens in um. This example, we can post Mango tokens,
Speaker 1: which is a native token of Mango markets, to borrow
Speaker 1: other type of tokens for example stable coins and things
Speaker 1: like that. Now, what are some of the particular crypto
Speaker 1: issues that are at played here, Like how has this
Speaker 1: been playing with folks into centralized financer defied Because we're
Speaker 1: going to get into some of the more legal arguments
Speaker 1: very shortly for me um covering Mango markets hack. The
Speaker 1: biggest interesting part is that it's very big. Despite what
Speaker 1: he climbed himself, everything did in the past was like
Speaker 1: he was just following the code that was designed to supposedly.
Speaker 1: How it works that he has received very little support
Speaker 1: from DeFi community in general and Defamy as we know
Speaker 1: is they sort of have this belief in code is
Speaker 1: law essos, which is a belief that author in crypto
Speaker 1: is the pieces of a coat that underlies all the projects. However,
Speaker 1: as the court is designed and people were just following it, Matthew,
Speaker 1: How do regulators feel about this idea that someone can
Speaker 1: allegedly exploit a protocol a marketplace for you know, tens
Speaker 1: of millions of dollars and then say well, this is
Speaker 1: just what your software allowed me to do. The law
Speaker 1: enforcement and the regulators would disagree. I think that is
Speaker 1: maybe one of the big takeaways from kind of the
Speaker 1: the legal action that has has come of this is
Speaker 1: that if they view an action as as being fraudulent
Speaker 1: or market manipulation, they are going to aggressively pursue that behavior.
Speaker 1: What about this action is being viewed as potentially fraudulent
Speaker 1: or a manipulation of markets? And who are the players involved?
Speaker 1: So there are a few at this point. The Department
Speaker 1: of Justice has brought a case alleging wire fraud, commodities fraud,
Speaker 1: and commodities manipulation. The Commodity Future and Trading Commission has
Speaker 1: brought its own case, and the Securities and Exchange Commission
Speaker 1: late last month brought a case alleging securities fraud against
Speaker 1: Mr Eisenberg. That's a lot of people and a lot
Speaker 1: of allegations. Why are there so many players here? I think?
Speaker 1: I mean from the d j's perspective, those are criminal charges,
Speaker 1: and then you have the CFTC and the SEC are
Speaker 1: these regulatory agencies. Those are civil complaints where they could
Speaker 1: in theory, recoup some of the allegedly ill gotten gains
Speaker 1: from this alleged scheme. Their theory of the cases is
Speaker 1: all pretty similar that the idea is he artificially propped
Speaker 1: up the price of the mango token, increase, seen the
Speaker 1: price of these mango perpetual futures, and ultimately walked away
Speaker 1: with somewhere in the neighbor of fifty million dollars. When
Speaker 1: I was setting done, and it sounds to me like
Speaker 1: there's this interesting I don't want to use the word
Speaker 1: tension necessarily, but there's this interesting distinction between like the
Speaker 1: crypto perspective on this as Mouao is describing it, which is,
Speaker 1: you know, these contracts for this particular protocol were set
Speaker 1: up in a way that allowed what Eisenberg to be done,
Speaker 1: and the regulators are coming in and they're like, sure,
Speaker 1: but the spirit of the actual laws that play hair
Speaker 1: would scream that this looks to be something closer to
Speaker 1: fraud and market manipulation. How have regulators in your experience
Speaker 1: had to deal with sort of translating some of these
Speaker 1: crypto native concepts into policy, legislation, law enforcement. I think
Speaker 1: from the from the DJ's perspective, they describe this as
Speaker 1: the defied finance plan forms. This is a new frontier
Speaker 1: of old school financial crimes. I think from their perspective,
Speaker 1: if you did the types of actions that he is
Speaker 1: accused of doing in a traditional market, that is going
Speaker 1: to be market manipulation, and um wouldn't be a whole
Speaker 1: lot of debate. I don't think about from the DJ's perspective,
Speaker 1: um and that they pursue charges. I think for them
Speaker 1: it's it's simply a matter of the same type of
Speaker 1: conduct in a new platform. From their perspective, it's it's
Speaker 1: quite similar now we are. While we may have said
Speaker 1: at the beginning that you know, like this idea of
Speaker 1: code is law is very widespread, a lot of people
Speaker 1: believe in it, the actual reaction to what happened to
Speaker 1: Mango Markets was far from unanimous, right. You definitely had
Speaker 1: people who were like, Nope, this this is not acceptable
Speaker 1: and we can't keep allowing things and defied to go
Speaker 1: this way. In addition to of course Eisenberg himself who
Speaker 1: at the time was like, well, you know, this is
Speaker 1: this is what I was able to do. So how
Speaker 1: do you, as someone reporting on this attempt to reconcile
Speaker 1: these differing perspectives as that was very interesting Previously when
Speaker 1: there's any sort of charges from regulators or prosecutors on
Speaker 1: DeFi related behaviors, we often see sort of resistance from
Speaker 1: the community and you know, as again cold is law
Speaker 1: and they believe that this is out of out of
Speaker 1: the regulation, out of regulators, sort of like field. UM.
Speaker 1: I think today, given what happened in the past year
Speaker 1: in Town two, which not exactly they're the most beautiful
Speaker 1: year for crypto in general, we saw at all kinds
Speaker 1: of frauds happening, and I think cryptal in general is
Speaker 1: quite humbled from all the experience in two, and they
Speaker 1: realize that it is almost sort of like naive to
Speaker 1: think today that crypto is outside the law, and people
Speaker 1: are actually hoping there's more clear locations from regulators on
Speaker 1: what it should be, um, what's legal and what's illegal
Speaker 1: and things like that. And in I think in this
Speaker 1: case specifically, given Eisenberg's own personality and how he sort
Speaker 1: of like bragged about his all his like you know,
Speaker 1: highly profitable trade trades in the past. People are very
Speaker 1: happy about that, you know, like the prosecutors are going
Speaker 1: after him and showing kind of example that they also
Speaker 1: make a distinguistinguished between what he was doing versus you know,
Speaker 1: quote is law, because in I think a lot of
Speaker 1: defail advocates his behavior there isn't like a reflection of
Speaker 1: code's law in crypto and he's what he's trying to
Speaker 1: do is code is above law, which is different. Well,
Speaker 1: I've asked you this question before, but is there really
Speaker 1: a middle ground, like is it possible to have defy
Speaker 1: with trap FI characteristics or Matthew, is it possible to
Speaker 1: have different types of banking with some of the you know,
Speaker 1: perceived innovations of crypto or we're always going to be
Speaker 1: talking about two totally different languages and the people who
Speaker 1: just like look at each other like they're both aliens
Speaker 1: on either side of this from covering defy self. The
Speaker 1: trend I'm seeing today is that I think DeFi is
Speaker 1: getting more and more sort of similar to traditional finance.
Speaker 1: I think a good point is that a lot of
Speaker 1: people are talking about so called permission to defy, which
Speaker 1: is the DeFi projects. That's white listing certain players into
Speaker 1: participating projects while after they were I think they went
Speaker 1: through such as like a m L and uh other
Speaker 1: different rules before they can't do that. So I think
Speaker 1: at this point, first of all, we are in a
Speaker 1: bear market, that we are far away from the old
Speaker 1: like Defy summer, when there was a lot of interests,
Speaker 1: a lot of retail interests, a lot of money in
Speaker 1: the space, and right now they have little interests in
Speaker 1: space in general, and people are looking for real innovations
Speaker 1: also called like real yields, real high real returns in
Speaker 1: the space other than just a bunch of like random
Speaker 1: tokens and posting sort of like fun or like unrealistic
Speaker 1: like high numbers out there. But in order to bring
Speaker 1: real I think returns or yields into Defy, you have
Speaker 1: to have sort of regulations, regulatory framework around it for
Speaker 1: I think institutions to participate. I think defied people, as
Speaker 1: I mentioned earlier, they're they're really humbled by the experience
Speaker 1: in two and they're sort of more like proactively engaging
Speaker 1: I think regulators, not just in the US, I think
Speaker 1: around the globe, because you know, after crypto is like
Speaker 1: global even there's might be a litteral slowdown in the
Speaker 1: US in terms like having a regulatory framework around how
Speaker 1: to to D five, But I think in other parts
Speaker 1: of the world too, I saw defied people. They're talking
Speaker 1: to a lot of regulators around word about how they
Speaker 1: can sort of encouraging an environment that can allow more banks,
Speaker 1: allowing more investment banks as well to get into this space.
Speaker 1: Up next, more from Bloomberg Report Muya Shan and Bloomberg
Speaker 1: Log correspondent Matthew Boltman will be right back. How are
Speaker 1: you seeing regulators approach this question of whether traditional finance
Speaker 1: should take on any defied characteristics. I think one of
Speaker 1: the interesting things from this complaint in particular is the
Speaker 1: SEC's view that the kind of the governance of the
Speaker 1: mango markets actually was not decentralized, that the power was
Speaker 1: concentrated in the hands of a limited number of individuals.
Speaker 1: And it's not the first complaint that we've seen along
Speaker 1: those lines. I'm thinking of another CFTC case. But at
Speaker 1: least some of these projects that these regulators are pursuing,
Speaker 1: in their view, they're kind of decorated in this new technology,
Speaker 1: but a lot of it is from their their perspective
Speaker 1: traditional fraud, and it clothes itself is decentralized, but actually
Speaker 1: the power is kind of concentrated. So I'm hearing two
Speaker 1: very interesting things from you that I want to make
Speaker 1: sure to kind of like real. The reason emphasize the
Speaker 1: first is you're saying that from the SECS perspective, from
Speaker 1: the u S regulatory perspective, this thing that presents itself
Speaker 1: as you know, we are defied, We are decentralized. From
Speaker 1: the SEC's perspective, They're like, mmmm, you look very much
Speaker 1: like these other kinds of entities that we continue to
Speaker 1: be centralized. The ways that you make decisions are concentrated
Speaker 1: in the hands of a few people, and the services
Speaker 1: or the products that you're offering also look like things
Speaker 1: that we would traditionally have remit over. Is that correct?
Speaker 1: As the first part this Mango respect to the Mango markets, absolutely,
Speaker 1: with respect of this particular project. Yes. One of the
Speaker 1: things that they had talked about the Mango token, which
Speaker 1: is kind of the central token that's involved in this
Speaker 1: alleged scheme. There were governance rights attached to that token,
Speaker 1: which in theory would give any countless people a say
Speaker 1: and how the project is run as you see in
Speaker 1: its complaint, called those governance rights illusory and said really
Speaker 1: that the power is concentrated in the creators of the
Speaker 1: mango market. Got it, and moal, if I could just
Speaker 1: put the second piece to you, that's very different from
Speaker 1: how the folks and Defy are positioning themselves. Right, So like,
Speaker 1: even with this idea of permissioned or you know, things
Speaker 1: that are subject to a higher bar, their argument is
Speaker 1: still we couldn't be more different from the banks, We
Speaker 1: couldn't be more different from these traditional securities and lending providers. Yeah,
Speaker 1: I think I would agree with that based on everyone
Speaker 1: I talked to in the past few weeks. It's just
Speaker 1: like I think an easy example is if you're creating
Speaker 1: a doubt, which is a decentralized autonomous organization, which I
Speaker 1: think is like device way of a traditional corporate entasy.
Speaker 1: It sounds like you know it is, this is like
Speaker 1: nothing like a corporate and you know it is. You
Speaker 1: shouldn't be regulated. But as long as you have a
Speaker 1: group of people who are making money in this case,
Speaker 1: that you do need to set up a bank account
Speaker 1: and where exactly you're gonna stay set a bank account
Speaker 1: if it's onshore in the US, so offshore somewhere else.
Speaker 1: Wherever it is, you know, it has the entity, it
Speaker 1: has some sort of like regulations like being involved. And
Speaker 1: what I'm seeing today is that if you're defied project
Speaker 1: that do not have a lawyer, that you're definitely constantly
Speaker 1: looking for a lawyer or any sort of legal service
Speaker 1: around how you should managing your your protocol or how
Speaker 1: you should organize your doubt today, which I think will
Speaker 1: be a trend for twenty three. Yeah, if there's one
Speaker 1: thing we can take away from a lot of these
Speaker 1: episodes is that no matter what, the lawyers will make money.
Speaker 1: So on that note, thank you Muyal, and thank you
Speaker 1: very much, Matthew. It's been a pleasure having you both
Speaker 1: on the show. Thank you. That was Bloomberg Reports Muya
Speaker 1: Chen and Bloomberg Glow correspondent Matthew Boltman. You can find
Speaker 1: more of their reporting on the Bloomberg Terminal and on
Speaker 1: Bloomberg dot com and Bloomberg Law. For more, be sure
Speaker 1: to check out or twice weekly newsletter Bloomberg Crypto. This
Speaker 1: is Bloomberg Crypto, a daily podcast from Bloomberg and I
Speaker 1: Heart Radio. For more shows from I Heart Radio, visit
Speaker 1: the I Heart Radio app, Apple Podcasts, or wherever you
Speaker 1: get your podcasts. Send us your comments, questions, or suggestions
Speaker 1: for the show to Crypto at bloomberg dot net. The
Speaker 1: supervising producer of Bloomberg Crypto is Vicky very Galina. Our
Speaker 1: senior producer is Janet Babin. Our producers are Mohammed Faruke
Speaker 1: and Sharon Burriro. Our associate producers are Ty Butler and
Speaker 1: is This on desta wonder At is our engineer. Original
Speaker 1: music by Leo Sidron. I'm Stacy Marie Schmaal. We'll be
Speaker 1: back tomorrow.