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Avi Eisenberg's Alleged $110M DeFi Fraud Trial May Showcase Government's New Approach to Crypto Scams

Eisenberg's trial to scrutinize DeFi and the government's legal approach

The criminal fraud and manipulation trial of crypto trader Avi Eisenberg, set to commence on Tuesday, is expected to shine a spotlight on the decentralized finance (DeFi) sector and challenge the government's approach to prosecuting complex crypto trading activities as straightforward fraud cases.

Key takeaways: 

  1. Eisenberg’s ‘trading strategy’ resulted in an alleged token price manipulation. 
  2. The case may serve as a precedent for further DeFi-related cases. 

Eisenberg stands accused of illegally exploiting Mango Markets' futures contracts in October 2022 by manipulating the price of the MNGO token and subsequently borrowing almost all of Mango's deposits against his position. As a result, he allegedly absconded with $110 million in cryptocurrencies that other users had deposited on the platform. Although he later returned a portion of the funds in exchange for a promise that Mango's backers would not pursue his prosecution, that promise was ultimately broken.

The trial represents a significant development in the government's efforts to regulate alleged crimes in DeFi, a sector of the crypto trading space governed by the concept of "code is law." Unlike centralized finance platforms such as Coinbase, Mango Markets operates on smart contracts, with trades, borrowings, and loans executing automatically.

Upcoming testimony and legal arguments

During Monday's court proceedings, prosecutors and defense attorneys hinted at upcoming testimony from Mango's founder, Dafydd Durairaj, who reportedly consulted with a ransomware negotiator following Eisenberg's trade. Prosecutors argued that this fact could help the jury understand that Durairaj viewed the negotiations as a hostage situation rather than an "arm's length" deal between two parties.

Judge Arun Subramanian partially sided with Eisenberg's defense team, instructing the government not to mention the ransomware negotiator to avoid prejudicing the jury. However, he stated that if the defense argues that the negotiations were "arm's length," the prosecutors could introduce the topic.

The parties also debated the use of the word "manipulation," its potential use by witnesses, and its presence in online terms-of-service documents. Additionally, they clashed over the phrasing of what traders on Mango Markets were "obliged" to do when operating on the site, questioning whether the term referred to a legal concept or the outcomes of executing a transaction on a smart contract.

Philosophical and practical questions in DeFi trading

Eisenberg's case delves into the philosophical and practical questions surrounding trading tokens on permissionless blockchains. It is the first federal criminal trial to involve a DeFi trader accused of violating U.S. law in a sector that once considered itself beyond the reach of traditional legal frameworks.

The trial is expected to test the government's recent strategy of presenting complex crypto misdeeds as simple cases of fraud, an approach taken in the prosecution of Sam Bankman-Fried and the civil fraud case against Terraform Labs and Do Kwon.

As the trial unfolds over the next two weeks, it will likely set important precedents for the legal treatment of DeFi and crypto trading activities, while also highlighting the challenges of applying existing legal frameworks.