Thursday, June 15, 2023

Code Isn't Law: An Analogy

In Trader Charged in $110 Million Market Scam Faces Dec. 4 Trial David Voreacos reports that Avraham Eisenberg is now in the "find out" phase:
Prosecutors claim Eisenberg manipulated Mango Markets futures contracts on Oct. 11, when he drove up the price of swaps by 1,300%. He used them to borrow about $110 million of cryptocurrency from other Mango depositors, the US alleges.

Four days later he posted on Twitter: “I was involved with a team that operated a highly profitable trading strategy last week.” He also said he believed “all of our actions were legal open market actions, using the protocol as designed.”
Below the fold, my analogy

Consider the specification of the front door of a house:
  • It has three states, open, closed and locked.
  • In the closed or locked states no-one can pass through.
  • In the open state anyone can pass through.
  • Someone with a key can change the state from closed to locked.
  • Someone with a key can change the state from locked to closed.
  • Anyone can change the state from closed to open.
  • Anyone can change the state from open to closed.
Compare these two cases:
  1. You are passing a house with a front door. You do not have a key. It is open. You enter the house, look around, and leave the house.
  2. You are passing a house with a front door. You do not have a key. It is open. You enter the house, look around and see a gold bar. You pick up the gold bar and leave the house.
In case 1 you have committed trespass, but are unlikely to be prosecuted. After all, you might be a good Samaritan seeing if anyone needed help.

In case 2 you have committed theft, and are very likely to be prosecuted. The definition of theft is:
A theft occurs any time there in an unauthorized taking of property from another with the intent to permanently deprive that person of the property.
Note that in both cases the front door performed exactly as specified. It was open and it permitted you to pass through. The difference has nothing to do with the front door performing as specified; it is what you did with the correctly performing front door.

Eisenberg claims that he found an open door, passed through, took valuable property that did not belong to him, and left. Arguing that because the door functioned as specified it was legal for him to take the property isn't going to be an effective defense.


David. said...

In just the last four days Molly White has posted the following instances of Code Is Law:

7/7) Hackers swipe pricey NFTs after compromising Gutter Cat Gang Twitter profile.

7/9) Arcadia Finance exploited.

7/10) Arkham Intelligence referral program exposes user emails.

7/11) New Rodeo Finance project exploited for the second time in one week.

7/11) Platypus Finance hacked for the second time.

David. said...

Allyson Versprille reports that US Prosecutors Accuse Engineer of Stealing Millions of Dollars in Crypto on DeFi Platform:

"Shakeeb Ahmed, a 34-year-old senior security engineer for an international technology company, took advantage of a flaw in one of the exchange’s smart contracts to insert fake pricing data, generating about $9 million of inflated and unearned fees that he was able to withdraw in crypto, the US Attorney’s Office for the Southern District of New York said in an indictment unsealed Tuesday. Manhattan prosecutors also accused Ahmed of laundering the stolen funds through a series of complex transactions, including using overseas digital-asset exchanges.
“This case is another reminder that DeFi markets are not a Hobbesian marketplace where no laws exist and any conduct is fair game,” Ashok Ayyar, counsel at Ashbury Legal, said. “Theft is theft, and code is not law.”

The action against Ahmed has similarities to charges brought against trader Avraham Eisenberg, who is accused of stealing $110 million worth of cryptocurrency from DeFi exchange Mango Markets by manipulating the price of futures contracts."

David. said...

David Gerard and Amy Castor report that Avraham Eisenberg is in even more trouble:

"as Eisenberg well knows, he is not able to get back his devices because they contain child pornography. The Government found child pornography on one of the Cellphones by early February and has since found child pornography on the Laptop and the other operable Cellphone."

David. said...

Nicolas Weaver's Tornado Hit by the Department of Justice is an interesting discussion of the legal basis for the DoJ's indictment of Tornado Cash's founders:

"This isn’t quite the “novel theory” Storm’s defense attorneys claim, because Storm and Semenov are charged only with conspiracy: conspiracy to commit money laundering, conspiracy to run an unlicensed money transmission business, and conspiracy to violate sanctions on North Korea. They didn’t commit the crimes; they aided and abetted those who committed the actual crimes.

In Tornado Cash, the website itself is not actually transmitting any value. Instead the deposit goes directly from the user’s cryptocurrency wallet to the autonomous Tornado Cash smart contract, and the withdrawal is processed by an “independent” relayer. But the relayer is clearly a money transmitter, there are no licensed Tornado Cash relayers, the relayer is connected to the user through the Tornado Cash website and a service maintained by the Tornado Cash developers, and the Tornado Cash developers also profit indirectly (as to be a relayer you needed to buy TORN tokens, and these tokens are consumed in the relaying process).

As a consequence, Storm and his associates were not just “developers” of an “autonomous system” that was a money transmitter, but active and critical participants in these transactions, even if the transactions were executed by somebody else."

David. said...

In Crypto Scam Criminal Trial Tests ‘Code Is Law’ Claim by Trader by David Voreacos and Chris Dolmetsch reports that

"Prosecutors charged Avraham Eisenberg with manipulating Mango Markets futures contracts on Oct. 11, 2022, to boost the price of swaps by 1,300% in 20 minutes. He then “borrowed” from the exchange against the inflated value of those contracts, a move the government claims was a theft.

Jury selection begins Monday in New York federal court, where groundbreaking crypto cases have played out. FTX co-founder Sam Bankman-Fried was sentenced there last month to 25 years in prison for orchestrating a multibillion-dollar scheme, while Terraform Labs Pte. and co-founder Do Kwon were found liable Friday for fraud in civil trial over the firm’s 2022 collapse, which wiped out $40 billion in investor assets.
Prosecutors allege Eisenberg deceptively used two anonymous accounts at Mango markets to buy and sell himself futures contracts. Those contracts were based on the relative value of Mango’s token, known as MNGO, and a stablecoin called USDC. The price of the futures sales was set by computer programs, known as oracles, that looked at exchange rates on various crypto platforms.

On the afternoon of Oct. 11, 2022, Eisenberg funded each of his anonymous accounts with $5 million in USDC, prosecutors allege. He used one account to sell MNGO futures contracts, and another to buy them. He then bought a large number of MNGO tokens, which boosted their value relative to USDC, sending the futures contracts up by 1,300%.

Eisenberg then exploited a feature of the exchange that allowed participants to “borrow” against their holdings, withdrawing $110 million in cryptocurrencies from Mango Markets, but he had “no intention of repaying them,” the US charges. The price of MNGO futures contracts immediately collapsed."

David. said...

Matt Levine has a characteristically oblique take on the Eisenberg case:

"Have Nice Crypto — probably the bulk of it? — where manipulation is disfavored and government intervention is, at least in theory, welcomed. And have Fun Crypto for the applied game theorists to play their games against each other. Have a market that makes it explicit, in advance, on the web page, “Anything that you can do on our platform is allowed, and if the results are absurd then that is fun for you and bad for someone else, you’re on notice!”

I don’t think that would really keep out federal prosecutors — they’re free to argue that something allowed by the explicit rules of the market was nonetheless fraud — but it might help? As it is, actual crypto lives mostly in ambiguity, where some people think that code is law and others think that law is law."

David. said...

Ashley Berlanger's Crypto influencer guilty of $110M scheme that shut down Mango Markets show that code isn't law, at least in the US:

"A jury has unanimously convicted Avi Eisenberg in the US Department of Justice's first case involving cryptocurrency open-market manipulation, the DOJ announced Thursday.

The jury found Eisenberg guilty of commodities fraud, commodities market manipulation, and wire fraud in connection with the manipulation on a decentralized cryptocurrency exchange called Mango Markets.

Eisenberg is scheduled to be sentenced on July 29 and is facing "a maximum penalty of 10 years in prison on the commodities fraud count and the commodities manipulation count, and a maximum penalty of 20 years in prison on the wire fraud count," the DOJ said."

David. said...

Molly White's thoughtful take on the conviction of Tornado Cash developer Alexey Pertsev entitled Privacy, human rights, and Tornado Cash is a must-read:

"The service he helped to create enabled criminals to launder billions of dollars in illicit funds connected to massive hacks perpetrated by sophisticated cybercrime groups, ransomware operations that have decimated businesses, and pig butchering schemes that have ruined people. As someone who rails against the abuses by the cryptocurrency industry, why then am I so worried about his conviction, and about the parallel case in the United States against two Tornado Cash co-founders?"

Read the whole thing for the explanation.

David. said...

Matt Levine writes:

"But it is possible that the philosophical trustlessness of crypto is somehow corrosive to actual trustworthiness. A lot of crypto exchanges turned out not to be all that trustworthy. If a stock exchange collapsed and took customer money with it, people would go around saying “where were the regulators” and “we need better rules to prevent that.” When a crypto exchange collapses, some people go around saying those things, but other people go around saying things like “not your keys not your coins” or “if you didn’t know that that exchange was shady then really it’s your fault.” Or when Avi Eisenberg spotted a profitable opportunity to manipulate the Mango Markets token, he did that, because he was philosophically committed to an ethos of code-is-law and trustlessness, though now he’s in jail."

The occasion for his comment is that some people sold their bankruptcy claim on FTX for perhaps 30 cents on the dollar, but now that John Ray's work means the payout might be around 118 cents they're trying to back out of the deal. As usual, Levine is a fun read.