• By Amy Castor and David Gerard

“this ape is a message
we considered ourselves to be a powerful yacht club
this ape is not an ape of honor
no highly esteemed juice is slurped here”

— more falafel please, SA

What are you gonna do, convict me?

Avi Eisenberg’s criminal commodities fraud trial started on April 9 and continues for two weeks. Eisenberg is the DeFi trader who drained Mango Markets of $110 million in October 2022 by manipulating the price of MNGO, the exchange’s native token. [CoinDesk]

Eisenberg used various anonymous accounts to take a long position on MNGO, drive up the price of MNGO ridiculously high, use the inflated value of MNGO to “borrow” all of the crypto on Mango Markets, and then default. He cashed out and flew to Israel that day. He bragged about his brilliant trade on Discord. He even tweeted: “What are you gonna do, arrest me?”

Eisenberg returned to the US and was arrested in Puerto Rico in December 2022. He’s been held in New Jersey ever since. 

Extensive and detailed laws exist on commodity market manipulation. Merely trading with intent to manipulate is a crime.

Almost all of what goes on in DeFi was always just straight-up illegal by the letter of US law. The CFTC first warned that it was unhappy about the highly manipulated state of crypto markets as far back as 2017.

This will be a tough one for Eisenberg to win. The defense does not dispute the sequence of events. They argue that Eisenberg was simply using the protocol as designed — code is law. The DOJ is arguing that just because you can do something doesn’t mean you should.

The defense has tried to impeach a government expert witness by … sandbagging him with documents saying he owes back taxes? If that’s the best they have, then Eisenberg is in trouble. [Twitter, thread]

Inner City Press has been covering the Eisenberg trial. [Twitter, thread; Twitter, thread; Twitter, thread; Twitter, thread]  

No, “fun markets” are a dumb and bad idea

In discussing Mango, Matt Levine of Bloomberg, who we usually regard highly, floats an old libertarian dream idea: what if we just … throw out regulation for a large chunk of the crypto market? [Bloomberg, archive]

I am just saying that you could resolve those disagreements by letting everyone go their separate ways. 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!”

This is an amazing thing to write when the crypto collapse of 2022 was precisely how that approach worked out in practice. But the answer to most libertarian dreams of deregulation is “on the other hand, history.”

It’s true that if it’s your money, you have the God-given right to set it on fire. If you really want to get into investments forbidden to retail, you can probably find a way to send your money down a hole.

But when we let companies promote that sort of investment to ordinary people, what happens in practice is that the investors go all-in on the highest-interest bet, and then they lose the lot. This is extremely well understood from the historical record!

DeFi is a dumpster fire. Everything collapses weekly in flames and screaming. Our dear friends the crypto degens like it that way. It’s a warm and cozy dumpster fire they have there.

In zero-interest times, people couldn’t make a sufficient return from sane investments — so they got into insane investments. They put their money into Celsius, Voyager, and Terra-Luna.

Celsius took money from retail customers and put it into DeFi. In fact, Celsius was the third biggest single player in the DeFi markets. It literally hired a DeFi trader, Jason Stone of KeyFi, to manage its investments and give retail investors huge exposure to the dumpster fire.

Levine assumes that if the dumpster fire is set up as a “fun market” that somehow the fire won’t spread. But we know from Celsius that market dumpster fires do spread.

In the fraud trial of former Celsius CEO Alex Mashinsky, the DOJ is currently collecting victim impact statements. We don’t expect Mashinsky’s victims had a lot of “fun.” Mashinsky probably did, though. That’s what “fun markets” mean in practice. [Twitter]

Market contagion is one of the US Treasury’s greatest fears about crypto — because they know all about dumpster fires too.

What we have for a “fun market” in the US are markets for accredited and institutional investors — where you can buy all the dubious magic beans you like. But even there, laws against misrepresentation and market manipulation still apply. There might be historical reasons for this.

Levine talks a whole lot about the interesting and intricate financial engineering possibilities of crypto and hardly ever about its real life victims. We realize the first is his ambit, but the second sort of come with the deal.

Esto no puede ser tan estúpido, debes estar explicándolo mal

Bitfinex Securities is an exciting new crypto securities platform run by the fine people who brought you the Bitfinex crypto exchange and the Tether stablecoin. They also wrote themselves special new laws in El Salvador to let them set up Bitfinex Securities.

There have been a couple of tokens on Bitfinex Securities, but they haven’t had any trades for months at a time. [Protos]

A new token, HILSV, hopes to raise $6.25 million to build a hotel near the Aeropuerto Internacional de El Salvador: “The Hampton by Hilton.” HILSV has been seeking out rather more publicity. [Bitfinex, archive; Bitfinex, archive; La Prensa Gráfica, in Spanish]

HILSV will trade on Bitfinex Securities against tethers and US dollars. The tokens are medium-term corporate bonds, priced at $1,000 each. Buyers are promised a remarkable 10% annual interest, paid semi-annually, for five years and then they get their principal back. The raise is scheduled to begin May 13.

The developer, Inversiones Laguardia (Laguardia Investments), is a real developer. They’re also good friends of the current El Salvador government and have had close and fruitful relations with past administrations.

Founder Ricardo Laguardia said in the press release that it would be impossible to raise the funds without access to new capital markets.

This seems an implausible claim. Hotels are a well-understood business, Laguardia is an experienced developer, and $6.25 million is a plausible sort of price for a new hotel complex. If your business plan was sane, why wouldn’t you just take out a loan? And why would you offer to pay 10% interest when you could get a loan for less?

We suspect that Inversiones Laguardia is doing this hotel project with an offering that will obviously be filled just so Bitfinex can get its new stock market up and running. We expect they have actual investors (and likely friends of the Salvadoran government) already lined up.

Of course, someone might have $6.25 million in dirty tethers that need shining up. But we’re sure Inversiones Laguardia would never be a party to such activities.

Every crypto real estate project in El Salvador since 2021 has been a rugpull or a nothing burger. This is the fourth attempt at a crypto-backed real estate project — after the Astro Babies NFT-backed casino and the Bitcoin Towers and Fusso NFT projects.

Laguardia does have a history of surprisingly sweet deals, such as the lease for a development at the same airport in 2018 for a remarkably low rent. We’re sure it’s all fine, though. [Portal de Transparencia, PDF, in Spanish, 2018] 

Uniswap: the searing light of regulatory clarity

Uniswap is the largest decentralized exchange in DeFi. The idea is that they run an exchange trading tokens that are almost all unregistered penny stocks. Then they claim that somehow they don’t actually run the exchange — except the bit where they get paid for not-running the exchange.

But if you make money from running an exchange for unregistered securities, the SEC may knock on your door. So Uniswap got a Wells notice letting them know of forthcoming enforcement action — reportedly for operating as an unregistered securities broker and an unregistered securities exchange. [CoinDesk; blog post, archive]

This is no surprise. The SEC announced it was investigating Uniswap in 2021. Enforcement lawyers told the WSJ they were looking into how investors used the exchange and how the exchange was marketed. [WSJ, 2021, archive]

Uniswap runs on the Ethereum blockchain. It has its own native token, UNI, that allows traders and investors to vote in its DAO. The exchange is extensively US-linked.

Hayden Adams founded Uniswap in 2018. He got an initial $11 million investment round in 2019 and another $165 million in 2022. Top investors — and holders of the UNI token — include Paradigm, a16z, and Union Square Ventures. [Form D; Techcrunch, 2022] 

Because Uniswap is “decentralized and there are no listing fees,” anyone can list a token on the exchange and create an alleged price in dollars for their token. Coincidentally, nearly all tokens on Uniswap turn out to be rugpulls. [arXiv, 2022, PDF]

Uniswap trader Nessa Risley led a class action against Uniswap in 2022. She claimed that the investors were “intimately involved” in overseeing its operations and were therefore responsible for the fraud on the exchange. She also said Uniswap had been operating as an illegal exchange and brokerage. 

Judge Katherine Polk Failla dismissed Risley’s suit in August 2023, saying that the individuals behind the scam tokens were in the wrong, not the platform itself. (Faillia is also overseeing the SEC lawsuit against Coinbase.) Risley is appealing. [Opinion and order, PDF; case docket]

Adams says he’s “ready to fight” the SEC all the way to the Supreme Court if necessary. [Twitter]

The SEC filed enforcement actions against Coinbase, Bittrex, and Kraken for dealing in securities without a license. We strongly suspect they’ll call out a bunch of tokens on Uniswap that are securities, including UNI.

We wouldn’t be surprised if Uniswap was forced to shut down. But they probably have the resources to fight for a while. 

Miners dumping

The bitcoin price has been all over the place. One reason is that miners have been dumping their holdings while number is up. We suspect that’s what’s causing quite a few of the recent crashes. [CoinDesk]

Miners are now competing with AI for cheap power in the US. These are the AI guys who make the same bad excuses for their ghastly power consumption as the crypto miners. [Bloomberg, archive]

Central banking, not very on the blockchain

Central bank digital currencies aren’t getting a lot of consumer takeup. Franklin Knoll, a payment specialist at the Federal Reserve Bank of Kansas, writes about three retail CBDCs issued in the Caribbean over the last four years and how they’ve fallen flat. [Kansas City Fed]

Knoll looked at the Bahamas Sand Dollar, DCash from the Eastern Caribbean Currency Union (ECCU), and the Jamaican JAM-DEX.

Each launched with great fanfare — but “the new payment methods have thus far seemed to fall flat with consumers, merchants, and, in some cases, the financial institutions meant to operate the payment platforms.”

As David wrote when the Bahamian Sand Dollar and DCash launched, money is a social construct. You can’t just build a system and think people will come to it.

Good news for bitcoin

Christopher Harborne’s lawyers are at it again. Following their defamation lawsuit against the Wall Street Journal, they sent another letter to Dirty Bubble (James Block) regarding his story “Tether’s Secret Agent.” Last time, Block edited bits out of his story. This time, he took the entire story down. He says he’s contemplating “next steps.” [Twitter]

The SEC is pivoting to AI too. They busted a couple of investment advisors for saying they used AI when they didn’t. [SEC]

Media stardom

Amy is in a documentary on NFTs called “NFT:WTF?” It will be on Netflix in the UK starting April 10. You can also watch it on YouTube. [Youtube]

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