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On October 11, 2022, Eisenberg manipulated the price of futures contracts, causing a surge of 1,300% in just 20 minutes, ultimately allowing him to “borrow” $110 million in cryptocurrencies against inflated assets, as Bloomberg reported. The federal jury in New York found him guilty of commodities fraud, commodities manipulation, and wire fraud.
Eisenberg, described by prosecutors as an “applied game theorist,” utilized a false identity to execute trades that significantly elevated the value of MNGO tokens and their corresponding futures contracts. His defense claimed that his trading actions were legal under the rules provided by the decentralized finance platform, which is run by a smart contract system cautioning users to operate at their own risk.
A smoking gun in Coinbase vs SEC?
The conviction of Eisenberg for commodities fraud, rather than securities fraud, could potentially be leveraged by Coinbase in its defense against the SEC’s lawsuit. As the case highlights the lack of clear regulatory guidance from the SEC on the classification of digital assets, Coinbase could continue to argue that the regulator has failed to provide adequate direction to the industry, leaving crypto projects and exchanges to navigate a murky regulatory landscape on their own.
Moreover, the fact that Eisenberg was prosecuted under commodities laws suggests that some digital assets, like the MNGO token, may fall under the jurisdiction of the Commodity Futures Trading Commission (CFTC) rather than the SEC. Coinbase could use this as evidence to challenge the SEC’s assertion of broad authority over the crypto space and the specific tokens listed in its complaint against the exchange.
By drawing parallels between the MNGO token and the various digital assets that the SEC alleges are unregistered securities traded on its platform, Coinbase may contend that if MNGO was treated as a commodity in Eisenberg’s case, the same logic should apply to the tokens singled out by the SEC.
Furthermore, Coinbase could argue that the SEC has been inconsistent and arbitrary in its treatment of digital assets, as evidenced by Eisenberg’s conviction for commodities fraud rather than securities fraud. The exchange may assert that the regulator has not provided a clear, predictable framework for determining which tokens constitute securities, leading to an uneven playing field and selective enforcement.
Lastly, Coinbase could use the Eisenberg case to reiterate its calls for the SEC to engage in transparent rulemaking and provide explicit guidance on how existing securities laws apply to digital assets. The exchange may argue that without such clarity, the industry will continue to face uncertainty and the risk of arbitrary enforcement actions.
Murky waters of US digital asset legislation
While the Eisenberg conviction provides potential avenues for Coinbase to challenge the SEC’s lawsuit, the specific facts and circumstances of each case differ. The court will ultimately have to evaluate the merits of Coinbase’s arguments and the SEC’s allegations based on the unique characteristics of the tokens in question and the applicable legal frameworks.
On January 20, 2023, the SEC charged Eisenberg in the Southern District of New York with violating anti-fraud and market manipulation provisions of the securities laws in relation to his actions on the Mango Markets platform. However, there has been no update to the SEC website regarding the progress of the case, whereas the CFTC’s case has gone to trial. While Eisenberg’s futures manipulation would come under the purview of the CFTC, the SEC has previously laid claim to digital asset tokens akin to MNGO, such as in the complaint against Coinbase.
The case against Eisenberg is unlikely to form an ironclad legal precedent to be used by Coinbase in court, yet it certainly reinforces the claim that US regulatory enforcement of crypto lacks clarity and neutrality. Still, some aspects of the case, including the development of the CFTC’s case compared to the SEC, may well come to light as a part of Coinbase’s defense showcasing the inconsistencies in US crypto regulation.
Ultimately, the commodities fraud verdict against Eisenberg adds another layer of complexity to the ongoing debate over the proper regulatory treatment of digital assets and may offer Coinbase additional ammunition in its legal battle with the SEC.