Bloomberg Chief Financial Writer: The underlying logic behind US listed companies' crazy buying of cryptocurrencies

Written by: Matt Levine

Translated by: Odaily jk

Crypto Treasury Companies

Last Tuesday, SharpLink Gaming Inc. was still a company focused on online marketing for sports lottery, with a stock price of around $2.91 per share and a market value of only about $2 million. Although still listed on Nasdaq, it was actually on the brof delisting. the A few ago, it just underwent a reverse stock split to maintain its stock price above Nasdaq's minimum requirement of while also failing to meet Nasdaq's basic requirement of at least $2.5 million in shareholder equity.

Accordingly, SharpLink announced a stock issuance that day, raising $4$4.5$ per share. The official statement was that these funds would be used to "restore compliance with Nasdaq's minimum shareholder equity requirements". However the, added: "We may use part of the funds to purchase crypto currencies in line with a treasury strategy we are considering."

But the problem is that now a bunch of "mini MicroStrategy" copycats are also being treated with crazy market premiums. The market's preference for these "new crypto treasury companies" seems endless. I completely cannot explain this phenomenon.

A month ago, I wrote: "The current situation is like the crypto circle constantly playing the US stock market, and the US stock market falls for it time and again." Now, this feeling is even stronger.

Point Two: Are People Still Doing This?

This is not actually surprising: I wrote last month, "If you operate a crypto investment fund and don't acquire a US-listed company with stalled or thin business to play this arbitrage game, it would be considered poor management."

For all companies related to the crypto field, the current lowest capital cost is to acquire a listed company and transform it into a crypto treasury model. Therefore, we have already seen players like Tether, SoftBank, Bitfinex, Nakamoto Holdings joining the battle. The Financial Times even reported that Trump Media & Technology Group is going to play - which is not surprising, to be honest, it would be strange if they did not join.

However, because of this, most listed companies participating in this game (except for MicroStrategy) are almost small, semi-abandoned companies. Companies like Apple, which truly have real industries, cash flow, and business, of course would not get involved in this "method of causing stock prices to skyrocket through a strange operation".

For some crypto entrepreneurs, the situation might be similar. We have reason to believe that Ethereum founder Vitalik Buterin is more concerned with how to optimize the Ethereum protocol, rather than thinking about how to package ETH at a high price to sell to stock investors. But for many, such valuation premiums are simply too tempting to resist.

Ultimately, according to official disclosure, Eisenberg borrowed and quickly withdrew over $100 million in crypto assets from Mango Markets.

In simple terms, this was almost like Eisenberg "stealing" $100 million from Mango Markets. By manipulating the MNGO price, he artificially inflated the market value of his contract positions and then used these inflated values as collateral to borrow large amounts of funds. Since these loans were non-recourse—which is almost an industry standard in decentralized finance platforms—he did not need to repay at all.

Of course, he was eventually arrested.

We have discussed this case several times before, including:

• When he just completed this transaction;

• When he subsequently posted a "Statement on Recent Events" on Twitter, explaining that he indeed did this, but it was not a problem because "all our actions were legal operations on an open market according to the protocol design, although the protocol development team may not have fully anticipated the consequences of setting these parameters";

• And when he was arrested, the US federal prosecutor clearly disagreed with his explanation.

Eisenberg was ultimately found guilty by a jury last April. But last Friday, the judge overturned the conviction.

According to Bloomberg:

US District Judge Arun Subramanian last Friday revoked the conviction of Avraham Eisenberg for fraud and market manipulation, and declared him not guilty on the third charge. The judge found that the evidence provided during the trial was insufficient to support the jury's determination that Eisenberg had made false statements to Mango Markets, a decentralized financial platform driven by smart contracts.

(This is the source of the original judgment.)

This case exposed two key issues:

First, the jurisdictional issue: Eisenberg was prosecuted in New York, but his so-called "game theory operation" occurred in Puerto Rico, targeting some technically "borderless" crypto trading platforms.

The three reference exchanges he used to manipulate MNGO prices were:

• FTX, headquartered in the Bahamas;

• AscendEX, headquartered in Romania;

• Serum, a decentralized exchange that may not have a headquarters at all.

And there is no evidence that Mango Markets itself has any direct connection to New York.

There has always been a consensus that "if you commit a financial crime, it's likely to be connected to New York," so New York federal prosecutors can almost manage the entire world. But this case shows that cryptocurrency has pushed the limits of this judicial boundary.

In the crypto world, there is a stereotypical belief that as long as you put things on the chain, you can avoid the jurisdiction of laws from various countries. But the reality is not that simple.

For example, in Eisenberg's case: Although he was sentenced in New York, he could theoretically be prosecuted in Puerto Rico or even Romania. However, putting things on the blockchain can indeed help you escape the judicial reach of the Southern District of New York (SDNY). In the crypto world, this is already considered a quite clever "operation".

In any case, this is the first key issue: The "commodity manipulation" charges against Eisenberg were overturned because the prosecution chose the wrong location. The US Department of Justice could consider re-filing these charges in Puerto Rico if they wish.

But in addition to commodity manipulation, he was also convicted of Wire Fraud—this charge was also completely revoked by the judge, and the prosecution has no right to re-prosecute.

The second core issue involves whether Eisenberg's actions constituted "fraud", which is not actually clear.

According to US Commodity Law (applicable to crypto tokens including MNGO), as long as you use "any manipulative means" in derivatives trading, you can be charged with commodity manipulation, which is why Eisenberg was prosecuted. But "wire fraud" is more strict, requiring the perpetrator to make false statements through computer or communication systems to obtain monetary benefits.

The court ruling pointed out:

"To establish fraud, one must prove the existence of material misrepresentation." And the judge's conclusion was that Eisenberg did not lie to anyone, no matter what he did.

The government argued in the trial that Eisenberg's "fraud" was mainly manifested in two aspects (quoted from the judgment, omitting citations):

• He made Mango Markets mistakenly believe he was applying for a legitimate crypto loan, when he actually wanted to steal funds;

• He falsely reported the value of his collateral, making the platform believe it was valuable, while in fact, this value was artificially inflated and had no actual support.

But these do not constitute lying.

Clicking the "borrow" button when you never intend to repay the loan might seem like fraud at first glance, but in the context of a crypto platform providing non-recourse loans, it actually does not stand.

In the operating mechanism of such platforms, borrowers have no personal repayment obligation: the platform can only recover through collateral. If the collateral value drops below the loan amount, abandoning the position is very common. As the judge said:

"What happens if a user borrows funds, but their collateral value plummets? The system will liquidate it. There is no evidence that the 'borrow' function on Mango Markets means the user has an obligation to repay—or any other obligation—even though this word might have such a meaning in traditional contexts."

So, in other contexts, if someone deliberately conceals or distorts important information related to contract terms or negotiations when signing a loan agreement, it might be considered fraud. But here, there are no terms and no negotiation process. There is only one word: "borrow".

Or, to quote SBF's words: "You never need to pay back, you'll just eventually get liquidated."

As for "falsely reporting collateral value", Eisenberg didn't actually do this: Mango Markets calculated the value of his collateral based on market prices (which were manipulated by him).

Interestingly, this does not constitute fraud because an earlier case about LIBOR manipulation provided supporting precedent:

Of course, Eisenberg was well aware that the value of his asset portfolio was obtained through market manipulation and knew this valuation would not last long. So, although the valuation of his asset portfolio might be technically "accurate" (calculated at the market price at that moment), the government believed his statement about collateral value was deceptive.

The government argued that when Eisenberg borrowed, he implicitly expressed two points to Mango Markets:

First, the value of the collateral in his account was not manipulated;

Second, these collaterals were indeed valuable.

And in the government's view, both of these were false statements.

But this logic conflicts with the ruling of the US Second Circuit Court of Appeals in the United States v. Connolly case.

In the Connolly case, Deutsche Bank (DB) would report its "interbank borrowing rate" to the British Bankers' Association (BBA) daily.

The defendants—DB's traders—would sometimes request LIBOR quotation personnel to submit quotes favorable to their positions. Trial evidence showed that other DB employees and LIBOR quotation personnel themselves admitted that adjusting LIBOR quotes for traders' interests was "not right" at the time.

However, the court did not buy it. The court rejected the government's argument that these quotes implicitly equate to "confirming that the quotes were not interfered with by traders".

Even though market participants generally believed that traders' intervention in LIBOR quotes was improper, the fact that there were no explicit prohibitions or guidelines against such behavior at the time was decisive. The court pointed out that although BBA later did introduce relevant prohibitive rules (just as Mango Markets updated its protocol after Eisenberg's operation), "there were no such rules or prohibitions in the early stages of this case".

We discussed the Connolly case in 2022: LIBOR itself was a "made-up" number, so Deutsche Bank's traders were unlikely to commit a crime by "getting this number wrong". Now it can be seen that this has a similar logical analogy to the MNGO token price.

In summary, what needs to be emphasized here is that, at least at the level of wire fraud, the platform's terms and conditions are indeed crucial. If Mango Markets had explicitly told users: "If you want to use your position as collateral for borrowing, you must promise that you have not engaged in any market manipulation", then Eisenberg's trading would constitute fraud. But it did not say so, and said nothing at all, so his actions did not constitute fraud.

Another typical tenet in the crypto world is: "Code is law" - as long as a crypto system allows you to do something, you have the right to do it, even if the development team did not fully anticipate the consequences when setting parameters. Under this concept, traditional legal norms, contextual conventions, or user agreements are not important; the only thing that matters is what code is written in the system.

However, the ruling in this case is not entirely about this. Its actual meaning is: code can become law. If you operate a crypto platform and tell users "please do not manipulate, attack, or engage in other destructive behaviors", then people might get into trouble when they actually manipulate. But if you operate a platform without saying any of these things, just saying "this is how the platform runs, figure it out yourself", then even if someone finds a system loophole and manipulates it, it is legal, or at least, does not constitute wire fraud.

This actually makes sense. I wrote in an article discussing Eisenberg's operation: "You can imagine two different market systems and let users choose to join one of them": one called "Nice Market" with clear rules prohibiting manipulation and insider trading; the other called "Fun Market" where as long as you can find a way to profit, it's considered skill, with completely open gameplay. I also suggested that given the relative lack of connection between crypto systems and real-world financial systems (although this is changing), it might become a testing ground for a "Fun Market", provided participation is entirely voluntary. This might be the bit of "actual rules" conveyed by this case.

However, all this does not help Eisenberg himself much. As Bloomberg pointed out, when he was arrested for this crypto case, US law enforcement discovered that he had downloaded 1,274 child pornography images and videos between 2017 and 2022, and he was sentenced to about four years in prison in May this year for possessing child pornography.