In 2022, DeFi protocols lost almost $386 million due to manipulations.
Such data was provided by Chainalysis in "The 2023 Crypto Crime Report".
Such data was provided by Chainalysis in "The 2023 Crypto Crime Report".
We are talking about oracle manipulation attacks. The scheme is easy. In one of the cases, the criminal, Avraham Eisenberg, used $10 million, with which he placed in a long and short positions in low-liquidity MNGO token, and additionally bought more of that token. These actions significantly increased the price of MNGO token on other decentralized exchanges. Due to that, he was able to take a flash loan (express loan), and via the inflated assets he withdrew almost all the assets belonging to Mango Markets.
Interestingly, that the criminal exposed himself because he does not consider it a crime - he said that he used an exploit in the smart contract and thus did not engage in fraud.
Interestingly, that the criminal exposed himself because he does not consider it a crime - he said that he used an exploit in the smart contract and thus did not engage in fraud.
And what does the regulator say?
The US Securities and Exchange Commission (SEC) noted that such actions are a crime and fall under "market manipulation" activity.
So, was it a real crime?
Market manipulation is illegal in the United States of America under the Securities Exchange Act, the Securities Act, and local state regulations.
Under Section 9(a) of the US Code, engaging in a series of transactions that create a valid or false active trade due to fictitious purchases or sales is prohibited.
In addition, the SEC distinguishes several types of market manipulation, one of which is the "wash sales" method - when a person almost simultaneously buys and sells an asset to create activity and increase the price of an asset. Low-liquidity tokens with a low trading volume are at risk because the smaller the book, the "cheaper" it is to manipulate the price.
De facto, such flash loan actions have the same essence as "wash sales," so the criminal's actions are not just the use of the smart-contract capabilities but manipulation, with the help of which he appropriated a considerable amount of assets. Therefore, he should be liable under the US law.
Under Section 9(a) of the US Code, engaging in a series of transactions that create a valid or false active trade due to fictitious purchases or sales is prohibited.
In addition, the SEC distinguishes several types of market manipulation, one of which is the "wash sales" method - when a person almost simultaneously buys and sells an asset to create activity and increase the price of an asset. Low-liquidity tokens with a low trading volume are at risk because the smaller the book, the "cheaper" it is to manipulate the price.
De facto, such flash loan actions have the same essence as "wash sales," so the criminal's actions are not just the use of the smart-contract capabilities but manipulation, with the help of which he appropriated a considerable amount of assets. Therefore, he should be liable under the US law.
Author: Danyil Voloshchuk, senior lawyer of Technologies and Investments at Juscutum