Mango Markets Resumes Crypto Trading, SEC Be Damned

Developers behind the closed decentralized crypto exchange Mango Markets say they are pushing for a relaunch of the project – even though the US Securities and Exchange Commission (SEC) claims the project’s original token, MNGO, is a security.

The SEC’s labeling of the token raises knotty issues about whether Mango Market’s “version 4” can proceed without facing the wrath of regulators. The SEC has not alleged wrongdoing by Mango. But the agency last week accused MNGO trader Avraham Eisenberg, who drained $116 million from the exchange in October, of manipulating the securities market.

Securities lawyers not involved in the case told CoinDesk that the SEC could lay the groundwork for filing a case against the exchange that issued MNGO to its investors when it launched in 2021.

“By noting that allegedly ineligible US investors participated in the token sale, the SEC suggests that it also has the authority to bring a future case alleging that this is an unregistered securities offering,” said Howard Fischer, a former SEC- trial attorney and partner at the SEC. law firm Moses Singer.

The SEC declined to comment.

In a call Sunday with Mango developers, which CoinDesk attended, project founder Daffy Durairaj promised to continue with the software upgrade that will relaunch Mango Markets, the once-popular place for trading, borrowing and lending cryptocurrencies on Solana. Things went dark in October after a trader drained Mango and its customers of $116 million worth of crypto.

That exploiter, 27-year-old Eisenberg, was arrested in December on charges of commodity fraud and market manipulation stemming from his self-described “highly profitable trading strategy.” Just last week, the SEC filed its own lawsuit against Eisenberg, alleging that Mango’s native board of directors, MNGO, is a security. (On Thursday, Mango sued Eisenberg over $47 million).

MNGO, a crypto-governance token that gives its holders voting rights over Mango Markets’ operations, “was offered and sold as a security,” the SEC said, noting that it is investigating “other violations of securities laws” along with the Eisenberg case. The ominous promise could have major implications for Mango Market’s US team if the SEC decides to sue.

Anyway: Mango’s developers are pushing forward with the marketplace’s relaunch. In a developer call on Sunday, Mango Markets founder Daffy Durairaj gave an overview of the progress. It was Mango’s first developer hit in the wake of the Eisenberg exploit, and Durairaj tried to strike a positive note.

For him and Mango’s other developers, the long-planned version (v)4 upgrade is the protocol’s ticket back to relevance in a radically changed landscape for Solana DeFi. Solana-based trading protocols have lost over 70% of their total value locked (TVL) since November 1, days before the FTX crypto exchange collapsed, according to DeFiLlama (Crypto DeFi overall lost around 14% in the same period.)

SEC’s specter looms over v4. In the lawsuit against Eisenberg, SEC lawyers went out of their way to mention that “Mango has touted the upcoming launch of version 4 of Mango Markets on its website and on social media.”

The reference looked odd because it had no apparent connection to the SEC’s charges against Eisenberg, Jeffrey Gebert, a partner specializing in securities at Canadian law firm McMillan LLP, told CoinDesk.

“There are some concerns that they are looking at Mango v4’s launch,” Durairaj said of the SEC to the 50 attendees at the developer call.

“I don’t know exactly what they’re worried about,” he said. “I don’t know why they added that to the complaint, so that’s up for debate.”

These lawsuits are proving to be a costly headache for Mango Labs, the American company that positions itself as MangoDAO’s legal defender. It spent an estimated $400,000 on legal fees last year and expects to pay an even bigger bill in 2023, Durairaj said on the developer call. He said Mango Labs will ask the decentralized autonomous organization for a $1.5 million grant, in part to pay its lawyers.

“Lawyers are very expensive. Every time you talk to them, it’s a lot of money, which is bad, he said during the conversation.

“We want to make sure that the DAO is defended, legally represented and well defended in case someone wants to allege, or do a class action, even if the SEC wants to file a lawsuit.”

Durairaj declined to be interviewed for this article.

The SEC’s case against Eisenberg treats MNGO as a security (if it wasn’t, it would be outside the SEC’s jurisdiction). That distinction, which it had not previously applied to MNGO, could spell big trouble for the project if the agency also claims the token is “unregistered,” several securities lawyers told CoinDesk.

One possible issue stems from Mango Markets’ $70 million token sale in August 2021. It claimed to ban US investors from participating in that sale, a move that CoinDesk noted at the time was likely an attempt to avoid regulatory scrutiny. Despite this self-imposed ban, the SEC’s lawsuit alleges American investors — indeed, some of Mango’s creators living in the United States — bought the token.

The SEC, in its case against Eisenberg, cast doubt on the degree of decentralization of Mango’s “so-called governance token,” as regulators referred to MNGO. The SEC alleged that MNGO token holders had “limited and minimal” control over the protocol and most did not vote, while insiders “dominated the votes”. It called the DAO’s governance rights “illusory.”

The suit was also elected on Mango’s “Upgrade Council,” a seven-member group of Solana and Mango insiders who can vote to push through changes to Mango Markets without the overall DAO’s input. The Upgrade Council had shut down Mango v3 in response to Eisenberg’s exploits, largely based on the voices of two of its creators.

Ron Geffner, a partner at Sadis & Goldberg LLP and former attorney in the SEC Division of Enforcement, highlighted the risks of creators moving forward with any project so closely tied to a purported security.

“It is reasonable to expect that in most cases the SEC will determine that every cryptocurrency offering is a securities offering,” he said. “As such, it is reasonable to expect that the safest course of action is for issuers and related parties to comply with securities laws.”

Durairaj, the Mango founder, said in Sunday’s developer talks that Mango v4 will correct the problems that led to Eisenberg’s exploit. For example, one planned change prevents risk in one asset’s trading pool from being transferred to another pool, he said.

The one-hour conversation also included a discussion on the future of Mango’s Upgrade Council. Durairaj said the council was “always intended to be an interim function” that could respond to security issues, such as the Eisenberg exploit, faster than a full DAO vote. He said the DAO could throw the advice “if we have a situation where Mango v4 is very robust.”

“We’re off to a good start and launching Mango v4 under DAO authority,” Durairaj said, though he cautioned that some features are still in the works.

Developers are almost done building an Android version of Mango that will act as a “Venmo for crypto,” he said.