Mango Markets to Resume Crypto Trading, SEC Be Damned

Developers behind the shuttered decentralized crypto exchange Mango Markets say they’re pushing forward with a relaunch of the project – even as the U.S. Securities and Exchange Commission (SEC) alleges the project’s native token, MNGO, is a security.

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

Securities lawyers who aren’t involved in the case told CoinDesk the SEC might be laying the groundwork to bring a case against the exchange that issued MNGO to its investors when it launched in 2021.

“By noting that purportedly ineligible U.S. investors participated in the token sale, the SEC is implying that it also has authority to bring a future case asserting this is an unregistered securities offering,” said Howard Fisher, a former SEC trial counsel and partner at the law firm Moses Singer.

The SEC declined to comment.

On a call Sunday with Mango developers, which CoinDesk attended, project founder Daffy Durairaj pledged to proceed with the software upgrade that will restart Mango Markets, the once-popular venue for trading, borrowing and lending cryptocurrencies on Solana. It went dark in October after one trader drained Mango and its customers of crypto worth $116 million.

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

MNGO, a crypto governance token that grants its holders voting rights over Mango Markets’ operations, “was offered and sold as a security,” the SEC said, noting it is investigating “other securities law violations” alongside the Eisenberg case. That ominous pledge could have major implications for Mango Markets’ U.S. team if the SEC decides to sue.

No matter: Mango’s developers are pressing forward with the trading venue’s relaunch. In a developer call on Sunday, Mango Markets founder Daffy Durairaj gave a run-down of progress. It was Mango’s first developer meetup in the wake of the Eisenberg exploit, and Durairaj tried to strike a positive tone.

Reopening Mango Markets

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-altered landscape for Solana DeFi. Solana-based trading protocols have lost over 70% of their total value locked (TVL) since Nov. 1, days before the FTX crypto exchange collapsed, according to DeFiLlama, (Crypto DeFi in aggregate lost some 14% over the same period.)

The SEC’s specter looms over v4. In the lawsuit against Eisenberg, SEC lawyers went out of their way to mention that “Mango has been touting 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 accusations against Eisenberg, Jeffrey Gebert, a partner specializing in securities at the Canadian law firm McMillan LLP, told CoinDesk.

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

“I don't know exactly what they're worried about,” he said. “I don't know why they added that into the complaint, so there’s something to discuss.”

Those lawsuits are proving to be a costly headache for Mango Labs, the U.S. company that’s positioning itself as MangoDAO’s legal defender. It spent an estimated $400,000 on legal fees last year and anticipates footing 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 the lawyers.

“Lawyers are very expensive. Every time you talk to them it's a lot of money, which kind of sucks,” he said on the call.

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

Durairaj declined to be interviewed for this article.

SEC vs. Mango?

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

One possible issue stems from Mango Markets’ $70 million token sale in August 2021. It claimed to ban U.S. investors from participating in that sale, a move which CoinDesk noted at the time was likely an attempt to avoid regulatory scrutiny. In spite of this self-imposed ban, the SEC’s lawsuit claims U.S. investors – indeed some of Mango’s creators who live in the U.S. – bought the token.

The SEC, in its suit against Eisenberg, also threw doubt on the degree of decentralization of Mango’s “so-called governance token,” as the regulators referred to MNGO. The SEC alleged MNGO token holders had “limited and minimal” control over the protocol and most sat out of voting, while insiders “dominated the votes.” It called the DAO’s governance rights “illusory.”

The suit also picked at 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 general DAO’s input. The Upgrade Council had shut down Mango v3 in response to Eisenberg’s exploit largely based on the votes 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 the SEC will, in most cases, determine each cryptocurrency offering is a securities offering,” he said. “As such, it is reasonable to expect that the safest course of action is that issuers and related parties comply with the securities laws.”

V4 upgrades

Durairaj, the Mango founder, said in the Sunday developer call that Mango v4 will patch the issues that led to Eisenberg’s exploit. For example, one planned change prevents the risk in one asset’s trading pool from carrying over to another pool, he said.

The one-hour call also included a discussion of the future of Mango’s Upgrade Council. Durairaj said the council “was always meant to be a temporary feature” that could react to security snafus, like the Eisenberg exploit, faster than a full DAO vote. He said the DAO could jettison the council “if we have a situation where Mango v4 is really robust.”

“We’re fine to go ahead and launch Mango v4 under DAO authority,” Durairaj said, though he cautioned some features are still in the works.

Developers are nearly finished building an android version of Mango that will serve as a “Venmo for crypto,” he said.