CFTC Partners With SEC And DOJ To Bring Coordinated DeFi Enforcement Action Targeting Oracle Manipulation

• Jurisdiction: United States,Federal
• Law Firm: Jones Day
• Subject Matter: Finance and Banking, Technology, Financial Services, Fin Tech
• Author: Mr Joshua B. Sterling, Brian C. Rabbitt, Peter Petraro, David Aron, Abradat Kamalpour, Mark W. Rasmussen, Jonathan D. Guynn, Rubina Ali and Tyler Fields
• Published date: 02 February 2023

In Short

The Situation: Decentralized finance ("DeFi") is a rapidly growing sector that, by definition, eschews centralized financial institutions altogether. Misconduct that has accompanied that growth has drawn the attention of the Commodity Futures Trading Commission ("CFTC"), which has brought three DeFi cases in the last 12 months.

The Result: The latest subject of this scrutiny allegedly artificially affected prices through "oracle manipulation" on three digital asset exchanges to benefit his "perpetual futures" contract positions on a DeFi market. In response, the CFTC recently brought a civil enforcement action, its first for a fraudulent or manipulative DeFi scheme, charging an individual with wash trading and with unlawfully obtaining more than $110 million in digital assets through this manipulative scheme.

Looking Ahead: The CFTC, U.S. Securities and Exchange Commission ("SEC"), U.S. Department of Justice ("DOJ"), and other federal agencies will continue to bring cases involving issues of first impression to apply their jurisdiction in new markets, including DeFi markets, in response to new methods of perceived violations of the statutes they administer.

On January 9, 2023, the CFTC initiated a civil enforcement action against the defendant, who came under scrutiny in October 2022 when he allegedly employed a manipulative strategy across three digital asset exchanges, and Mango Markets, a DeFi protocol, that yielded over $110 million in digital assets. The DOJ and SEC also brought parallel charges. In its complaint, the CFTC alleges that on October 11, 2022, the defendant misappropriated more than $110 million in digital assets from Mango Markets through oracle manipulation. An oracle is a data feed that moves data on and off a blockchain. Oracle manipulation can consist of artificially influencing the data feed to the oracle and/or into the blockchain'in this case, the Mango Markets blockchain. This is the type of oracle manipulation the CFTC alleged in its complaint.

The defendant allegedly executed his improper scheme by creating two anonymous accounts on Mango Markets, which he used to establish long and short perpetual futures contracts in the different accounts based upon the relative prices of MNGO, the native Mango Markets token; and USDC, a stablecoin. According to the complaint, the defendant then began purchasing substantial quantities of MNGO on three digital asset exchanges that were the inputs for the Mango Markets oracle. The...