Comparing Apples to MNGOs: Government Actions Against Avi Eisenberg Show How Poorly Digital Assets Are Classified in US

The vastly different—and mutually exclusive—conclusions that the SEC, CFTC, and DOJ have come to about MNGO have exacted a real cost on the growth of the U.S. crypto industry.

A Securities and Exchange Commission (SEC) attorney walks into a courtroom in the Southern District of New York (SDNY) and asks her colleagues at the Commodity Futures Trading Commission (CFTC) and Department of Justice (DOJ): what’s MNGO? 

The Assistant U.S. Attorney says: “a commodity – just look at our indictment charging Avi Eisenberg with commodities fraud!” The CFTC lawyer says: “we agree, and when paired with USDC, it’s a swap under our jurisdiction — just look at our complaint against Avi Eisenberg!” The SEC lawyer shakes her head and says, no, “MNGO was sold as a security as shown in our complaint against Eisenberg.”

This is not the beginning of an absurd joke; this is the reality of the chaos created by the lack of legislative clarity on how digital assets are classified in the United States. And why should this dark comedy of a jurisdictional fight concern everyday Americans?

For starters, lack of legal and regulatory clarity runs counter to the fundamental principle of the rule of law. Three separate government entities, with regulatory and criminal enforcement authority over individuals and companies, can and have looked at the same digital asset and the same fact pattern and come to vastly different—and mutually exclusive—conclusions. 

This chaos does not align with our country’s principles of fair notice, due process, and judicial economy. And it certainly does not support a government agency’s claims that “the rules are clear” or that individuals or companies should face criminal penalties without knowing what laws they have allegedly broken. When the regulatory agencies themselves can’t agree on how to talk about a case like this, how should a non-expert?

Just consider the contradictory positions taken by these government entities in their actions against Eisenberg, based on the same facts:

• CFTC Complaint ¶¶ 22 and 51: “Mango Markets users could also trade MNGO, the ‘native’ token of Mango Markets . . . MNGO functions as the governance token of the Mango DAO, meaning that MNGO token holders may vote those tokens to govern (e.g., to modify, operate, market, and take other actions with respect to) Mango Markets . . . The MNGO-USDC Swaps meet the definition of ‘swaps’ under” the CEA.
• SEC Complaint  ¶ 9: “the MNGO tokens Eisenberg purchased and manipulated were purchased and sold as investment contracts and therefore as ‘securities’ under the federal securities laws.”
• SDNY Indictment ¶ 23: Eisenberg “willfully and knowingly, directly and indirectly, used and employed, and attempted to use and employ, in connection with a swap, a contract of sale of a commodity in interstate commerce. . .  by . . . engag[ing] in a manipulative and deceptive scheme involving the intentional and artificial manipulation of the relative value of USDC and MNGO and the price of perpetual futures contracts on Mango Markets.”

The result is three different descriptions of the same digital asset, MNGO, with allegations that Eisenberg is potentially criminally and civilly liable under three different statutory authorities. 

Read more: The Very Soul of DeFi Is on Trial With the Avi Eisenberg and Uniswap Cases

Regulatory Uncertainty and Its Costs

Notably, the DOJ could have charged Eisenberg with securities fraud if they agreed with the SEC that the MNGO token was an “investment contract,” but they did not. The SEC and CFTC could have coordinated and said MNGO is a security under SEC jurisdiction but swaps of MNGO with USDC are subject to CFTC jurisdiction, but they did not. Instead, the words “security” or “investment contract” do not appear in the DOJ’s Indictment or the CFTC complaint against Eisenberg. 

This is the opposite of regulatory clarity. It’s not just a technical issue. It’s important to acknowledge the real world impact of this morass and bureaucratic infighting, which can lead to negative social, economic, and national security consequences. Since 2017, the United States’ share of developers has declined by 2%two percent each year, with the number of blockchain developers based in the U.S. falling from 40% in 2017 to 29% in 2022.

Other, more crypto-friendly jurisdictions like India, Africa, and Latin America are capturing a greater share of blockchain developer talent from the United States. Central and Southern Asia, and LatAm are now leading the United States in digital asset and blockchain technology adoption. 

In Europe, Germany is growing its developer share and most recently passed capital markets framework reforms to include tax incentives and benefits to support Germany’s competitiveness in the technology industry. Indeed, Germany’s banking industry, a buttoned-up, traditionally conservative group is embracing the tech; the country’s largest federal bank will soon offer crypto custody services.These trends show that the world, not the United States, is keen to harness blockchain technology for real world use and doing so by adopting clear, consistent guidelines in the space.

The Next Frontier: The Case of Ether

The regulatory turf battle is bigger than questions of how to classify MNGO and may soon be focused on the classification of Ether. In addition to the Eisenberg case, in the more recent complaint against Kucoin, the CFTC has publicly taken the position that bitcoin and ether are commodities. And while the SEC has been clear that bitcoin is not a security, it has been ominously silent about its position on ether. 

The recent news that the SEC is investigating the Ethereum Foundation could be a signal that it is about to publicly claim ether is a security, which will bring the SEC in direct conflict with the DOJ and the CFTC. There is also more potential for uncertainty given that it is not clear how the SEC will handle the pending ETH spot ETF applications. Again, if the regulators and enforcement agencies overseeing the digital asset space are not aligned on how to classify the same digital asset, how can anyone else be clear on what the rules are or how to follow them? 

While these are just two recent examples of the confusion and lack of guidance that has plagued this industry for years, in the broader sense, this uncertainty is contributing to the loss of talent in the United States across this emergent technology space. Instead of fostering and supporting the industry’s good actors who want to build innovative solutions for real world problems, the government provides them only a murky and ever-changing legal landscape that motivates them to seek friendlier jurisdictions. 

There is simply no more time to lose.  If we want to keep innovation in the United States, and ensure that we are building sound solutions that uphold our economic, social and national security priorities, Congress must step in to provide clear rules or guidelines on how to classify digital assets. 

Otherwise, we’ll be left wondering what exactly a MNGO is, after all.

Amanda Tuminelli is the DeFi Education Fund’s Chief Legal Officer where she leads the organization’s impact litigation and policy efforts. Jane Khodarkovsky is a Partner at Arktouros, pllc, where she represents projects and builders in the emergent technology space, and was a former federal prosecutor.