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to keep their livelihoods working they can only triangulate watch the patterns hire consultants listen to ex google engineers giving guru talks and adjust their behavior in response to indirect evidence of changes that the platform itself will not confirm the anxiety is the entire point this is a feature for youtube it means that nobody is ever quite confident enough in their model of the platform to walk away from it and start their own thing because the platform s value to the creator is precisely the platform s opacity to everyone else the audience is on youtube the audience is sortable only by youtube and the sorting function is youtube s private property take the formula public and you lose the moat take the moat public and the audience eventually figures out it doesn t need youtube there s a precedent here and it s an instructive one compare here to early 2000s google search which had a more or less publicly understood ranking function links pointing in basically with some weighting for anchor text and a few other things and which proceeded to get absolutely demolished by seo farms over the course of about a decade until the public formula became useless and google had to switch to a private machine learned ranking that nobody outside mountain view understands including most of the people inside mountain view the transparency of pagerank circa 1999 was the single thing that almost killed search you can tell the story of every google ranking update from 2010 onward as a slow retreat from legibility an accelerating refusal to explain why the search results changed the deeper principle here is that any institution running a selection function on public inputs faces an arms race between its scoring system and the applicants ability to optimize against the scoring system and the only sustainable position is to keep the scoring system moving faster than the applicants can adapt which means the institution must structurally refuse to commit to a fixed knowable defensible rubric doing so would amount to giving up the game now look at the sec under gary gensler 2021 through 2025 on the question of crypto regulation and tell me this same logic isn t running the standard reading of gensler s tenure which you will find in every blockchain association policy brief every coinbase amicus filing every aggrieved op ed from tom emmer or patrick mchenry on the house financial services committee is that the sec engaged in regulation by enforcement rather than rulemaking meaning the agency declined to issue specific guidance on how crypto companies could register their tokens as securities how to structure a compliant offering what specifically counted as a security and what didn t while simultaneously bringing enforcement actions against firms that failed to register under the existing securities laws coinbase formally petitioned the sec in 2022 for digital asset specific rulemaking asking essentially tell us the rules so we can follow them and in december 2023 the commission denied that petition gensler wrote a public statement on the denial explaining why the statement is worth reading in full but the short version is the rules already exist they re the rules from 1933 and 1934 the howey test from the 1946 supreme court decision tells you whether something is an investment contract and therefore a security and if you want to know whether your token meets the howey criteria you can read howey same as anyone else the sec doesn t owe you a more specific decoder ring than that industry s response was predictably screaming because what gensler was actually doing and i want to be careful here because this is the part that the partisans on both sides won t quite say out loud was structurally identical to what youtube does with its algorithm and what raya does with its admissions formula he was refusing to commit to a legible rubric the howey test in the abstract sounds like a rule in application is there an investment of money in a common enterprise with an expectation of profit derived from the efforts of others turns out to be a four prong test where every prong is contestable every prong has fifty years of case law on it and the sec s actual view on how those prongs apply to any specific crypto offering is whatever the sec decides on the day they bring the enforcement action hester peirce the dissenting republican commissioner crypto mom in the industry trade press said this out loud in 2023 that the agency was being imprecise about whether the token itself was a security versus whether the offering of the token was a security and that this imprecision was a failure of the agency s duty to be a clear regulator tom emmer accused gensler of inventing the term crypto asset security out of whole cloth with no statutory basis they were right he did invent it that was the point here s the thing the industry side never quite admitted which is that the alternative they were demanding a published rulebook specifying exactly which token structures qualify as securities under sec jurisdiction which qualify as commodities under cftc jurisdiction which qualify as something else entirely would have been catastrophic for the sec s enforcement capacity the moment the agency published a rubric every crypto lawyer in manhattan and miami would have started designing tokens to score just below the threshold the selection function would have become a target and because crypto tokens can be designed from scratch with arbitrary technical features unlike say a public company which has actual operations that constrain what it can plausibly claim to be the gameability of any published rubric would have been essentially total this is the part the law school people had a name for decades ago the howey test works as a selection function because it s a standard rather than a rule a standard is judged after the fact in litigation by a court applying the four prongs to the actual facts of the actual transaction a rule is judged before the fact by the applicant checking their offering against the published criteria standards are expensive you have to litigate every case and unpredictable the prongs are contestable rules are cheap you can apply them administratively and predictable the criteria are public the trade off is well understood in administrative law going back to the 1980s cass sunstein wrote a whole book about it and what gensler was doing was making the deliberate institutional choice to live with the expense of the standard in exchange for the gameability protection that only a standard provides he picked the expensive option on purpose plus and this is the part that gets lost in the policy debate the sec does not actually have the institutional capacity to administer a published rule against a multi trillion dollar adversarial industry that can produce a new token design in a weekend the agency has what five thousand employees maybe six a few hundred of them work on crypto and even that s probably overstating it if you give those people a rulebook and tell them their job is to check every new token offering against the rulebook they are immediately and permanently underwater and the smarter crypto lawyers will be designing structures the sec staff have never seen before by lunchtime on the day the rulebook publishes whereas if you give those same people a standard and tell them their job is to pick a few highly visible test cases and litigate them aggressively you produce uncertainty that propagates through the entire industry at near zero administrative cost the math is brutal and obvious one enforcement action against coinbase or binance does more deterrent work than ten thousand pages of regulations because the deterrence operates across the entire space of token designs simultaneously every issuer has to assume the sec might decide their thing was a securities offering with no way to know in advance the terror is the policy the unpredictability is the moat and the crypto industry more than any industry in living memory has actually built its own internal ideology around the proposition that gaming the rules is the same as following the rules which is why gensler s structural posture has the specific shape it does the phrase you want to know here is code is law this is the central ideological commitment of a large and vocal faction of the crypto world and it goes back to 2016 to the original ethereum dao hack when an attacker drained about 60 million worth of ether out of a smart contract investment vehicle by exploiting a recursive call vulnerability in the code and a substantial chunk of the ethereum community argued that what the attacker had done wasn t theft because the smart contract had allowed the transaction and the smart contract was the contract and the blockchain was immutable and if the code said you could do it then it was by definition allowed the ethereum foundation hard forked the chain to undo the hack the people who refused to accept the hard fork kept mining the original chain which became ethereum classic and which carries the code is law banner to this day as essentially its founding philosophical commitment the mainstream ethereum chain quietly accepts that sometimes the humans have to intervene but the rhetoric of code is law has continued to be ambient in crypto culture for the last ten years deployed every time someone gets exploited and the industry has to decide whether the exploiter was a thief or a clever trader which brings us to october 2022 in october 2022 a guy named avraham eisenberg a self described applied game theorist which is exactly the sort of credential you give yourself when you re about to do what he was about to do drained 110 million out of mango markets a solana based defi lending protocol the mechanism was in retrospect dumb he opened two accounts used the first to take a huge long position on mngo mango s native token against the second s short position then ran the price of mngo up roughly 1 300 in a few minutes by buying it across thin order books on ascendex and other venues then used the inflated long position collateral on the first account to borrow 110 million worth of various cryptocurrencies from the protocol then walked then he did the part that makes the case immortal he went on twitter and announced in essence that what he d done was a highly profitable trading strategy that exploited a flaw in the protocol s design and that he d used mango markets exactly as it was built to be used even if the development team did not fully anticipate all the consequences he proposed a settlement to the mango dao under which he d return 67 million in exchange for the dao agreeing not to seek criminal prosecution he then voted his own stolen tokens in favor of the settlement which passed the dao got 67 million back eisenberg kept the other 47 million he went to puerto rico the fbi arrested him in december 2022 he went to trial in april 2024 and got convicted on wire fraud commodities fraud and commodities manipulation the first jury verdict ever rendered on the code is law defense the trade press called it rule of law 1 code is law 0 then in may 2025 judge arun subramanian sitting in the southern district of new york vacated all three convictions the ruling which is worth reading in full if you have any interest in how the legal system is going to handle the next decade of defi exploits rested on two grounds first venue was bad because eisenberg was in puerto rico when the trades happened and the prosecution s new york hooks a mango user in poughkeepsie an exchange vendor in manhattan didn t rise to the level of essential conduct second and more importantly the wire fraud conviction failed because the government couldn t prove a material misrepresentation because and i m quoting the judge here mango markets was permissionless and automatic and a permissionless automatic system cannot be deceived in any meaningful legal sense there was no human counterparty to lie to the smart contract did exactly what its code said it would do code is law won in federal court on the merits in may 2025 prosecutors appealed in december 2025 the appeal is pending eisenberg is in federal custody anyway serving four years on an unrelated child pornography conviction stemming from evidence the fbi found on his phone during the puerto rico arrest the sec and cftc civil cases are still pending nobody comes out of this one looking good the reason this matters for the broader argument is that eisenberg s defense was the natural conclusion of an entire industry s preferred regulatory posture if the rules are the published rules and the published rules are the smart contract and the smart contract did what it did then there is no fraud because fraud requires deception and you can t deceive a thing that has no expectations a federal judge wrote those words down they are on paper now the industry that asks the sec for clear rules so we can comply is the same industry that builds its protocols as automatic permissionless systems specifically so that the rules the on chain rules the only ones the industry recognizes can be engineered around without anyone technically violating them the mngo price oracle was a published rule eisenberg complied with it that s the whole defense this is what the sec was looking at which is what the gensler era sec was actually responding to even if the response was inarticulate and looked like petulance the agency was being asked to publish a rulebook for an industry whose internal culture explicitly holds that published rules are loopholes waiting to be optimized any rubric the sec produced would have been treated as an instruction manual and any token issuer who scored their offering just under the security threshold would have a defense identical in structure to eisenberg s i followed the published rules if you didn t anticipate this that s your problem not mine you can see why gensler declined to provide the rulebook now and this is where you have to be careful i am declining to argue gensler was right on the merits the structural critique most often leveled against him regulation by enforcement is bad because it doesn t give regulated entities clear rules to follow was at the level of institutional logic asking him to do the thing that would have most rapidly destroyed his agency s ability to regulate anything at all the crypto industry s preferred outcome had never been clear rules in the abstract their preferred outcome was clear rules they could engineer around which is what every regulated industry has always wanted from every regulator since the interstate commerce commission and which every effective regulator has always declined to provide there s an interesting parallel here in the way the irs has historically handled tax shelter regulation which is also a structurally opacity dependent practice the agency famously refuses to commit in advance to whether a given transaction will be treated...
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