This is a judgement that should make history in the crypto world. A few days ago, on 21 June to be precise, the Paris Criminal Court handed down a landmark decision in a trial concerning decentralised finance (DeFi) by convicting the managers of a protocol of "misleading commercial practices" and "money laundering".
The case pitted a Singapore trader against the French managers of the "ArbiApe" application developed on Arbitrum, a second-layer protocol of the Ethereum blockchain. The trader had attacked the three engineers because of a condition in the ArbiApe smart contract that caused him to lose all his cryptos.
The three defendants were, however, acquitted of the "swindling" charge initially brought by the prosecution. "The court handed down fines - mostly suspended - even though the prosecutor had asked for prison sentences of up to 12 months and unsuspended fines of up to 50.What actually happened?
The story goes back to September 2021. An investor working as a trader in Singapore for a major international exchange platform (according to our information, this was Binance) decided to invest 925 ETH in a new DeF protocol. The objective? Generate significant returns.
The name of the protocol is ArbiApe, a programme heavily inspired by Arbinyan and which had managed to attract a lot of investors in the preceding days. The principle of the protocol was based on a first-mover bonus, which prompted some, like the Singaporean trader, to rush in...
The problem was that after deciding to withdraw his funds a few seconds later, the protocol charged him a fee of... 100%. At the time of the events, this represented almost €3 million 😅.
When the programme was launched, the rate was initially set at 2%, but a line of code allowed the platform's managers to increase it to 100% a few minutes after it was deployed, before lowering them back down to 2%.
According to the investigators, quoted in the indictment at the end of May, this increase was "drowned in the mass of transactions, and therefore virtually invisible to investors". Clearly not enough to constitute fraud, the courts ruled.
"The level of the fees was accessible to any investor, and a fortiori to a crypto professional as long as they had been coded in a perfectly transparent way on the smart contract and before the disputed transaction was initiated", explained Romain Chilly. "The court agreed with us as it held that no fraudulent manoeuvre constituting a swindle had been established", he insists.
According to the defence, the plaintiff was a victim of his eagerness to use the protocol even though it was not fully functional at the time of the investment. "This was clear from the lack of communication on the project's social networks about the possibility of interacting with the smart contract and the absence of other victims," continued Romain Chilly.
"We argued that it was the plaintiff's eagerness alone, who wanted to be the first to invest in the product to get the best returns, that was the cause of his injury and the loss of his funds," the lawyer emphasised.
Transparency of the code.... but not of the communication
On the other hand, the court considered that the fact that the level of fees was not explicitly stated on the project website, this constituted a substantial omission. Hence the offence of misleading commercial practices, even though the plaintiff was a seasoned professional in the sector...
The defendants were also convicted of money laundering for transiting part of the funds via the Tornado Cash protocol, used to conceal the origin of crypto flows. The defence justified this action on the grounds of the plaintiff's position at Binance.
The defendants explained that they had been afraid that the Binance trader would obtain a freeze on all the wallets that had interacted with the smart contract in question. According to the defence, this was a precautionary measure that the judge did not uphold.
In the end, the defendants can count themselves lucky. The judge's leniency probably stems from the fact that the funds were returned to the plaintiff before the trial. According to our information, this was done as part of an out-of-court settlement in exchange for an assurance that the victim would not claim further compensation.
A landmark judicial decision
What should we take away from this case? Firstly, that it is one of the first of its kind on a global scale. "While many investigations target certain managers of DeFi companies or protocols, this is the first European trial to have ruled on the criminal liability of developers of a decentralised finance protocol on which someone lost a very large sum of money", agrees Romain Chilly.
The court had to rule on the following question: to what extent should the founders of a decentralised finance project take steps to warn, inform and protect people interacting with the protocol they have developed?
In the background, we understand that the adage "code is law" is not a sufficient argument in court. "The main lesson of this judgement is that even in the absence of fraudulent intent, protocol founders must put in place sufficiently clear information for people who interact with their product", insists Romain Chilly.
"Code transparency is not enough, even when your product is aimed at crypto professionals. Code is definitely not law", assures the lawyer.
For the DeFi sector, the message sent by the courts is crystal clear even though it is not yet subject to specific regulation. "The French judiciary does not hesitate to apply existing rules of law in a maximalist way, particularly those relating to consumer protection, in order to punish behaviour that it deems insufficiently diligent", concludes Romain Chilly.
