Crypto scam or simple management error of a not yet mature project? Three young engineers have just appeared before the Paris court on charges of fraud and money laundering, this Wednesday, May 24. They are suspected of running a scam with a smart contract hosted on Arbitrum, a derivative of the Ethereum blockchain.
In September 2021, they had managed to grab 925 ethereum, or around 2.5 million euros. A substantial contentious transfer from an investor living in Singapore, also a trader at Binance, the world leader in crypto exchange platforms, who had filed a complaint on September 20.
27 seconds
This September 13, Slimane, Gabriel, and Pierre-Etienne, young engineers from the West of France not yet in their thirties, are in the process of refining the outlines of a new smart contract for their ArbiApe project. With this smart contract, the engineers seek to draw inspiration from the overwhelming success of Arbinyan. This “farming”, this contract capturing crypto assets in exchange for the generation of interest, had indeed succeeded in attracting a crowd of investors a few days earlier.
As is often done in crypto, the Arbiape is almost a clone of Arbinyan, with a few differences, such as for the withdrawal fees, zero for the “Nyan”. At 11:04 a.m., the contract is deployed. But if initially the withdrawal fees are set at 2%, at 11:38 they jump to 100%, before then at 11:49 to be lowered to zero. Except that in the meantime, an investor invested 925 ethereum at 11:47 a.m. before asking 27 seconds later for the contract to close.
Result: the latter loses all of his bet and his funds are automatically transferred to the wallet of the three engineers. The Singaporean investor will ultimately have to wait sixteen months to recover his funds. A discount framed by a deal with the three defendants, which provides for his withdrawal from the legal proceedings in exchange for the reimbursement of his ethereum.
Suspended prison sentences and heavy fines
A typical case for the prosecution of a fraud followed by a money laundering operation. The judicial inquiry was supported by an expert report. The latter underlined the disloyalty around the real value of withdrawal fees: behind the 2% rate displayed in the code, there was a mutability mechanism. And he believed that the abrupt changes in fees were indicative of malicious intent.
“Most scams are based on greed”, recalls Deputy Prosecutor Louise Neyton, who requested suspended sentences of 8 to 12 months in prison, accompanied by fines ranging from 10,000 to 50,000 euros and a publication of the judgment on specialized crypto sites. According to the magistrate, the three defendants, identified thanks to the competition of Binance and OVH, had assumed that hurried investors, attracted by this new crypto product synonymous with significant gains for the first entrants, “would not have time to dissect the small lines of the smart contract” and thus proceed to checkout.
“We were still in the test phase”, defends himself on the contrary Slimane, who had just come out of a sleepless night spent working on this project. And to clarify that that day, the new smart contract, in beta version, had not yet been announced on the project’s social networks, a Discord lounge, a Telegram channel and a Twitter account. “We didn’t expect someone to invest and immediately withdraw their funds, we hadn’t expected this behavior,” he laments.
Dismissal, too risky an operation
However, once in possession of the 925 ethereum, the three engineers will not be in a hurry to return them. Return the crypto to the issuing wallet? Too risky an operation, they assure the judges. “But it’s the problem of the owner of the account, and the situation is there even in the event of automatic withdrawal”, is astonished the president of the court.
“We felt that there were costs and that there was room for negotiation”, ends up clarifying Slimane. The three engineers, who consult a law firm, do not let the nest egg sleep. The ethereums were transferred barely an hour after the operation to three other wallets before being sent, for part of the funds, to the Tornado Cash mixer.
“We said to ourselves that we shouldn’t lose money – even if in the end we would only have had a minimal share – because of market fluctuations”, explains Gabriel. As for the use of the mixer, the engineers explain it by their desire to invest in NFTs on Binance. However, this platform had frozen their accounts, a freeze visibly linked to the misadventure of the Singaporean investor.
“Unrewarding” Conversations
Explanations that are undermined by the reading, by the deputy prosecutor, of messages found by the investigators where the three engineers exult. “It’s so funny to manipulate lemmings on Discord”, says one about investors, “we have won the ponzi bro”, says another, “we will have to launder by buying NFT”, finally points out one of the defendants. “These are not very rosy conversations”, agrees Me Romain Chilly, one of the defendants’ lawyers.
But, he recalls, these are three young people in their twenties “who find themselves in an illegitimate way with 2.5 million euros”. “So yes, they’re losing their footing a bit, they think they’ll be able to keep some of the money”. However, adds the lawyer, “this demonstrates possible bad faith, not fraudulent maneuvers”. Because for the defense, the smart contract was “perfectly accessible and transparent”, a far cry from backdoor or classic “rug-pull” techniques, these scams that tarnish the image of crypto.
“Do not make this file the trial of decentralized finance”, pleads besides Romain Chilly. The absentees always being wrong, his colleagues note that the injured Singaporean, not an average investor in view of his financial capacities, also assumed this “share of risk”. “In this story, he decides to go way too fast. But he had the possibility of acting otherwise”, points out Me Antoine Ory. The deliberation will be delivered on June 21.