Can the legal system keep up?

Cryptocurrencies have changed our financial landscape and changed how many people think about banking. They have also generated legal questions, including those from the infamous Sam Bankman-Fried scandal and a more recent Massachusetts case involving allegations of stealing electricity to pursue a crypto mining operation. GBH legal analyst and professor of north-eastern law Daniel Medwed joined Morning edition hosts Paris Alston and Jeremy Siegel to talk about cryptocurrency and the legal landscape surrounding it. This transcript has been lightly edited.

Paris Alston: If anyone can solve these two complicated things, Daniel, we know it’s you. So tell us, how does crypto mining work?

Daniel Medved: I asked our associate producers, Rachel and Gal, to give me their twenty-something take on this, so they’ve informed me. Here’s my best impression of what’s going on. Generally speaking, cryptocurrency is a form of digital currency where you use the encryption algorithms, that’s where the term crypto comes from, to generate and accumulate wealth that you can trade online that is outside of the normal banking system, outside of the normal currency regime. And that is part of the appeal, that there is limited government oversight. It is one of the reasons why people are attracted to this sector.

Now, especially when it comes to crypto mining, this is how it works: you run these supercomputers to solve complex mathematical equations. This is how you produce the digital coins. Then you validate those transactions by putting them on something called the blockchain, and then you can trace your transactions and your wealth essentially through a virtual ledger. So that’s sort of the big picture of how crypto works.

Jeremy Siegel: I think that’s about as far as I know. For anyone still confused by that, crypto mining is like if you took mining in the real world, but put it on a computer and instead of mining, you create equations.

Medved: Right. Exact.

Seal: So Daniel, you mentioned that a lot of people are attracted to crypto because of the absence of significant government oversight, but the absence of government oversight can also make it easy for people to commit crimes, for people to get scammed, right?

Medved: I think that is absolutely correct. It’s kind of like the Wild West out there, where we’re still trying to figure out how to regulate this industry. And it often happens with new financial markets, new trading vehicles, things like hedge funds years ago and Sam Bankman-Fried or the SBF scandal, I think is very illustrative. So in short, here’s what happened there. SBF ran a crypto derivatives fund called FTX, and he allegedly used client funds to cover liabilities for an affiliated research firm, Alameda Research. He fled to the Bahamas, where he was extradited after he was charged with eight federal crimes back in December, including securities fraud and wire fraud. Now he is back in the United States. Just last week, the FBI brought down four more charges related to illegal political donations. So I think SBF is a very high-profile and perhaps extreme example of potential fraud in the industry. Billions of dollars are at stake there.

Alston: Yeah, I mean, speaking of Tik Tok, I know the Internet had a field day with SBF and continues, right? I’m looking at a meme now, you know, the one with the dog and everything’s on fire and he’s got a cup of coffee? He’s like: This is fine. It has a large picture of Sam Bankman-Fried on the front. And wasn’t he the son of two Stanford law professors?

Medved: That is correct. He was the son of two Stanford law professors. And there is also a local connection, isn’t it always a local connection? He went to MIT.

Seal: Oh wow. SBF Going to MIT and starting FTX. All these acronyms almost make this more confusing for me. So, Daniel, let’s get closer to home. Talk about this case in Cohasset, involving the other end of things, crypto mining, right?

Medved: Absolutely. So apparently back in December 2021, the facilities manager for Cohasset Middle and High School noticed something was wrong on campus. He saw this strange assortment of electrical wiring, computers and temporary ductwork. So, along with the city’s IT director, they began investigating, and they identified a cryptominer that was in a crawl space on campus, and that was connected to the school’s electrical system. So they called the police. The police called in some federal investigators who conducted a forensic accounting or examination of these computers. And after a three-month or so investigation, they identified the assistant city facilities manager, a guy named Nadeam Nahas, as the culprit. And apparently he was at least accused of stealing $18,000 worth of electricity from the school district.

Alston: Seems like he really did this to save money, right? Because I understand that crypto mining can take up quite a lot of power.

Medved: Yeah, that’s my hunch. I’m not entirely sure, but it seems like a reasonable conclusion here, Paris. It takes a staggering amount of electricity, power, to run a crypto mining operation. You have to keep these supercomputers running as fast and as long as possible. And in addition, you need to run fans to prevent the computers from overheating. By one estimate, the amount of electricity required to run cryptomining for a year worldwide is equivalent to the amount of electricity required to keep the lights on in a medium-sized European country, such as the Netherlands, for an entire year. So I think crypto not only implicates economic and legal issues, but also environmental ones.

Seal: Daniel, what is the current status of the Cohasset case?

Medved: Nahas was charged with vandalism and fraudulent misappropriation of electrical services in Quincy District Court, but apparently failed to appear at a court hearing last week, last Thursday, leading to the issuance of a warrant for his arrest. So I think we have to follow along and keep the lights on.