Articles Posted in E-commerce

Digital currency security and privacy laws are changing with time. We have mentioned transparency issues in previous articles. The fact that Bitcoin’s blockchain transactions are public and generally accessible can be beneficial when it comes to government investigations. Yet, it may not be the most secure platform for cryptocurrency transactions especially for legitimate businesses. So, in short, we should realize that government surveillance and subsequent investigation may be part of the deal.

The Bitcoin blockchain automatically records all transactions to show when, where, or how the digital currency was bought or sold. It does not show the true name of the associated individuals but that information can be obtained from digital currency exchanges (e.g., Coinbase), third-party wallet providers, or third-party intermediaries. In fact, state or federal anti-money-laundering laws require them to store customer records for identification purposes. So, for example, if a government agency wanted to identify the customer, it could issue a warrant without obtaining a court order. Then, the third-party recipient – i.e., a digital currency exchange like Coinbase, Abra, or Uphold – would be obligated to respond within a certain deadline. Now, if the government agency has no probable cause to issue the subpoena or warrant, then there may be a problem. There are two notable cases on this point. First, is United States v. Gratkowski, No. 19-50492 (5^th Cir. 2020), where the district court held that the government was allowed to subpoena Bitcoin records from a digital currency exchange without a warrant. Second, is Harper v. Rettig, et al., where the plaintiff sued the Internal Revenue Service (“IRS”) for violating his Fourth Amendment right against unreasonable searches and seizures when it issued an informal demand letter to the digital currency exchange to obtain his financial records. Plaintiff argued that he was unlawfully subject to the government’s investigation since there was no evidence to prove he had committed a violation. Plaintiff also argued that his rights were violated under the Fifth Amendment’s Due Process Clause since the government agency seized his private financial records without prior notice. The government argued the “Third-Party Doctrine” was applicable, and as such, it should be allowed to access any kind of information that was shared with the digital currency exchanges. The Third-Party Doctrine holds that there is no reasonable expectation of privacy when an individual shares information with another party – e.g., Internet Service Provider, Digital Currency Exchange. These cases clearly show that there will certainly be an ongoing clash regarding cryptocurrency security and privacy regulations. On one hand, the government agencies will be overseeing the transactions to ensure legal compliance. On the other hand, consumers will protect their rights pursuant to the applicable state, federal, or international laws.

The government has, and will probably, continue to investigate websites for criminal activities. The government can use special tools or techniques – e.g., forensic software – to evaluate and obtain suspicious addresses from the blockchain. The next step is to send subpoenas towards third-party digital currency exchanges to trace cryptocurrency payments back to the user. The government agents can obtain more information from the digital currency exchange and determine whether they should obtain a search warrant. If so, then they can legally search the suspect’s home or other properties for more incriminating evidence. We have mentioned the Third-Party Doctrine carves out an exception to the Fourth Amendment’s principle against unreasonable searches and seizures. The courts have held that a user who submits information to a third-party digital currency exchange may not protect his privacy by using the Fourth Amendment. However, some litigants have argued that digital currency transactions are similar to cellphone location records which are protected by the Fourth Amendment under Carpenter v. United States (2018) 138 S. Ct. 2206. The district courts have rejected that comparison because cellphone location records are automatically gathered as a result of communications between the individual’s cellphone and communication service provider’s cell towers. However, the digital currency financial records are gathered as a result of the user’s voluntary transactions.

Bitcoin has become a popular digital currency in the past several years. Its price has fluctuated tremendously in the past five years. And now, everyone is rushing into buying it by using various applications such as Coinbase. As always, the bad actors (i.e., hackers) are on the prowl to exploit weaknesses. These weaknesses include the lack of preventive measures such as encryption and backups to secure the wallets. Therefore, once the wallet has been hacked, there isn’t much the victim can do to regain the digital currencies.

It is important to remember that Bitcoin transactions are transparent. In other words, all Bitcoin transactions are public, traceable, and stored on the blockchain network. Bitcoin addresses are the only indicators that show where they are stored and transmitted. Our research indicates that you should be able to protect your privacy if you use a new Bitcoin address every time you receive payment. Technology experts recommend that it may be prudent to use several wallets for different objectives – i.e., you can have a software and hardware wallet that can be used for a different reason. This way, there would not be a direct link between the cryptocurrency transactions.

Technology experts recommend not posting a Bitcoin address on a public domain such as a social media platform. The whole point is to avoid publishing information regarding your digital currency transactions since it could let third parties identify your Bitcoin address. It must be noted that Bitcoin’s network is a so-called “peer-to-peer” network that can be used by the general public. Also, in this kind of network, the user’s Internet Protocol (“IP”) address can be logged without your knowledge or consent. Therefore, it’s important to use some kind of masking software (e.g., ToR) or other technology to hide your computer’s IP address. ToR, which is also called “The Onion Router” provides a way for its users to mask their identities. It was originally designed for the military but it has been used by civilians for several years.

Digital currencies have become prevalent around the globe in recent times. There are various enterprises that are involved in the mining process which is now more difficult especially because it needs more computing power. Bitcoin’s price volatility is a major issue which has scared away investors. However, more importantly, are the security and privacy issues.

Digital currencies are usually stored in software or hardware wallets. These wallets allow the owners to store their digital currencies. There are studies that indicate hardware wallets are not as secure since hackers can use malware to intercept communications between the wallet and computer.

Hackers are always after valuable digital currencies. They are constantly trying to figure out a way to steal Bitcoin, or other kinds of cryptocurrencies, in a clandestine manner. For example, in 2014, Mt. Gox was hacked by an anonymous group and 850,000 Bitcoins were extracted without being found. There are other exchanges such as Coinbase, Binance, Kraken, or Gemini which can be targeted by the so-called “bad actors.” The hackers will use the necessary tools and techniques to shut down the major exchanges. These tools or techniques can be DDoS attacks which can cripple the computer network system. These types of attacks have been used to bring down the networks of private and public organizations.

Cybersecurity risk management has become a more challenging endeavor recently. It was never an easy task for commercial enterprises, but now that we’re facing a global pandemic and economic recession, there are additional challenges. At this point, most of our personal information is being transmitted and stored on the internet. Third-party cloud service providers have become a useful variable in the equation but they can also become a liability if there is a cybersecurity incident. Therefore, cybersecurity risk management has become more difficult especially since commercial enterprises share personal or confidential information with third parties.

The fact that our personal information is no longer in our possession or control makes cybersecurity risk management more challenging. Now, if, our personal information was stored in one location, and as such, was in one company’s possession, life would have been easier. However, multiple vendors, and third-party service providers gain access to our confidential information. So, the level of liability rises to a different stage since there is additional potential responsibilities that must be managed. In addition, some companies have allowed their employees to work from home and this business model makes it more difficult to manage cybersecurity risks. In other words, remote employees can become the proverbial “weakest link” which can be quite dangerous for the commercial enterprise.

A problem in the cybersecurity risk management formula is that change is never ending. The constant change in technology and law makes it more difficult for companies and their information technology managers to keep up. Our law firm’s cybersecurity lawyers generally recommend working with computer technology experts on a regular basis. This way, they can develop the necessary policies on their networks. They should identify the risks by understanding the cybersecurity rules and regulations. An information technology manager should implement internal and external policies to secure the network which usually holds confidential information. For example, the network should have a secure software or hardware firewall, encryption algorithm, and multi-factor authentication system. The information technology manager should develop and implement regular training sessions for employees.

Cybersecurity risk management is a key component in avoiding cybersecurity incidents. Our law firm assists clients with breach response plans pursuant to the rules and regulations. An Incident Response Plan (“IRP”) should be carefully created to address cybersecurity incidents. There are strategic challenges with implementing an effective IRP within the organization but there could also be legal challenges. Hence, we encourage clients to implement a cybersecurity framework that can effectively prevent breaches. This can be done by working with qualified legal and computer experts.

We encourage clients to coordinate communications with their employees and representatives. The company’s partners and affiliates should also be aware of the breach notification and prevention protocols. This is especially important if the company has various locations and satellite offices. The company must act quickly when it finds out about a breach so that it can follow the rules and regulations. In fact, the European Union’s General Data Protection Regulation (a/k/a “GDPR”) mandates breach notification to the proper authorities within three days. In addition, in California, the law imposes a 72-hour breach notification obligation under the California Consumer Privacy Act (“CCPA”) which became effective on January 1, 2020.

We encourage clients to develop different types of response plans for various cybersecurity incidents. There are different types of breach that can take place on the computer network. In general, the bad actors compromise the computer network to steal personal information. However, availability attacks have also increased which in essence deny access to the system. For example, installing ransomware on the computers or launching a Distributed Denial of Service (“DDoS”) attack on the computer network can accomplish this task. There could be serious legal consequences if the company cannot properly protect its network which yields private and confidential information – e.g., intellectual property, trade secrets. There are various state, federal, and international laws in this context. For example, the Philippines Data Privacy Act defines a “security incident” as an event or occurrence that affects or tends to affect data protection or may compromise availability, integrity, or confidentiality.