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 (5th 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.