The Situation: While investigating a website for criminal activities, federal agents traced Bitcoin transactions and issued a subpoena to a virtual-currency exchange to identify customers of the site. Using that information, the agents obtained a warrant to search one customer's home where they discovered more incriminating evidence. The customer unsuccessfully moved to suppress the evidence, and he appealed.
The Result: The Fifth Circuit ruled that no search warrant is required to obtain records of Bitcoin transactions under the well-established doctrine that "a person generally has no legitimate expectation of privacy in information he voluntarily turns over to third parties."
Looking Ahead: Virtual-currency exchanges and other cryptocurrency intermediaries should ensure that they are complying with know-your-customer and anti-money laundering requirements and review their compliance policies and procedures to prepare for government subpoenas.
A Bitcoin user does not have a Fourth Amendment privacy interest in records kept by a virtual-currency exchange, the Fifth Circuit has held. In United States v. Gratkowski, No. 19-50492 (5th Cir. 2020), the Court ruled that federal agents could subpoena Bitcoin records from an exchange without first obtaining a warrant based on probable cause. Government investigators can also use sophisticated software to extract information from the Bitcoin blockchain without a warrant, according to the Court, because the blockchain is public.
Although Bitcoin transactions are often described as anonymous, they take place on a blockchain that publicly discloses how much Bitcoin changes hands, as well as the senders' and receivers' "addresses," similar to bank-account numbers. The blockchain does not disclose the identities of the users associated with these transactions and addresses. But government investigators can often discover users' identities from other sources: virtual-currency exchanges, hosted-wallet providers, and other cryptocurrency intermediaries that help people send and receive Bitcoin. These companies are required by law to keep records of their customers and transactions, just as banks do, under know-your-customer requirements imposed by anti-money laundering laws. To link an anonymous Bitcoin transaction with a user's real-world identity, the government can subpoena the intermediary.
That is what happened in Gratkowski. Federal agents investigating a website for criminal activities used forensic software to extract a list of suspicious addresses from the Bitcoin blockchain. They then subpoenaed a virtual-currency exchange to trace Bitcoin payments made to those addresses back to customers. The exchange's response identified Gratkowski as one such customer. Using Gratkowski's Bitcoin records to establish probable cause, the agents obtained a warrant to search his home, where they uncovered more incriminating evidence. Charged with federal crimes, Gratkowski moved to suppress the evidence. He challenged both the Bitcoin records obtained from the public blockchain and the Bitcoin records obtained from the exchange. Gratkowski's motion was denied, and he appealed.
Judge Haynes, writing for the Fifth Circuit, decided the case under the well-established doctrine that "a person generally has no legitimate expectation of privacy in information he voluntarily turns over to third parties." Courts have applied this "third-party doctrine" to customer financial records kept by banks. The Fifth Circuit reasoned that Bitcoin records kept by an exchange should be treated the same way. Both banks and exchanges are regulated financial institutions that "keep records of customer identities and currency transactions," although one deals in physical currency and the other in virtual currency. The third-party doctrine also applied to records found on the blockchain, where every Bitcoin user "can see every Bitcoin address and its respective transfers." Since Gratkowski had no privacy interest in his publicly-available Bitcoin records, the government did not need a warrant to run those records through forensic software.
Finally, the Fifth Circuit declined to treat Bitcoin records like cell-phone location records, which enjoy special Fourth Amendment protection under the Supreme Court's recent decision in Carpenter v. United States, 138 S. Ct. 2206 (2018). Unlike cell-phone location records, which provide an "all-encompassing record of the holder's whereabouts," Bitcoin records have a limited financial scope more akin to traditional bank records, the Fifth Circuit held. And also unlike the cell-phone location records in Carpenter-which transmitted automatically from the phone to the wireless carrier-the records in Gratkowski resulted from the user's own affirmative acts when he conducted Bitcoin transactions.
Gratkowski is the first appellate decision to address Fourth Amendment privacy interests in virtual-currency transactions. While the opinion is not binding outside the Fifth Circuit, we expect the government to urge Gratkowski's reasoning in cases nationwide. Bitcoin users, virtual-currency exchanges, and companies that transact business on a public blockchain should therefore consider three practical consequences of the Gratkowski decision (in the Key Takeaways below):
Three Key Takeaways
- Virtual-currency exchanges should prepare for government subpoenas. Virtual-currency exchanges, hosted-wallet providers, and other cryptocurrency intermediaries should have personnel and plans in place to respond to subpoenas and ensure compliance with know-your-customer requirements and anti-money laundering laws. It will be better to identify and remedy any gaps in compliance before subpoenas come.
- Some Bitcoin users may seek out products and services that enhance user privacy. The Gratkowski decision may spur some Bitcoin users to seek out alternate methods of transacting that enhance user privacy, such as other forms of cryptocurrency that have privacy features Bitcoin lacks, or services that allow Bitcoin users to obscure transaction details.
- Blockchain users should be aware that transactions on public blockchains can be viewed by everyone. The Gratkowski case demonstrates that sophisticated forensic software can reveal much about transactions made on a public blockchain. This is undoubtedly positive when it discourages or prevents criminal conduct. However, all blockchain users should keep in mind that transactions on public blockchains can be viewed by everyone and act accordingly. When there is a lawful reason to keep transactions confidential, for instance, legitimate businesses should consider whether a public blockchain is the right platform and should remain alert to potential threats from cybercriminals.
Originally published July 2020.
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