On June 30, 2020, the Fifth Circuit Court of Appeals unanimously held in United States v. Gratkowski1 that an individual does not possess a sufficient privacy interest in the records of bitcoin (BTC) blockchain transactions to justify protection under the Fourth Amendment, concluding that a BTC user who utilizes the public blockchain and/or a cryptocurrency exchange has no more of an expectation of privacy than those that use traditional banking institutions.
U.S. v. Gratkowski
The defendant in Gratkowski was the subject of a federal investigation into a child pornography website, in which BTC was one method of accepted payment. Using an outside service to analyze the BTC blockchain (which is public), federal agents were able to identify a cluster of BTC addresses controlled by the website, some of which were located at a particular cryptocurrency exchange. Federal agents served a grand jury subpoena on that cryptocurrency exchange – and not a warrant – requesting information on the customers whose accounts had sent BTC to any of the addresses in the cluster that investigators had identified. With that information, agents obtained a search warrant on the defendant’s home, uncovering incriminating evidence which led to criminal charges.
The defendant moved to suppress the evidence obtained via the search warrant, arguing that the basis for the search warrant (e.g., the information obtained via the grand jury subpoena issued on the cryptocurrency exchange) was obtained in violation of his Fourth Amendment privacy rights. Specifically, the defendant argued that the government violated his reasonable expectation of privacy in the records of his BTC transactions both on BTC’s public blockchain as well as the cryptocurrency exchange. The district court denied the defendant’s motion and the defendant appealed to the Fifth Circuit Court of Appeals.
The Fifth Circuit affirmed the district court’s denial of the defendant’s motion to suppress, holding that the defendant did not have a reasonable expectation of privacy for information on either BTC’s public blockchain or at the cryptocurrency exchange. With respect to the defendant’s transactions using BTC, the Court found that the defendant voluntarily used BTC (which has a public blockchain with a visible chain of transactions), noting that BTC users are “unlikely to expect that the information published on the Bitcoin blockchain will be kept private, thus undercutting their claim of a ‘legitimate expectation of privacy’.” This weighted heavily against a finding that the defendant had a privacy interest in his BTC transactions. Additionally, the Court referenced the third-party doctrine, whereby a person generally “has no legitimate expectation of privacy in information he voluntarily turns over to third parties.”
With respect to the defendant’s BTC transactions at a cryptocurrency exchange, the Court found that the cryptocurrency exchange’s BTC records were more akin to bank records (for which there was no reasonable expectation of privacy) than, for example, cell phone location records (for which there was a reasonable expectation of privacy). In addition, unlike cell phone location records, obtaining access to a cryptocurrency exchange’s BTC records did not provide federal agents with “an intimate window into a person’s life,” but rather, simply provided information about a person’s virtual currency transactions.
The Fifth Circuit’s ruling places certain digital assets into a category much more aligned with traditional banking for the purposes of the Fourth Amendment. Cryptocurrency exchanges should be aware of this precedent when responding to grand jury subpoenas, search warrants, or other governmental inquiries.
Additionally, the Court’s ruling could have implications on the use of third-party intermediaries, such as exchanges, to transact and host virtual currencies. For example, certain actors could seek to avoid exchanges, and instead, transact on peer-to-peer marketplaces or other decentralized platforms to avoid detection from governmental authorities. In addition, actors could use mixers (for the purposes of BTC) or otherwise use digital assets that do not leave a transaction trail on the blockchain, such as privacy coins, which are much more difficult to trace. This could present an additional challenge for in-house compliance teams seeking to determine source of funds.
In short, we will continue to follow developments closely in this space, including as it relates to those in the virtual currency industry. If you have any questions regarding the implications of this ruling, please contact Anthony Tu-Sekine, Andrew S. Jacobson, or your primary attorney in Seward & Kissel’s Blockchain & Cryptocurrency Group.