According to the United States Court of Appeals for the Fifth Circuit, law enforcement officials do not need a search warrant to get account records from a cryptocurrency exchange or from the public blockchain. On June 20, 2020 the court ruled that cryptocurrency exchange account holders do not have a constitutionally cognizable privacy interest in their transaction history and therefore do not enjoy the search and seizure protections ensured by the Fourth Amendment. U.S. v. Gratkowski, 2020 WL 3530575 (5th Cir. June 20, 2020).
The Supreme Court has long held that a person generally “has no legitimate expectation of privacy in information he voluntarily turns over to third parties.” Smith v. Maryland, 442 U.S. 735, 743-44 (1979). The third-party doctrine is a United States legal doctrine that holds that people who voluntarily give information to third parties such as banks, phone companies, internet service providers, and email servers have no reasonable expectation of privacy. A lack of privacy protection allows the United States government to obtain information from third parties without a legal warrant and without otherwise complying with the Fourth Amendment prohibition against search and seizure without probable cause and a judicial search warrant.
However, exceptions have been made to this principle in certain instances. For example, in Carpenter v. United States, 138 S. Ct. 2206 (2018) the court was faced with the question of whether the third party doctrine extends to cell-site records that track location and movement from where calls are made. Based on cell-site evidence obtained from a telecommunication provider, the government charged the defendant with robbery. The court held that expectations of privacy in this age of digital data do not fit neatly into existing precedents, but tracking a person’s movements and location through extensive cell-site records is far more intrusive than past precedents might have anticipated. Thus, the Court held narrowly that the government generally will need a warrant to access cell-site location information.
In U.S. v. Gratkowski, the defendant argued that he had a privacy interest in the information held in the Bitcoin blockchain. Thus, raising the novel question of whether a person has a cognizable privacy interest in 1) Bitcoin’s public blockchain and 2) transactional information stored on a cryptocurrency exchange.
The court in Gratkowski found that Bitcoin users are unlikely to expect that the information published on the Bitcoin blockchain will be kept private, thus finding that users who trade on the network do not have a legitimate expectation of privacy. In making this finding, the court determined that every Bitcoin user has access to the public blockchain and can see every Bitcoin address and its respective transfers. Due to this publicity, it is possible to determine the identities of Bitcoin address owners by analyzing the blockchain. Users therefore do not have a privacy interest in their trading history due to it being publicly available on the blockchain.
In determining whether a user has an expectation of privacy in their transaction history on a cryptocurrency exchange, the court looked to precedent on traditional financial institutions such as banks. The court recognized that in enacting the Bank Secrecy Act, Congress assumed that individuals lacked “any legitimate expectation of privacy concerning the information kept in bank records.” United States v. Miller, 425 U.S. 435, 439-40 (1976). The purpose of the Bank Secrecy Act was “to require records to be maintained because they have a high degree of usefulness in criminal tax, and regulatory investigations and proceedings.” 12 U.S.C. 1829b(a)(1).
In analyzing existing precedent and applying it to cryptocurrency exchanges, the court found that a user does not have a privacy interest in their transactional records on an exchange. The court therefore found it permissible for the government to request warrantless searches of transactional records from cryptocurrency exchanges.
U.S. v. Gratkowski exposes the lack of privacy interest in cryptocurrency transactional records and the ability for the government to conduct warrantless searches. Although the facts of this case focused on the purchase of illicit products, its holding extends far beyond to all criminal conduct, including to tax evasion.
Under this precedent, it is legal for the government to search the blockchain to identify illicit activity or tax evasion, as well as to request transactional information from cryptocurrency exchanges regarding user activity. With blockchain’s immutable ledger and cryptocurrency exchanges being required to retain transactional information, it is necessary to properly comply with regulatory and tax reporting requirements.
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