Texas Federal Judge Rules Fourth Amendment Does Not Apply to Bitcoin Transaction Records
A lawyers explanation of United States v. Gratkowski (2020) 964 F3d 307.
Do US citizens have a Fourth Amendment right to privacy in the records of their bitcoin transactions? A recent federal case out of the 5th Circuit Court of Appeals addressed whether the Fourth Amendment applies to cryptocurrency transactions on the blockchain which sets enormous precedent on the ability of the government to obtain these records without a warrant.
As a word of caution, this is one of the darker cases that I’ve come across in my journey to understand the regulatory framework growing around this emerging industry. It involves a criminal defendant who used his bitcoins to purchase illegal content on a child pornography website. However, before we proceed in discussing this case and the legal implications that it has on Fourth Amendment constitutional rights, it’s worth noting that what the Defendant did in this case bears no relation to the millions of users who are currently holding bitcoin for completely legitimate and altruistic reasons. Despite media reports about the illegal use case of cryptocurrency, most cryptocurrency holders are not funneling money to terrorist organizations, nor are they individuals using cryptocurrency for uses like the Defendant in this case. The predominant share of people who own bitcoin do so because they understand the true power of a borderless, decentralized currency that is autonomous and decoupled from the manipulation of mismanaged macroeconomic policy practiced by well intentioned, but naturally flawed human beings. It’s also a protest out of a monetary system that regularly engages in the steady devaluation of the money that low income people work so hard to earn. Needless to say, as with any new technology some human beings will utilize it for evil while others will use it to create a far better and fairer world. So despite the heinous conduct from the Defendant that set this case in motion, the ruling still holds legal precedent and touches on civil liberties with respect to cryptocurrency transactions.
Let’s start off explaining some factual background about the probative facts in this case. A criminal defendant, Gratkowksi, became the subject of a federal investigation after federal law enforcement began investigating a child-porn website “(“the Website”) and the bitcoin purchases through Coinbase that offenders like Gratkowski were using to buy illegal child porn. Due to the high volume of bitcoin that was flowing to the Website, federal agents were tipped off and began to investigate this high traffic on the public bitcoin ledger.
I head to learn a little bit about the blockchain ledger and how groups of transactions operate to fully understand the facts of this case. Whenever an organization creates multiple bitcoin addresses, it often combines the addresses into a central bitcoin address known as a “cluster.” Given the fact that the bitcoin ledger is completely available to the public, law enforcement organizations, such as the FBI, are able to comb through the ledger and identify clusters that they deem violate US laws.
That is what happened in this case. Federal agents were able to pinpoint a cluster of cryptocurrency transactions on the public ledger that were being used to purchase child pornography on the Website. The Feds then served Coinbase with a grand jury subpoena instead of obtaining a warrant so that they could obtain the information of any individuals who had sent bitcoin to any addresses within the Website’s cluster. Gratkowski was identified and was ultimately arrested after agents seized a hard drive from his home containing child pornography. Gratkowski admitted to the crime and was ultimately charged with one count of receiving child pornography and one count of accessing the Website with an intent to view. Gratkowki argued that the subpoena violated the Fourth Amendment right to privacy for the records of his bitcoin transactions and moved to suppress the evidence obtained by it.
This was the first instance where a federal court had to address whether a US citizen has a Fourth Amendment right to privacy in the records of their blockchain transactions.
In the United States, the Fourth Amendment states plainly
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.has a fairly well established
The Fourth Amendment protects the people against unreasonable searches and seizures by the government. Whether it be a question of can police officers can go through your trash to find incriminating evidence against you, or can they can wiretap your phone without your consent, the Fourth Amendment has been analyzed and litigated in numerous ways by the US Supreme Court. However, it’s important to remember that the function of it serves to ensure a proper restrain on governmental conduct by officials whose conduct extends beyond the normal need for law enforcement. It doesn’t necessarily mean all searches and seizures are prohibited, just unreasonable ones.
As Justice Learned Hand most famously wrote in an old alcohol prohibition case from the 1930s, the Fourth Amendment is:
“one of the pillars of liberty so necessary to a free government that expediency in law enforcement must ever yield to the necessity for keeping principles on which it rests inviolate.”
There are times however where the Supreme Court has established a search is indeed reasonable and thus not prohibited by the protections of the Fourth Amendment. For the Government to have infringed upon an individual’s Fourth Amendment right, the person must have had a reasonable expectation of privacy in the items at issue. Furthermore, the moment an individual voluntarily turns these items or information over to a third party, the Supreme Court has held that there is no legitimate expectation of privacy anymore. This is known as the third-party doctrine and was established in Smith v. Maryland (1979). 442, U.S. 735, 743–44.
Now based on this analysis, it seemed fairly certain that Gratkowski was going to face justice for the crimes he committed. And rightfully so. Or at the very least, the evidence would be admissible by the government in his criminal prosecution. However, Gratkowski relied on one case that sets out an interesting exception to the third-party doctrine when applied in the context of cell phones. This is the case of Carpenter v. United States (2018) 138 S. Ct. 2206.
To keep a long story short, the Carpenter case was about four men who were arrested after robbing a series of Radio Shacks and T-Mobiles stores in 2011. Ironically enough, when the Feds ultimately caught up to them, they applied for a court order under the Store Communications Act to obtain the defendant’s cellphone location data from their mobile carrier. The government in that case sought to overcome the defendant’s Fourth Amendment objections that a privacy interest existed in their location data from the cell phone records. The government argued that because the cellphone location data was stored with the phone carrier, it was effectively a third party disclosure and thus Smith would allow it to come in. However, the Carpenter court determined that given the unique nature of cellphone location records, an individual maintains a legitimate expectation of privacy in the record of his physical movements captured through the cellphone records. This case set a precedent that the government could not simply obtain your movements under the third party doctrine simply because your cell phone was monitoring them and storing with Verizon and AT&T.
Gratkowski argued that his circumstances equated to the unique context that was present in Carpenter. He argued to the court that the bitcoin transaction records, stored on the public blockchain network and Coinbase’s exchange, were not subject to the third-party doctrine of the Fourth Amendment and therefore because he had a reasonable expectation privacy in the bitcoin records it could not be used against him.
The Court in this case disagreed. Rather than relying on the Carpenter case, the Gratkowski court determined that the circumstance in this case was more tantamount to bank records and call logs rather than cellphone location data. The issue of bank records had already been litigated previously by the Supreme Court in the case of United States v. Miller (1976) 425 U.S. 435. There, the Supreme Court concluded that the bank records were not confidential communications to a third-party but negotiable instruments which contained only information voluntarily conveyed to the banks and exposed to their employees in the ordinary course of business. The Court held that when Congress enacted the Bank Secrecy Act, it assumed that individuals did not have “any legitimate expectation of privacy concerning the information kept in bank records.” They determined this by noting that the express purpose of the Bank Secrecy Act was to require records to be maintained because of their utility in “criminal tax, regulatory investigations and proceedings.” This language was quoted right from the law itself: 12 USCS § 1829b.
The court in Gratkowki’s case concluded that there was a stark difference between the bank records and autonomous tracking of your location data by a cellphone. They held that the difference between location data and bank records/call logs is that location data “provides an intimate window into a person’s life, revealing not only particular movements, but through them familial, political, professional, religious, and sexual associations.” Further, the Gratkowki court concluded that cellphones have become “almost a feature of human anatomy” and the third party location data implicate privacy concerns beyond the records sought in Miller and Smith. The reason? Cellphones have become indispensable to 21st century living, and do not require not affirmative action by the user for the phone to begin tracking your movement. This lack of ability to live without a cellphone and lack of affirmative act by the user to turn the tracking on was the reason the Court chose to make an exception in the Carpenter case.
The Court denied that individuals have a reasonable expectation of privacy in their cryptocurrency transaction records on the public blockchain ledger because: (1) the information on the blockchain is very limited in that it only records the address sending, receiving and the amount of coins transferred; (2) Bitcoin is not a “pervasive or insistent part of daily life; and (3) an affirmative act from the user is required to transfer the coins. Also, the Gratkowski court denied that individuals have a reasonable expectation of privacy in their transaction records on Coinbase (and other exchanges) because the information about the person is limited, Coinbase does not have “an intimate window into a person’s life,” and an affirmative act is still required on the part of the user to initiate the transfer. Ultimately, the Court determined that users agree to sacrifice some privacy by transacting through an intermediary like Coinbase. Therefore, by doing so, they do not have a reasonable expectation of privacy in their transactions on these exchanges as well. This harks back to the first article I published where a California Court set the precedent of “Not Your Keys Not Your Coins.”
In the end, Gratkowski had to face justice for his crimes and the evidence of his transactions was not prevented from being used against him. Regardless of your opinion on Gratkowski and what he did with his bitcoins, this case is a pivotal moment for how Federal Courts are seeing cryptocurrencies and the information stored in the public ledger and exchanges. One fact appears to be changing even faster than courts can keep up with and it will be interesting to see if their rulings changes as new technologies continue to test the Fourth Amendment Third-Party Doctrine. The most striking difference that we are all seeing unfold before our eyes is the increasing pervasive and insistent use case in our daily life that cryptocurrencies are having. For this case, the Court determined it was small. The verdict is still out on how that that will change going forward. In the end, however, this case is an interesting intersection between the needs of the government to address Fourth Amendment privacy concerns and protecting civil liberties while also recognizing the need for law enforcement to stop crimes perpetrated with cryptocurrencies. This case will be interesting one to keep an eye on going forward.
