Virtual currency has been around for a number of years now, and yet many still believe virtual currency transactions provide a level of anonymity and privacy not afforded by other types of monetary transactions. That simply isn’t true. With the right tools and understanding, it is possible to uncover the identities of virtual currency users. Moreover, virtual currency has led to the evolution of financial regulations, tax regulations, and legal regulations. In July, the Fifth Circuit dealt with whether Bitcoin users had certain Fourth Amendment protections from unreasonable searches and seizures. In short, they do not.
Bitcoin Transactions, Generally
Virtual currencies may take many forms, but the “Bitcoin” is perhaps the most well-known. Furthermore, Bitcoin transactions function in a very specific way. Bitcoin users maintain an “address,” which is a string of alphanumeric characters, much like a bank account number. A company or organization may form multiple addresses and combine them into a separate, centralized address, known as a “cluster.”
When a Bitcoin user desires to execute a transaction, he or she must utilize either specialized software or a virtual currency exchange. Coinbase and Mt. Gox are two notorious exchanges. A Bitcoin transfer involves a transaction announcement on a blockchain, a publicly accessible ledger of all Bitcoin transactions. The blockchain only includes the following information: the amount of Bitcoin transferred, as well as the sender’s address and the receiver’s address. Based on this information (and analyzing the blockchain transaction history, clusters, and the virtual currency exchange), individual users may be identified. This should reinforce the fact that Bitcoin transactions are pseudonymous, notanonymous. See Bitcoin Forensics – The Facade of Anonymity for more information on the Internal Revenue Service and supposed Bitcoin anonymity.
United States v. Gratkowski
In Gratkowski, federal agents analyzed the public Bitcoin blockchain and identified a cluster of addresses controlled by a nefarious website used for child pornography. After the agents identified the addresses, they served Coinbase with a grand jury subpoena to obtain all information on customers who sent Bitcoins to any of the addresses in the website’s cluster. Coinbase identified Gratkowski as a customer.
Federal agents obtained a search warrant and found child pornography at Gratkowski’s house. The government charged him with more than one child pornography-related counts. As a result, Gratkowski moved to suppress evidence obtained from the government’s blockchain analysis and the Coinbase subpoena. Gratkowski argued such methods violated the Fourth Amendment.
The Fourth Amendment of the U.S. Constitution states, in part, that “[t]he right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated . . . .” For a search to be “unreasonable,” a person must have a “reasonable expectation of privacy in the items at issue. Additionally, a person generally has no legitimate expectation of privacy in information he voluntarily turns over to third parties—the third-party doctrine.
The Supreme Court has previously held that bank records and telephone call logs are not protected by the Fourth Amendment. However, it has held that individuals do have privacy interests in their cell phone location records even though such records are held by third parties. As a part of its analysis, the Supreme Court considered (1) “the nature of the particular documents sought,” which includes whether the sought information was limited and meant to be confidential, and (2) the voluntariness of the exposure.
Ultimately, the Fifth Circuit held that Bitcoin transaction records are not subject to Fourth Amendment privacy rights. The court was persuaded that blockchains records are more like bank records than cell phone location records. In particular, the Fifth Circuit noted that transferring and receiving Bitcoin requires an affirmative act and that users are unlikely to expect any privacy related to the information published on the blockchain. Further, the court underscored that virtual currency exchanges are financial institutions subject to the Bank Secrecy Act and, thus, maintain records of customer identities and currency transactions.
The Fifth Circuit joins other jurisdictions in denying Bitcoin users Fourth Amendment privacy interests in their virtual currency transaction records. This should not be surprising since a blockchain is publicly accessible. Consequently, virtual currency users should be weary of their actions for a few reasons. First, as Gratkowski makes clear, transaction records can be used against virtual currency users. Second, governments/agencies will go to great lengths to uncover user information (e.g., open source tools, private software, subpoenas, etc.). Finally, while Bitcoin transactions are pseudonymous and provide a certain level of privacy protection, Bitcoin users are certainly not invisible.
For more Insights on Bitcoin matters, see Bitcoin, Blockchain, and the Revolution to Come, Bitcoin Forensics: The Facade of Anonymity, The IRS and Big Data: The Future of Fighting Tax Fraud.
 United States v. Gratkowski, 964 F.3d 307, 309 (5th Cir. 2020).
 Id. at 309-10.
 U.S. Const. amend. IV.
 United States v. Jones, 565 U.S. 400, 406 (2012).
 Smith v. Maryland, 442 U.S. 735, 743-44 (1979).
 See United States v. Miller, 425 U.S. 435, 439-40 (1976); see also Smith, 442 U.S. at 742-44.
 Carpenter v. United States, 138 S. Ct. 2206, 2217 (2018).
 Id. at 2219-20.
 Gratkowski, 964 F.3d at 311-12.
 Id. at 312.
 See Zietzke v. United States, 426 F. Supp. 3d 758 (W.D. Wash. 2019); Zietzke v. United States, No. 19-cv-03761, 2020 WL 264394 (N.D. Cal. Jan. 17, 2020).
Have a question? Contact Zachary Montgomery, Freeman Law, Texas
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