Bitcoin Exchanges And The Cryptocurrency World Was Just Rocked

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In an unexpected to say the least case of first impression, the United States Court of Appeals for the Fifth Circuit, essentially, blew away the privacy doors of the cryptocurrency world when it forced a Bitcoin exchange to disclose user data to the federal government without being served a warrant. See USA v. Gratkowski, Case number 19-50492, (5th Cir. 2020).  This Bitcoin exchange use blockchain technology that records every transaction in a publicly accessible ledger, but the persons owning the actual Bitcoin addresses are not known.

The appellate court found that the government could subpoena a cryptocurrency exchange, and obtain records since there was no violation of the defendant’s Fourth Amendment rights. The court reasoned that users of the digital coin exchanges have no greater privacy rights than those people who have accounts at ordinary banks. The court also held that Bitcoin traders have no expectation of privacy for information published on the public blockchain.

This decision also implicated the United States Supreme Court’s recent decision requiring a warrant to access cellphone records in Carpenter v. United States.  In this case, however, the court said only a subpoena was necessary because it was similar to bank records where there is not necessarily a Fourth Amendment protection.  The court also indicated that no one considered Bitcoins to be as central to someone’s daily life like cellphones.

It would appear that, despite the well-known privacy benefits of blockchain technology, this court apparently believes these exchanges fall under the “third-party doctrine,” whereby there is no expectation of privacy when a party turns over their information voluntarily to a third party, including, but not limited to, banks.  The court found that both traditional banks and cryptocurrency exchanges would be subject to the Bank Secrecy Act of 1970, the statutory authority requiring financial institutions to turn over financial records.

Nonetheless, this decision may have a chilling effect on the blockchain and cryptocurrency industry.  Many participants have been drawn to this medium because it offers high degree of privacy. It is possible that this decision may cause a great deal of anxiety in this area.

As a result, it is more likely that law enforcement authorities—civil and criminal—will be seeking information from Bitcoin exchanges.  Conversely, it is also likely that Bitcoin exchanges will probably publish less information and seek enhanced privacy protections. Accordingly, these issues should be carefully discussed with counsel when proceeding in the future.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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