Many people hold the misconception that cryptocurrency offers total anonymity in financial transactions. There are multiple reasons why the belief that this decentralized private digital money does not conceal the identities of transacting parties. For one, the perception of complete anonymity is illusory because all transactions on the blockchain are accessible to the public. Since most blockchain environments “..have transaction structures that show the sender and receiver addresses explicitly. Because of this property of openness, a large proportion of the users can be re-identified..” (p. 18). These concerns pale in comparison to the legal resources at the disposal of government agencies with broad objectives ranging from tax collection, criminal investigation, and to even surveillance. This disproportionately impacts new entrants in the space that use exchanges and lack the technological illiteracy to hold their digital token in self-hosted wallets, as exchanges are subject to KYC and AML laws.
There are many various laws, judicial constructs, and conferred powers government actors utilize to relinquish our financial privacy. These tactics extend beyond semantical word games over what constitutes “…persons, houses, papers, and effects..” in the digital age (Amend. IV). One of the best-known doctrinal assaults against economic privacy invoked by law enforcement is the third-party doctrine. A judicial doctrine that strides a thin line, between the state interests; and regulating illegal activities (p.3). Although, the third-party doctrine has remained in use since the 1970s it has been a subject of controversy. The decision in United States v. Miller (1976) spurred the passage of the Right to Financial Privacy Act (1978), a feeble attempt to stifle the reach of the doctrine. The law was riddled with numerous exceptions to warrant requirements.
What is the Third-Party Doctrine?
Legal scholar Orrin S. Kerr provides a succinct definition of the doctrine:
“…The “third-party doctrine” is the Fourth Amendment rule that governs the collection of evidence from third parties in criminal investigations.’ The rule is simple: By disclosing to a third party, the subject gives up all of his Fourth Amendment rights in the information revealed (p.563)..”
The extent to which the doctrine is a rule and not an exception is a matter of debate among civil libertarians and privacy purists. Any information disclosed to a financial intermediary is not out of the reach of government officials. This also includes information provided to a third party that the customer believes will “remain private” ( Hoffa v. the United States) (p.9).
The nascent roots of the third-party doctrine lay within the test established in Katz v. the United States (1967). What has become known as the “Katz Privacy Test”; weighs privacy interests against the interests of the state. The case established a two-part judicial test for distinguishing when a private citizen has a reasonable expectation of privacy. 1.) An individual must have a subjective expectation of privacy. 2.) Society must accept these circumstances as being reasonable. Both standards are abstract and murky, making it a hindrance to derive clear and consistent guidance from such disputable and open-end criteria.
It is not until nearly a decade later that the doctrine emerged when the Katz Test applied to a case regarding financial privacy. This seminal case was no other than the infamous United States v. Miller (1976). The case involved Mitch Miller charged with producing untaxed liquor. In the process of collecting evidence, the ATF (Department of Alcohol, Tobacco, and Firearms) issued several subpoenas to collect Miller’s banking records. (p.12). Miller was never informed that his banks had been summoned to supply his records to the ATF. As luck would have it, the lower courts saw that the ATF “…had unlawfully circumvented the Fourth Amendment by first requiring the banks to maintain the customer records for a certain period and second by using the insufficient legal process to obtain those records from the bank..”(p.13). The high court reversed the previous decision citing that “…bank kept copies of personal records that he gave to the bank for a limited purpose and in which he retained a reasonable expectation of privacy under Katz..” (p. 13). The SCOTUS reasoning :
“…checks are not confidential communications, but negotiable instruments to be used in commercial transactions, and all the documents obtained contain only information voluntarily conveyed to the banks and exposed to their employees in the ordinary course of business. The Fourth Amendment does not prohibit the obtaining of information revealed to a third party and conveyed by him to Government authorities….”
Ultimately, the court ascertained that information provided to banks was not subject to Fourth Amendment protection. After all, the information we are willing to disclose to an intermediary may not be so confidential. Ideally, we would never choose to convey such information. We also trust financial institutions to exclude the gruesome details of our purchasing decisions, regardless of the legality. All because a purchase was legal does not mean it was not embarrassing. For example, frequent outings at fast-food restaurants, pornography, and scoring BTS tickets are all legal transactions, but all ones that should not be scrutinized by the judging eyes of stuck-up government employees. It is not just the bad guys who are seeking the prying eyes of government officials.
The case to advance the third-party doctrine was Smith v. Maryland (1979), adjudicated a few years after Miller further reinforced this hideous obstruction to individual privacy. In this case, the telephone company installed a pen register “…to record the numbers dialed from the telephone at.. the home the suspect of robberies. This scenario would be considered a Fourth Amendment exception since the phone companies already have access to and record phone records.
Another landmark case in the judicial history of the doctrine was United States v Jones (2012). The defendant was arrested on drug charges after a law enforcement official attached a GPS tracker to her vehicle for 24-hour surveillance and all without a warrant. The Supreme Court viewed the warrantless attachment of a GPS tracking device as a Fourth Amendment violation. That covert tracking constituted a trespass and a violation of the reasonable expectation of privacy.
For any faithful civil libertarian, Jones might have been a glimmer of hope in the arena of the right to privacy. The logic in Riley v. California (2014) we have the illusion of hope regarding privacy matters. Riley was a member of a San Diego gang that opened fire on a rival and subsequently drove away. He was then pulled over for expired tags while operating another vehicle and was searched before being impounded; officers intercepted contraband. The responding found two guns and called in the gun unit to analyze Riley’s phone depicting the suspect making gang signs. The ballistics tests tied Riley to the previous shooting direct toward rival gang members. The court ruled in favor of Riley in this case; digital data presents no immediate harm to investigation officers, but phones operate as “minicomputers”, holding a plethora of personal information. Therefore, a warrantless search may be acceptable in exigent circumstances (which Riley did not present).
The next step in the stare decisis whittling down the third-party doctrine was Carpenter v. the United States (2018). Defendant Timothy Carpenter; was implicated in a series of robberies, and his phone number was located by authorities; they used this information per the Stored Communications Act (1986). Based upon “..cell-site evidence..” Carpentry had been located as being nearby to the crimes. The five-four decision stated that :
“… Expectations of privacy in this age of digital data do not fit neatly into existing precedents, but tracking person’s movements and location through extensive cell-site records is far more intrusive than the precedents might have anticipated…”
Essentially, utilizing the tracking capabilities of smartphones veers into a territory that infringes upon our enumerated right to privacy. Paralleling, the situation in Jones warrantless tracking regardless of the method is unconstitutional. In many ways using a smartphone is analogous to strapping a tracking device to a motor vehicle.
Crypto and The Third-Party Doctrine
The byproduct of the Carpenter decision has opened a new chapter in the Jurisprudence of the third-party doctrine. Per Fourth Amendment Orrin Kerr “… Carpenter “recasts a lot of doctrine in ways that could be used to argue for lots of other changes.” (p.226). So far, the courts appear to have analogized transactions occurring on cryptocurrency with those of traditional financial institutions (banks). The first case to apply the doctrine to cryptocurrency transactions was United States v. Gratkowski (2020).
The case involved a federal investigation into a child-pornography website and officials subpoenaed Coinbase’s transaction records; defendant Richard Gratkowski was suspected of patronizing the website under investigation through the exchange. (p.1-2). Gratkowski attempted to suppress the information procured in the investigation”.. the government violated the Fourth Amendment by using a subpoena to obtain his information instead of a warrant…” (p.127). The defendant foolishly argues this point without much consideration of the stare decisis substantiating the doctrine. After all, voluntarily disclosed information, in most instances (p.1), is immune from warrant requirements. The court found paralleling cryptocurrency transactions to phone records (Carpenter) was not an equal comparison. As phone logs are far more intrusive “window into a person’s life”(p 129).
Beyond the concerns regarding the degree to which disclosure of transaction histories could be construed as intrusive, in the eyes of the law, the defendant has already consented to the visibility of his financial activity. The court perceived that Gratkowski did not have a reasonable expectation of privacy as Coinbase not only has public records of all transactions but also is subject to the Bank Secrecy Act (1970) (p. 130). Per the letter of the law, the assumption of anonymity is illusory when conducting business with an intermediary such as Coinbase since it is an institution that fits within the purview of the BSA. (p.131).
In a hail Mary attempt, Gratkowski’s defense team tried to invoke the logic of Kyllo v. the United States (2001). In Kyllo, an agent of the Department of the Interior utilized thermal-imaging technology to detect Danny Kyllo’s marijuana grow operation. The Fifth Circuit felt as if extrapolating Kyllo to Gratkowski’s circumstances was inappropriate as even if thermal imaging was equal to traceable record transactions, the cited case is only applicable to searches within the home (p.132).
Per the current case law, it is indisputable that the third-party doctrine extends to cryptocurrency transactions that occur on an exchange. This does not ethically justify the application of this egregiously invasive judicial construct to financial surveillance. In balancing state and individual interests, the right to privacy implied in the Fourth Amendment was effectively sullied. An individual using banking or investment services should not have to be concerned about the trespasses of government agents on their transactional histories. Even if an individual has committed no crime, they still have a right to privacy. Do you want the judgmental eyes of an overpaid government employee criticizing your recent purchases of tickets to a BTS concert or a treasure trove of goodies at the local sex shop? Some purchases and investment decisions are downright humiliating and should remain out of the view of external individuals. All because stare decisis sides with the third-party doctrine, does not mean that it is faithful to the contextual interpretation of the Fourth Amendment. Especially, when in the digital age the perception of “…persons, houses, papers, and effects…” (Amend. IV) has shifted into a sphere of intangible media.
While it is disturbing that the technologically illiterate must restore to using crypto exchanges subject to the legal logic of the doctrine. Unfortunately, self-hosted wallets are not safe from the encroaching hand of the state. While regulators are now seeking to target self-hosted wallets for AML and KYC, we know that the Juris prudence will most likely extend the insidious third-party doctrine to these private methods of cryptocurrency storage. Soon cryptocurrency transactions will fully be under the surveillance and auspices of the government. The best we can hope for is that the high court will realize the error of this perverted doctrine and call it out for the Fourth Amendment violation that it is.