Court Analogues Coinbase To ‘Traditional Bank’ For Fourth Amendment Privacy Protection Purposes

In the context of a search warrant in a criminal case, the United States Fifth Circuit Court of Appeals ruled that the Coinbase virtual currency exchange was “a traditional bank.” Details of the case, UD v Gratkowski, Case No. 19-50492 (5th Cir. June 30, 2020), as follows.

Richard Gratkowski became the subject of a federal investigation when federal agents began investigating a child pornography website. To download material from the site, some users, such as Gratkowski, paid the site in Bitcoin.

Federal agents used an outsourcing service to analyze the publicly visible Bitcoin blockchain and identify a cluster of Bitcoin addresses managed by the website. After they identified the Bitcoin addresses of the site, subpoena agents presented a grand jury on Coinbase to obtain all information about Coinbase customers whose accounts had sent Bitcoin to any of the addresses in the site’s cluster. Coinbase identified Gratkowski as one of these customers. With this information, agents obtained a search warrant for Gratkowski’s house. At his house, agents found a hard drive containing child pornography; Gratkowski admitted that he was a customer of the site. Gratkowski moved to suppress the evidence obtained through the warrant.

The case posed the “new question” whether an individual has a Fourth Amendment privacy interest in their Bitcoin transaction records. The right against unreasonable searches applies when a person has “a reasonable expectation of privacy.” However, under what is known as the “third party doctrine,” there is no legitimate expectation of privacy in information that is voluntarily transmitted to third parties. Applying that doctrine, the US Supreme Court has previously held bank records that were not subject to Fourth Amendment protections. The Supreme Court has also ruled that the third-party doctrine applies to telephone call logs.

However, in Carpenter v. United States, 138 S. Ct. 2206, 2217 (2018), the Supreme Court ruled that individuals have a privacy interest in their mobile phone location records, because that provides officers with an “all-encompassing record of the holder’s location” and “provides a window close to someone’s life, not only revealed [an individual’s] certain movements, but through them [their] family, political, professional, religious and sexual associations. “In holding that, the court noted that mobile phones had become” almost a feature of human anatomy. “

The Fifth Circuit rejected Gratkowski’s analogy of the Bitcoin blockchain to Carpenter. He said the Bitcoin information is limited and transaction through Bitcoin is not “pervasive [or] a demanding part of daily life. ”

The court further ruled that the Coinbase records hat was more like the bank records than mobile phone data. He said Coinbase is a financial institution that provides a method for Bitcoin users to transfer Bitcoin. The main difference between Coinbase and traditional banks, is that Coinbase deals with virtual currencies while traditional banks deal with physical currency. But both are subject to the Bank Secrecy Act as regulated financial institutions. Both keep records of customer identities and currency transactions.

Finally, the court noted that Bitcoin users are not required to use third parties. They can conduct Bitcoin transactions on their own. However, as this requires a high level of technical expertise, many people chose to use a third-party intermediary instead, such as Coinbase. In making that choice, a person voluntarily agrees to sacrifice some privacy.

The court ruled that Gratkowski had no privacy interest in the records of his Bitcoin transactions on Coinbase. He thus affirmed the district court’s denial of Gratkowski’s motion to suppress. The decision should also stand as a lesson to all who believe their Bitcoin transactions are anonymous.

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