In the context of a search warrant in a criminal case, the Fifth Circuit Court of Appeals in the United States held that the virtual currency exchange Coinbase was like a “traditional bank.”  The details of the case, U.S. v Gratkowski, Case No. 19-50492 (5th Cir. June 30, 2020), are 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 website, some users, like Gratkowski, paid the website in Bitcoin.

Federal agents used an outside service to analyze the publicly viewable Bitcoin blockchain and identify a cluster of Bitcoin addresses controlled by the website. Once they identified the website’s Bitcoin addresses, agents served a grand jury subpoena on Coinbase for all information on the Coinbase customers whose accounts had sent Bitcoin to any of the addresses in the website’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 to them that he was a customer of the website.  Gratkowski moved to suppress the evidence obtained through the warrant.

The case presented the “novel question” of whether an individual has a Fourth Amendment privacy interest in the records of their Bitcoin transactions.  The right against unreasonable searches applies when a person has a “reasonable expectation of privacy.”  But, under the so-called “third party doctrine,” there is no legitimate expectation of privacy in information voluntarily turned over to third parties.  In applying that doctrine, the U.S. Supreme Court has previously held bank records were not subject to Fourth Amendment protections.  The Supreme Court has also held 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 held that individuals had a privacy interest in their cell phone location records, because that provides officers with “an all-encompassing record of the holder’s whereabouts” and “provides an intimate window into a person’s life, revealing not only [an individual’s] particular movements, but through them [their] familial, political, professional, religious, and sexual associations.”  In so holding, the court remarked that cell phones had become “almost a feature of human anatomy.”

The Fifth Circuit rejected Gratkowski analogy of the Bitcoin blockchain to Carpenter. It said that the Bitcoin information is limited and that transacting through Bitcoin is not “a pervasive [or] insistent part of daily life.”

The court further held that hat the Coinbase records are more akin to the bank records than to cell phone data.  It said that Coinbase is a financial institution that provides Bitcoin users with a method for transferring Bitcoin. The main difference between Coinbase and traditional banks, is that Coinbase deals with virtual currency 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, since that 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 held that Gratkowski did not have a privacy interest in the records of his Bitcoin transactions on Coinbase.  It therefore affirmed the district court’s denial of Gratkowski’s motion to suppress.   The decision should also stand as a lesson to all those who believe that their Bitcoin transactions are anonymous.

Author

Email
David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. He is currently the Chairman of the Litigation Department of the firm’s New York office. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. Since 2008, David has been included in Chambers for his expertise in international arbitration.