In the wake of the sanctions brought by the Office of Foreign Assets Control (“OFAC”) against virtual currency mixer Tornado Cash, legal scholars far smarter than I am have debated the issues surrounding whether the Tornado Cash protocol is an “entity” within OFAC’s power to sanction, and whether this falls afoul of “code is speech” First Amendment protections articulated in the Bernstein case and elsewhere.
In lawsuits funded by Coinbase and Coin Center, various individuals have raised legal challenges to the OFAC sanctions. Both lawsuits raised the potential First Amendment infringement issue that the OFAC sanctions represent, and the Coinbase lawsuit claimed the sanctions represented a deprivation of due process under the Fifth Amendment. In this post, I will try to articulate why I believe the strongest challenge may be one brought under the Fourth Amendment and its protections over the “right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures…”
Heads up: while I try to make my blog posts as plain-speak as possible, I will need to get into the legal weeds and pull out my case cites and shit for this one. If you aren’t a nerd lawyer feel free to skip this one. I won’t be upset.
Security Against Search and Seizure
The Fourth Amendment provides “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” United States Const. Amend IV. The most famous case involving the Fourth Amendment is Terry v. Ohio, 392 U.S. 1 (1968) which held that law enforcement officers are permitted to stop and question individuals so long as the officer has a “reasonable suspicion” that the person has committed, is committing, or is about to commit a crime. The case is so famous, those types of stops are colloquially known as “Terry Stops” based on the ruling from that case.
It should be noted that the Fourth Amendment only applies where there is a subjective expectation of privacy that society accepts as objectively reasonable. Katz v. United States, 389 U.S. 347, 361 (1967). One example of when there is no reasonable subjective expectation of privacy, is when information is disclosed to a third-party. The “third-party doctrine” is the legal principle that states a party lacks a reasonable expectation of privacy under the Fourth Amendment over information “revealed to a third party and conveyed [by that third party] to the Government authorities.” United States v. Miller, 425 U.S. 435, 443 (1976).
While the third-party doctrine is expansive, it is not unlimited. For example, in Carpenter v. United States, 138 S. Ct. 2206 (2018) the Court held that while law enforcement agencies have the right to subpoena phone companies for a suspect’s call records, requesting information as to that person’s cell phone location records, known as “cell-site location information” (“CSLI”) is often not permitted because carrying cell phones is “such a pervasive and insistent part of daily life that carrying one is indispensable to participation in modern society.” Id. at 2220. As such, even though a third-party (the phone carrier) has that information, it is an unreasonable intrusion on a person’s privacy for the government to require a carrier to provide that information.
What is considered “private” and requires a search warrant for the government to observe vs. what is “public” and does not require a warrant varies based on the facts and circumstances. For example, in Kyllo v. United States the Supreme Court held, in the context of using thermal imaging devices to uncover an indoor marijuana growing facility, “[w]here, as here, the Government uses a device that is not in general public use, to explore details of the home that would previously have been unknowable without physical intrusion, the surveillance is a ‘search’ and is presumptively unreasonable without a warrant.” Kyllo v. United States, 533 U.S. 27, 40 (2001). However, in California v. Greenwood the Supreme Court held that search of trash which a person leaves on the curb for collection does not require a warrant. California v. Greenwood, 486 U.S. 35 (1988).
Relatedly, while there is no requirement for the government to obtain a warrant to stake out a location and/or follow a vehicle, the Supreme Court has held that for the government to use a GPS device to track that same vehicle instead of human observation, that requires a warrant. See United States v. Jones, 565 U.S. 400 (2012).
Fourth Amendment As Applied to Cryptocurrency
Transfers of (most) cryptocurrencies occur on public and immutable blockchains. Anybody in the world can go through the applicable public blockchain data to determine things like the digital wallet address of the cryptocurrency sender, address of the receiver, date and time of transaction, amount of transaction, and other details. So how does the Fourth Amendment’s protections apply to a public ledger, and what are a person’s objectively reasonable expectations of privacy for transactions on that ledger?
This exact issue was examined in United States v. Gratkowski, 964 F.3d 307 (5th Cir. 2020). Gratkowski involved an individual accused of using bitcoin to purchase child pornography on the dark web. Federal agents used an outside service to analyze the publicly viewable bitcoin blockchain transactions to determine the wallet address(es) of the distributing website. Those agents then subpoenaed Coinbase to produce the records of any Coinbase users who sent cryptocurrency to the wallet addresses linked to the distributing website. Coinbase identified Mr. Gratkowski as one of these customers, which allowed federal authorities to obtain a warrant to search Mr. Gratkowski’s house and computers, and led to his eventual arrest and prosecution.
As the Court in Gratkowski explained, the public nature of the blockchain makes it exponentially easier to follow the flow of cryptocurrency as opposed to tracing fiat funds. See Gratkowski, 964 F.3d at 312 (“Bitcoin users are unlikely to expect that the information published on the Bitcoin blockchain will be kept private, thus undercutting their claim of a legitimate expectation of privacy.”). See also, Id. at fn. 4 (“Unlike cell phones that are ubiquitous, Gratkowski points to nothing that suggests Bitcoin is central to most people’s daily lives.”).
The Court went on to hold “Bitcoin users have the option to maintain a high level of privacy by transacting without a third-party intermediary. But that requires technical expertise, so Bitcoin users may elect to sacrifice some privacy by transacting through an intermediary such as Coinbase. Gratkowski thus lacked a privacy interest in the records of his Bitcoin transactions on Coinbase.” Id. at 313. See also Zietzke v. United States, Case No. 19-cv-03761-HSG(SK), 2020 WL 264394, at *4 (N.D. Cal. Jan. 17, 2020) (holding similar to Gratkowski).
Why the Fourth Amendment Should Protect Use of Tornado Cash
One way to preserve privacy on a public blockchain is through the use of “mixing services” which comingle cryptocurrencies and then distribute to wallet addresses in a way which obfuscates where the funds distributed from those mixing transactions originated from. As stated in the challenges to the OFAC sanctions against Tornado Cash, there are plenty of legitimate uses for mixing services. For example, people use it to send money to Ukraine or to political causes which they want to support without having that information public for the world to see. Also, just like you wouldn’t want your entire net worth and bank account balances to be public information, people often want to store funds in ways which are not linked to their primary digital wallets or identities.
So the Fourth Amendment provides a constitutional right to be “secure” from unreasonable search and seizures, while the case law establishes that that security is only provided when there is an objectively reasonable expectation of privacy, and there is no such reasonable expectation on a publicly available blockchain ledger. So where do mixing services fit into the equation?
In the case of Tornado Cash, the sanctions imposed by OFAC are based solely on the fact that Tornado Cash is a privacy-preserving protocol, and not on any specific individual or entity. This means that the sanctions apply to all users of the platform, regardless of whether or not they have done anything wrong. This is a violation of the Fourth Amendment, as it amounts to an unreasonable search and seizure of the digital assets of all of the platform’s users, without probable cause or a warrant.
Furthermore, the sanctions have a chilling effect on the right of individuals to “secure” the privacy guaranteed by the Fourth Amendment. The Supreme Court has held that the Fourth Amendment protects not only against physical intrusions, but also against the unreasonable gathering and dissemination of information. Because virtually all blockchain transactions are open, sanctions against Tornado Cash and other mixing services could be seen as creating an open book for federal authorities to gather and observe all blockchain transactions without a warrant and without an ability for individuals to be secure from it.
Essentially, the sanctioning of Tornado Cash and other mixing services would be the same as if the government required individuals to put their trash on the curb for anybody (including the government) to dig through at will. Or if the government required all cars to have a GPS tracking device with that information broadcasted and publicly available. Allowing sanctions against Tornado Cash could be seen as prohibiting United Stated citizens from being secure against the unreasonable gathering and dissemination of their information.
By imposing sanctions on Tornado Cash, OFAC is essentially punishing people for using a privacy-preserving protocol. While the government has a right to observe public blockchain data just as everybody else does, it does not have the right (under the Fourth Amendment) to prohibit people from preserving their privacy from some observations through the use of mixing services like Tornado Cash.
Conclusion
Since I began writing this article, Senators Elizabeth Warren and Roger Marshall have introduced a bill titled the Digital Asset Anti–Money Laundering Act of 2022. I believe this bill is nothing more than gamesmanship from those Senators to take advantage of the bad press caused by the FTX collapse to curry favor amongst crypto-haters (such as the financial institutions which fund those Senators’ election efforts). If, on some off-chance, that bill were to pass (or any other bill with substantially similar financial surveillance features) I believe it would fail Constitutional scrutiny for the reasons listed above.
United States citizens do not have an absolute protection from search and seizure. If the government has a reasonable suspicion an individual is doing something illegal using cryptocurrency, the government has a right to investigate that suspicion. However, a prohibition against mixing services is a prohibition against individuals being secure from warrantless searches into their financial and other blockchain activity. That is something which is not permitted under the Fourth Amendment. It is my hope that future attempts by the government to infringe on US citizen’s rights to privacy through the use of blockchain technology (including mixing services) are challenged on Fourth Amendment grounds.
If you have any questions or would like me to write about anything else, let me know on either of my twitter pages! As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.
The NFTtorney 