Texas Blockchain Legislation Status

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Texas Cryptocurrency Updated Laws

Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology

Texas HB 3608
SB 1859
Signed by governor 6/10/19
Relates to business entities; includes a distributed electronic network or database employing blockchain or distributed ledger technology in definitions.
Texas HB 4214
Passed House 5/1/19
Creates programs and requirements for state agencies and local governments to assess cybersecurity risks. Requires each state agency and local government would be required to consider using next-generation technologies, including cryptocurrency, blockchain technology, and artificial intelligence.
Texas HB 4517 Establishes the Texas blockchain working group.

HB 4774 – The Texas Virtual Currency Act (TVCA)

On June 15, 2021, cryptocurrency-specific legislation was passed under the laws of Texas when Governor Abbott signed House Bill 4474 into law. Specifically, the bill adds amendments to the state’s Business & Commerce Code to address virtual currency. The short title of the bill is the “Texas Virtual Currency Bill” (TVCB). Overall, the law specifically addresses cryptocurrency by: (1) recognizing the legal status of virtual currency, (2) ensuring that cryptocurrencies are subject to commercial laws under Texas regulations, and (3) supplying legal rights to cryptocurrency holders. Under section 12 of the TVCA, the Act becomes effective on September 1, 2021.

First, the Act legitimizes the legal status of cryptocurrency by providing it a legal definition. Under HB 4774, virtual currency is defined as “a digital representation of value that is used as a medium of exchange, unit of account, or store of value” that is not legal tender. The statutory definition of virtual currency does not include: (1) a transaction in which a merchant grants a value that cannot be exchanged with the merchant for legal tender, bank credit, or virtual currency as part of a rewards program; nor (2) a digital representation of value issued by or on behalf of a publisher and used solely within an online game, game platform, or family of games sold by the same publisher or offered on the same game platform.

Second, the Act requires cryptocurrency companies and investors to follow the existing commercial laws of Texas, such as the state’s Business & Commerce Code. Accordingly, a cryptocurrency firm offering an ICO to the public must comply with the Texas Securities Act (TSA). Specifically, the TSA applies to firms and individuals who sell securities or render investment advice in Texas. Generally, the TSA prohibits: (1) fraud in the offer or sale of securities, and (2) fraud in providing investment advice services. Cryptocurrency firms that violate the TSA are subject to administrative, civil, and criminal sanctions for violations of Texas securities law. By subjecting cryptocurrency firms to TSA liability, the Act incorporates cryptocurrency oversight into the general framework of Texas commercial law.

Third, Section 12.003 supplies legal rights to cryptocurrency investors. Specifically, Section 12.003 states that virtual currency buyers acquire all rights in the virtual currency that the transferor had or had the power to transfer. If only a limited interest in a virtual currency is bought, then the buyer acquires rights to the extent of the interest purchased in cryptocurrency. For example, if a purchaser buys 33% of a single bitcoin, or .33 of Bitcoin, then they only have rights over 33% of a single Bitcoin. Accordingly, it is possible for several different investors to have property rights in a single cryptocurrency.

Furthermore, section 12 provides special rights to qualifying purchasers. A qualifying purchaser is defined as “a purchaser that obtains control of a virtual currency for value and without notice of any adverse claim.” These buyers are analogous to bona fide purchasers under Property law. Section 12 defines an adverse claim as “a claim that a claimant has a property interest in a virtual currency and that it is a violation of the rights of the claimant for another person to hold, transfer, or deal with the virtual currency.” There are two situations that indicate a purchaser has notice of an adverse claim: (1) the person knows of the adverse claim; or (2) the person is aware of facts sufficient to indicate that there is a significant probability that the adverse claim exists and deliberately avoids information that would establish the existence of the adverse claim. In applying property law, the former is akin to actual knowledge and the later is akin to constructive knowledge.

In conclusion, the TVCA: (1) recognizes the legal status of virtual currency, (2) regulates cryptocurrency under the commercial laws of Texas, and (3) provides cryptocurrency holders with legal rights. Therefore, the TVCA makes cryptocurrency safer for investors by legally recognizing virtual currency, subjecting cryptocurrency firms to commercial regulations, and by supplying token investors with legal rights to their investments.

Texas DOB – Memorandum 1037

On April 1, 2019, the Texas Department of Banking (DOB) issued a revised supervisory publication known as Memorandum 1037. The memo was titled “Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act.” According to the DOB, a virtual currency is an electronic medium of exchange that is: (1) used to purchase goods and services from certain merchants or to exchange for other currencies, either virtual or sovereign; (2) not legal tender status in any jurisdiction, and (3) is not issued by a governmental central bank. Under the DOB’s definition of virtual currency, cryptocurrencies currently exist outside established financial institution systems.

According to the DOB, there are two basic forms of virtual currency: (1) centralized virtual currencies, and (2) decentralized virtual currencies. Centralized virtual currencies are created and issued by a specified source, usually the creator. One prominent subclass of centralized virtual currencies is called “Stable Coin.” These are considered centralized because they are backed by the issuer with sovereign currency, precious metals, or cryptocurrency. Therefore, centralized cryptocurrencies may hold intrinsic value unlike decentralized cryptocurrencies. Consequently, Stable Coins grant holders “redemption rights,” granting holders the right to redeem coins for sovereign currency from the issuer.

In contrast, decentralized virtual currencies are not created or issued by a particular person or entity. Consequently, decentralized cryptocurrencies have no administrator or central repository. Currently, the vast majority of cryptocurrencies are classified as decentralized virtual currency except for Stable Coins. Unlike centralized virtual currency, decentralized virtual currencies do not have assets underlying their intrinsic value and virtually all have no governmental authority or central bank establishing its value through law or regulation. Therefore, the value of decentralized virtual currencies is exclusively determined by what buyers are willing to pay.

According to the memo, an exchange of virtual currency for sovereign currency is not considered a currency exchange under the Texas Finance Code (TFC). Under the TFC, “currency” is defined as “the coin and paper money of the United States or any country that is designated as legal tender and circulates and is customarily used and accepted as a medium of exchange in the country of issuance.” Therefore, virtual currencies are not considered “currency” under the code because neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country. Consequently, currency exchange licenses are not required for firms exchanging virtual currency with sovereign currencies.

In conclusion, Memorandum 1037 provides virtual currency a legal definition. In addition, the memo differentiates between centralized and decentralized virtual currencies. The memo concludes by stating that virtual currency exchanges for fiat currencies are not considered currency exchanges under the TMSA because under the statutory definition, no virtual currencies are considered “currency” under the laws of Texas.

Texas Department of Banking Notice

On June 10, 2021, the Texas Department of Banking (TDB) published Industry Notice 2021-03. The notice provides cryptocurrency a state definition under Texas law. Specifically, the notice defines “virtual currency” as “an electronic representation of value intended to be used as a medium of exchange, unit of account, or store of value.” The notice states that virtual currencies include cryptocurrencies like Bitcoin. Therefore, cryptocurrencies like Bitcoin are legally defined as virtual currency under Industry Notice 2021-03.

Furthermore, the notice outlines the legal obligations of Texas banks that decide to offer virtual currency custody services to the public. The notice states that Texas state-chartered banks are authorized to provide cryptocurrency services as long as the bank follows “adequate” protocols. To be adequate, protocols must comply with applicable law and effectively manage the risks associated with cryptocurrency trading. If these conditions are met, then Texas banks are legally authorized to accept virtual currency deposits from Texas citizens. In other words, banks can legally provide cryptocurrency services under the state laws of Texas.

Additionally, Texas banks are legally permitted to create cryptocurrency private keys and possess them on behalf of clients. A private key refers to a form of cryptography that allows a user to access their cryptocurrency. Essentially, private keys are similar to bank account passwords. However, individual banks intending on providing virtual currency custody services  must assess and determine what storage options best fit their current circumstances. Since the notice does not designate a uniform storage option, Texas banks are provided discretion to select the appropriate storage option that best serves their clients’ interests.

Furthermore, the notice provides different guidelines depending on whether a bank provides services in a fiduciary or non-fiduciary capacity. If providing custody services in a non-fiduciary capacity, the bank functions as a bailee by taking possession of the customer’s asset for safekeeping while legal title to that asset remains with the customer. If a bank provides custody services in a fiduciary capacity, then that bank is legally required to possess trust powers. In other words, banks that opt to act as fiduciaries will be designated trustees under Texas law. Accordingly, banks intending to act as fiduciaries are required to have charter amendments and compliance procedures for 7 Texas Administrative Code § 3.23 before providing fiduciary services.

The duties of banks vary and are determined by custodial agreements between banks and customers. In other words, the relationship between banks and individual customers are built on freedom of contract principles because both can agree to contractually limit the bank’s duties. Accordingly, whether a bank is acting as a fiduciary or non-fiduciary capacity will be determined by the contract between bank and client. Even if they are functioning as non-fiduciaries, Texas banks generally owe customers a duty of proper care to safely keep assets and promptly return then upon request whether or not they are fiduciaries.

In Texas, the TDB burdens banks intending to enter a new line of business to conduct proper due diligence and carefully examine the risks involved in offering a new product or service through a methodical risk assessment process. Therefore, banks intending to enter new lines of business by offering cryptocurrency services must exercise due diligence. Due diligence requires banks to methodically conduct a risk assessment process. Banks that decide to offer cryptocurrency services without exercising due diligence and implementing risk-assessment procedures violate Texas law.

If a bank decides that the benefits of offering cryptocurrency outweigh the risks, then the bank shall implement effective risk-management systems and controls to measure, monitor, and control relevant risks associated with cryptocurrency. Necessary controls include: (1) administrative controls, such as policies and procedures; (2) technical controls, such as access controls and authentication mechanisms; (3) physical controls, such as protection of hardware and data specific to the virtual currency held; and (4) confirmation of adequate coverage with its insurance carrier. Presumably, these controls are designed to protect both banks and clients from the risks associated with cryptocurrency.

Under Texas law, banks cannot escape liability by outsourcing its duties to third parties. Even if a bank does not have cryptocurrency expertise, Texas banks cannot outsource banking duties to service providers with expertise in handling cryptocurrency without violating state law. However, banks can still utilize the expertise of third parties as long as they do not delegate away their banking duties. The TBD states that banks that choose to establish a relationship with such service providers are legally required to implement a strong service provider oversight program that addresses the risks associated with a service provider relationship. A bank’s oversight obligations remain throughout the beginning and end of third-party relationships. In other words, a bank’s oversight program must be in effect from the first steps of due diligence through a potential termination of the service provider relationship.

In conclusion, Industry Notice 2021-03 legally defines cryptocurrency and details the legal obligations of banks providing cryptocurrency services. In doing so, the Industry Notice regulates cryptocurrency under the general banking laws of Texas. Accordingly, banks providing cryptocurrency services are subject to the existing legal framework of Texas.

Texas State Securities Board – The Investor’s Guide to Cryptocurrency Offerings

The Texas State Securities Board (TSSB) formally released an article entitled “The Investor’s Guide to Cryptocurrency Offerings.” Overall, the TSSB states that most cryptocurrency investors are speculators, details the differences between fiat currencies and virtual currencies, explains the inner-functions of cryptocurrency, explains initial coin offerings (ICOs), warns investors of the risks associated with cryptocurrency, and mentions notable crypto-scams from the past and enforcement actions.

In the introduction, the TSSB differentiates between speculating and investing. According to the TSSB, speculators are attracted to opportunities that promise significant gains in a relatively short time with little or no risk. According to the TSSB, cryptocurrency investors are speculators because they are similar to the tech speculators of the 1990s. Specifically, the TSSB states that just “as many ‘90s-era tech investors couldn’t explain why the price of their favorite software stock was going to the moon, few of today’s investors in cryptocurrency-related offerings can explain how cryptocurrencies work or why they are important.” According to the TSSB, Bitcoin spurred great interest as a speculative instrument after reaching a market capitalization of $127 billion in less than a decade.

In addition, the TSSB’s memo states that “with great speculation comes great fraud.” The TSSB warned that “extensive hype, combined with investors’ lack of understanding, has made investments related to digital currencies particularly susceptible to fraud.” To combat the risks of fraud, the TSSB intends to educate investors by explaining the difference between fiat currencies and virtual currencies. Fiat currencies are trusted mediums of exchange issued by a recognized governmental authority. Since they are backed by the government, fiat currencies constitute legal tender. Prominent examples of fiat currencies include dollars, euros, pounds, or yen. Fiat currencies operate through intermediaries that authorize transactions, such as banks. Additionally, there supply of fiat currencies is theoretically unlimited because governments are authorized to increase the amount of currency in circulation by printing more money.

Like fiat currency, virtual currencies are intended to be used as a medium of exchange. However, virtual currencies have no physical coins or bills and therefore are not legal tender. Accordingly, cryptocurrencies are unregulated and provide no consumer protections. Furthermore, there are no intermediaries that authorize the transactions between parties in virtual currency transactions, such as banks. Instead, cryptocurrency transactions utilize a decentralized computer network that involves no banks or other intermediaries. Accordingly, cryptocurrency transactions are decentralized. Unlike fiat currencies, there is a limited supply of virtual currency. For example, the mathematical formula used to generate bitcoins gradually reduces the number of new bitcoins that are produced over time. Overall, a maximum of 21 million Bitcoins can be in circulation at any given time.

After describing the differences between fiat and virtual currencies, the TSSB then explains how cryptocurrencies work. According to the memo, cryptocurrencies enable two parties to conduct business transactions outside the banking system. Cryptocurrencies are stored on a digital wallet that contain the parties’ private keys. The private keys enable parties to spend Bitcoins from their account. In other words, private keys are similar to bank account passwords that enable users to spend their funds. In addition, the underlying technology that runs cryptocurrency is called “blockchain.” The blockchain functions as a public ledger that records Bitcoin transactions and legitimizes transactions.

Then, the TSSB details how ICOs are regulated. ICOs are typically used in start-ups because entrepreneurs can issue virtual tokens to raise capital. Under Texas securities law, ICOs are similar to stock IPOs. For ICOs, the issuer sets the token price, which then fluctuates depending on market demand.

Due to their similarities with IPOs, one issue in securities law is whether virtual currencies are classified as securities or currencies. The SEC argues that ICOs are securities and must comply with the same rules and regulations as stocks. Under the SEC’s reasoning, ICO issuers are required to: (1) be licensed, (2) provide required disclosure information, and (3) refrain from providing misleading information to market their offerings.

Notwithstanding the SEC’s perspective, several groups have lobbied Congress and regulators in an effort to exempt digital currencies from SEC regulations. According to these groups, cryptocurrencies are not the equivalent of actual currencies because some cryptocurrencies, such as Bitcoin and Ether, function as “utility tokens” in commercial transactions and are not primarily bought and sold like securities. Under this reasoning, ICOs should not be subject to the same laws and regulations that govern traditional securities. However, this argument is presumed to be unpersuasive.

There are three types of cryptocurrencies: (1) payment tokens, (2) utility tokens, and (3) ICO tokens. According to Webster’s Dictionary, a utility token is a “digital token of cryptocurrency that is issued in order to fund development of the cryptocurrency and that can be later used to purchase a good or service offered by the issuer of the cryptocurrency sold utility tokens as a method of fundraising for the start-up.” Accordingly, Bitcoin and Ether tokens are probably not utility tokens because they can be used to purchase goods and services from thousands of different businesses and not just the issuer. Thus, the argument that ICOs should not be regulated under securities laws presumably fails because this argument miscategorizes Bitcoin and Ether as utility tokens when they are instead presumed to be either payment tokens or ICO tokens.

Nevertheless, the TSSB declares that ICOs should be subject to the same regulations as IPOs because cryptocurrency investments are presumably riskier due to the novelty of the crypto-market. Like other investments, cryptocurrency investments could lose some or all their value and may not provide anticipated returns. However, the TSSB stated that certain cryptocurrency investments provide more risk than traditional investments. First, cryptocurrency’s value is highly volatile. In particular, cryptocurrencies are especially volatile due to remarkable shifts in value over short periods and the speed at which a change in price can occur. In the past, Bitcoin has fluctuated in value of more than $26,000 in a little over four months.

Second, cryptocurrencies are easily liquidated. Unlike stocks, cryptocurrencies cannot be easily converted into cash. Consequently, cryptocurrency investors face the risk of being unable to cash out their investments promptly. Third, cryptocurrency exchanges are largely unregulated. Consequently, virtual currencies are incredibly vulnerable to hack attacks and trading irregularities, including price manipulation efforts by major cryptocurrency investors. Four, cryptocurrency accounts are vulnerable to hacking attacks or malware. Accordingly, holders face the possibility of having their cryptocurrency holdings stolen or lost. To make matters worse, there is no insurance to cover the loss of virtual currency. As a result, cryptocurrency investors who have their investments lost or stolen are often stuck with no legal recourse to be justly compensated.

Five, fraudulent cryptocurrency offerings have become prominent in recent years. Often, investors in these crypto-scams are left with “worthless or non-existent holdings and significant, often irreplaceable losses of their hard-earned, much-needed money.” One scam is called “crypto marketing,” which involves a scheme where promoters recruit investors to pitch investments. Those recruited often promote cryptocurrency investments to friends, family, and on social media. Investors are promised significant returns and commissions on their sales. However, these investors are not licensed to sell securities and are therefore violating securities laws. Consequently, they may be inadvertently subjecting themselves to criminal liability due to their participation in “crypto marketing.”

Due to the growing amount of fraudulent crypto-offerings, the Texas commissioner has entered 26 administrative orders involving 79 individuals and entities. In 2017, the TSSB became the first state securities regulator to implement an enforcement order against a cryptocurrency firm. In 2020, Texas authorities cracked down on fifteen alleged crypto scams. Ten of these scams were operated by a single Texas man. According to the TSSB, these scams made false claims by offering lucrative and low risk investment options.

Also, the TSSB notes that several statements made by cryptocurrency firms have been revealed to be false. For example, a cryptocurrency firm named GenuisPlanFxPro falsely claimed to hold a handful of international financial licenses. In reality, they were not licensed by any government entities. However, there is a common denominator in all of the TSSB claims brought against fraudulent cryptocurrency companies. Overall, these fifteen firms display a common pattern: all fifteen firms use their social media savvy to “draw investors in and drain them dry.”

According to the TSSB, several bad actors use their social media and internet knowledge to make their operations appear legitimate and reach a large number of potential victims. Typically, “once they raise capital, their websites often go dark, social media often goes dormant and fraudsters often disappear. In many cases, the money is gone.” The number of firms that were prosecuted by the TSSB in the year 2020 alone suggests the prevalence of cryptocurrency scams and suggests that they are growing in frequency. Therefore, the TSSB intended to warn the public and educate investors on how to identify fraudulent public offerings.

In conclusion, the TSSB’s article aims to inform and protect investors from the risks associated with cryptocurrency by: (1) comparing investing against speculating regarding cryptocurrency, (2) detailing the differences between fiat currencies and virtual currencies, (3) explaining how cryptocurrencies work, (4) explaining initial coin offerings (ICOs), (5) warning investors of the risks associated with cryptocurrency, and (6) mentioning notable crypto-scams from the past and enforcement actions. Thus, the aim of the TSSB’s article is presumably to decrease the frequency of cryptocurrency scams that have prominently emerged in the past few years by educating investors on the nature and risks of virtual currency.

United States v. Gratkowski, 964 F.3d 307 (5th Cir. 2020)

In 2020, the 5th Circuit considered the case of Gratkowski and resolved the legal issue of whether the Fourth Amendment applies to cryptocurrency transactions. In particular, the court addressed “whether an individual has a Fourth Amendment privacy interest in the records of their Bitcoin transactions.” The court answered in the negative, holding that the Fourth Amendment does not protect the identity of parties in Bitcoin transactions because individuals are not provided a reasonable expectation of privacy in their transaction records.

The factual background that led up the court’s decision involve facts that may shock the conscience. Specifically, Richard Gratkowski was arrested after being investigated in connection to a child-pornography website on the darknet, also known as the “dark web.” The dark web refers to websites that do not appear on search engines such as Google. Often, the dark web is used to create an online marketplace for drugs and other illegal goods or services. Since the dark web provides users with more anonymity than regular search engines, the dark web often facilitates terrible crimes such as child abuse and murder for hire. More often than not, these egregious crimes are funded with cryptocurrency. In fact, one Florida court found that cryptocurrency is “one of the most common forms of payment within darknet markets” because “little to no personally identifiable data about the sender or recipient is revealed in a BTC transaction.”

In the case at hand, Gratkowski used the dark web to purchase child-pornography using Bitcoin on what the case labels “the Website.” The Website contained over 125,000 videos available for download, the majority of which consisted of child pornography. Shockingly, the Website explicitly instructed its users to “not upload adult porn.” To download the Website’s illegal videos, each user must expend “points,” which can be acquired through the Website by paying in Bitcoin.

While cryptocurrency is presumed to be anonymous, government agents can nevertheless identify the parties in cryptocurrency transactions by analyzing the blockchain. They can also determine the identities of cryptocurrency users by issuing grand jury subpoenas on cryptocurrency exchanges, such as Coinbase. In the present case, Gratkowski was identified as one of the Website’s customers after federal agents subpoenaed Coinbase “for all information on the Coinbase customers whose accounts had sent Bitcoin to any of the addresses in the Website’s cluster.” Sadly, one Florida court noted that governmental authorities discovered that over 4,000 different accounts were associated with the Website.

After determining the identity of Gratkowski, federal agents obtained a search warrant for his house. During the search, agents found a hard drive containing child pornography that was downloaded from the Website. Following the discovery and a subsequent confession, the Government charged Gratkowski with one count of receiving child pornography and one count of accessing websites with the intent to view child pornography.

During the trial, the Fifth Circuit addressed the issue of “whether an individual has a Fourth Amendment privacy interest in the records of their Bitcoin transactions.” The text of the Fourth Amendment states “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.” Essentially, the intent of the Fourth Amendment is to protect U.S. citizens from unreasonable searches and seizures by the government. The crux of Gratkowski’s argument is that he was subject to an unreasonable search and seizure by the U.S. government when they used his Bitcoin records as evidence against him. Nevertheless, this argument is wholly unpersuasive because Gratkowski’s Bitcoin purchases did not afford him a reasonable expectation of privacy under 5th Circuit law.

For the Fourth Amendment to apply, citizens must have a “reasonable expectation of privacy” in the items at issue. In other words, there is no Fourth Amendment violation when officers search and seize an item that does not provide the owner with a reasonable expectation of privacy. Examples of instances where the reasonable expectation of privacy does not apply include items that are in plain view or items that are provided to third parties, such as banks. In the present case, Gratkowski argued that the government’s search violated his Fourth Amendment rights due to his reasonable expectation of privacy in the records of his Bitcoin transactions on (1) Bitcoin’s public blockchain and (2) Coinbase. However, the court found that Gratkowski’s argument failed due to the “Third-Party Doctrine.”

The Third-Party Doctrine is a product of caselaw that functions as an exception to reasonable expectation of privacy violations. The Doctrine holds that people do not have reasonable expectations of privacy in information provided to third-parties, such as banks. Specifically, people do not have reasonable expectation of privacy for bank records because they are “not confidential communications but negotiable instruments” and are “voluntarily conveyed” to the banks.

Beyond bank records, the Third-Party Doctrine has been extended to telephone call logs. The Supreme Court previously held that there are no privacy interests in the telephone numbers when individuals “voluntarily convey” dialed numbers to phone companies by placing a call. Through this reasoning, individuals do not need to make explicit statements to voluntarily convey information to third parties. Under Supreme Court precedent, individuals can voluntarily convey information merely by using third-party services.

Nevertheless, later Supreme Court precedent held that not all information resulting from the sole act of sharing information through the utilization of third-party services eliminates privacy interests. For example, case precedent distinguishes between telephone call logs and cell phone GPS coordinates. The court reasoned that unlike telephone call and bank records, GPS tracking provides “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.”

Therefore, there are situations where an individual does not voluntarily share information to third parties by merely using a company’s services. The Supreme Court reasoned that GPS coordinates are not voluntarily shared for two reasons: (1) “cell phones and the services they provide are such a pervasive and insistent part of daily life that carrying one is indispensable to participation in modern society;” and (2) CSLI does not require “any affirmative act on the part of the user.”

In deciding the Gratkowski case, the Fifth Circuit held that Bitcoin records do not provide a privacy interest because they are more analogous to bank records and call logs. Unlike GPS coordinates, blockchain records do not provide the government with “an all-encompassing record of the holder’s whereabouts” or an “intimate window into a person’s life.” Instead, blockchain records are limited because they merely indicate (1) the amount of Bitcoin transferred, (2) the Bitcoin address of the sending party, and (3) the Bitcoin address of the receiving party. Also, blockchain records are distinguishable from GPS records because using Bitcoin is not “a pervasive [or] insistent part of daily life,” and transferring and receiving Bitcoin requires an “affirmative act” by the Bitcoin address holder. Therefore, the Fifth Circuit reasoned that blockchain records are more akin to bank logs and call logs, which by analogy provide no reasonable expectation of privacy.

To no avail, Gratkowski also argued that he had a reasonable expectation of privacy in the Coinbase records that documented his Bitcoin transactions. This argument lacks merit because it is even more akin to bank records than the records stored on the blockchain. Like banks, Coinbase is a financial institution. The only difference is that Coinbase is a virtual currency exchange that provides Bitcoin users with a method for transferring Bitcoin and other cryptocurrencies. Even though virtual currency exchanges deal with virtual currency while traditional banks deal with physical currency, both are financial institutions and therefore are subject to the Bank Secrecy Act. Like traditional banks, virtual currency exchanges are required to keep records of customer identities and currency transactions. Accordingly, Coinbase is akin to bank records in that neither provide users with a reasonable expectation of privacy.

One issue of ambiguity raised by the Gratkowski case is whether all virtual currency exchanges provide zero privacy interests, or if the holding is strictly confined to Coinbase in particular. This issue is important because Coinbase is not the only virtual currency exchange on the market. In fact, over 500 virtual currency exchanges are presently available. Some may argue that the Gratkowski case is strictly limited to Coinbase and does not extend to the hundreds of other virtual currency exchanges on the market. However, such a narrow reading is unpersuasive. A broader interpretation of the Gratkowski case is warranted because virtual currency exchanges function like financial institutions.

Furthermore, limiting Gratkowski to just Coinbase to the exclusion of hundreds of other virtual currency exchanges directly contradicts the text of the case. Notably, the text of the Fifth Circuit’s decision states Coinbase and “other virtual currency exchange institutions” do not provide users with privacy interests. Therefore, the narrow reading offered above directly contradicts the text of court precedent. Under principles of stare decisis, the Gratkowski decision extends to other exchanges and is not strictly limited to Coinbase. Therefore, other virtual currency exchanges such as Binance and Robinhood are presumed to be controlled by Gratkowski under Fifth Circuit law.

A broad interpretation of the Gratkowski decision is also supported by other cases that address issues concerning the internet and the reasonable expectation of privacy. These cases often distinguish between content that is open to the public versus content that is private. In Crispin v. Christian Audigier, Inc., the district court held that emails and private messages are “inherently private” and therefore pose a privacy interest because these “stored messages are not readily accessible to the general public.” In contrast, messages posted publicly on Facebook are not protected by a reasonable expectation of privacy because “Facebook permits wall messages to be viewed by anyone with access to the user’s profile page.” These cases are comparable to information on the blockchain because they are not “inherently private” and are “readily accessible to the general public” by analyzing the blockchain. Accordingly, a broad reading of Gratkowski is consistent with court precedent that addresses internet issues and the reasonable expectation of privacy.

In conclusion, the Gratkowski case held that there is no Fourth Amendment violation when the government subpoenas virtual currency exchanges to determine the identity of parties in cryptocurrency transactions because information on the blockchain is not protected by a reasonable expectation of privacy. While cryptocurrency proponents may prefer a narrow interpretation of the Gratkowski case, such a reading is inconsistent with both the text of the Fifth Circuit decision and internet precedent. Therefore, Gratkowski should be extended to all virtual currency exchanges and should not be limited to just Coinbase. Accordingly, information on the blockchain does not provide a reasonable expectation of privacy and subpoenaing virtual currency exchanges does not trigger Fourth Amendment protection. Rather, these subpoenas are presumed to be reasonable under Constitutional law.

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