Blockchain Transactions: Reasonable Expectation of Privacy (Part I) | Criminal Tax Blog

Blockchain Transactions: Reasonable Expectation of Privacy (Part I)

Criminal Tax Attorneys

Under the Fourth Amendment to the United States Constitution, the government may not search for, or seize, documents or other items without obtaining a warrant that establishes probable cause that evidence of a crime will be found in the place to be searched.  This overarching rule governs law enforcement’s ability to search homes, businesses, cars, and other personal property.

This amendment governs our warrant procedures in the United States; a procedure that is well understood by most citizens.  Law enforcement officers will draw up an affidavit establishing a crime has been committed and the basis for their belief that evidence of that crime will be found in the place to be searched.  This affidavit, and the accompanying warrant, are reviewed by a federal or state judge to ensure probable cause has been established.  If probable cause is found, the judge will issue the warrant allowing for the search.  Law enforcement may then travel to the location, produce the warrant, and execute the search.  During the search, they may seize items they believe are contraband or other evidence of a crime.

On its face, this process seems simple enough. And it likely would be if that procedure was followed in all cases.  However, warrants are not always obtained prior to searches and seizures. Federal agents and their state counterparts routinely conduct warrantless searches to obtain evidence of a crime.  They routinely seize documents and other information without establishing probable cause before a judge.

This reality has led to an ever-growing need for Constitutional interpretation.  The Courts must determine whether an officer’s search of a premises or seizure of evidence is lawful when conducted outside of the clear confines of the Fourth Amendment.  The Courts’ ultimate goal is to decide whether a particular warrantless search was reasonable.  The Courts have answered that seminal question numerous times over the last 100 years under various sets of facts.  In doing so, the Courts have carved out exceptions to the “warrant requirement” of the Fourth Amendment.  These exceptions include the automobile exception, searches conducted during exigency, the community caretaking exception, searches incident to a lawful arrest, pat downs for officer safety, and consent.  Most of these exceptions are based on the need for immediate action or to protect officer safety.

All the above listed exceptions deal with facts where all parties agree a search has taken place and a warrant was not obtained.  The Fourth Amendment is only implicated during a search or seizure of property.  If no search takes place, the Fourth Amendment provides no protection.

An example likely best highlights this point. If an officer reaches into a person’s pocket to retrieve a bag of cocaine, there is no doubt a search has taken place.  The officer’s conduct will only be lawful if he obtained a warrant prior to the search or the facts fall within a delineated exception to the warrant requirement. Now, let’s change the facts.  As officer’s approach, the suspect throws a baggie under his vehicle to hide the evidence.  The officer retrieves the baggy without a warrant.  Under those facts, the Fourth Amendment would not be implicated.  The officer did not search the suspect, but rather, retrieved a baggy the suspect discarded.  Since no search has taken place, the officer does not need a justification for obtaining the evidence.  The Fourth Amendment is not implicated.

This type of analysis has led to a very interesting arm of Fourth Amendment interpretation – defining what acts constitute a search and give rise to a Fourth Amendment challenge.  The above hypothetical is quite simple to answer.  However, the question becomes more difficult when the legal principles must be applied to third party records and emerging technologies.

In 2020, the Fifth Circuit delivered an opinion answering whether a search existed when law enforcement reviewed the blockchain history of a defendant without the use of a warrant. United States v. Gratkowski, 964 F.3d 307 (5th Cir. 2020).  This is the first case where a Federal Court of Appeals applied our legal standards to blockchain technology.  In this post, we will review how the Court arrived at their decision in Gratokowski in three steps –  first, we will review the seminal Supreme Court cases that define “search” under the Fourth Amendment.  Next, we will review how those standards have been applied to third party records and cell phone data.  Finally, we will review the Fifth Circuit’s opinion in Gratkowski and analyze the Fourth Amendment’s interplay with distributed ledger technology.

Criminal Tax Attorneys

What is a Search?

In Katz, the Supreme Court found a search is conducted when 1) the defendant had an expectation of privacy in the area to be searched and 2) the defendant’s subjective expectation is reasonable. Katz v. United States, 389 U.S. 347 (1967).  The rule delivered in Katz is still the seminal definition for defining a search under the Fourth Amendment.  However, an earlier and alternative definition still appears in federal case law.  This second definition was often championed by Antonin Scalia and obtained its roots in the theory of trespass.  Under Jones, a search will occur if: 1) a trespass occurs, 2) the trespass occurs in relation to the home, effects, papers, or persons, and 3) the trespass occurs with the intent to obtain information or find something. United States v. Jones, 565 U.S. 400 (2012). There is clear overlap in the two definitions, but nonetheless, it is important to note the two different elemental breakdownsToday, Courts will find a search exists if there is an invasion of privacy or a trespass if the purpose is to obtain information.

Most criminal cases do not present a need for analyzing the search element.  If an officer enters a home, goes through a defendant’s pockets, looks through a car, or enters a business there is little doubt a search has taken place.  This is true under the privacy or trespass theories outlined above. No federal prosecutor would argue against that reality.

However, the analysis becomes necessary, and more complicated, when law enforcement searches for, or seizes, information held by or provided to a third party.  Does a person have a reasonable expectation of privacy in their bank records? Phone records? Text messages? Location data on their cell phones?  Other cell phone contents?  If they do, is that expectation something society would deem reasonable?

These complicated topics have been tackled individually by the federal Courts of Appeals. In the next post, we will revisit these cases to outline the evolution of the legal theories in Katz and Jones.  Hopefully, this analysis will provide an adequate basis for understanding how the Federal Courts are applying these principles to distributed ledgers.