Do Digital Currency Investigations Differ Any from Paper Currency Investigations?

The New York Times reported yesterday on Bitcoin, which is a peer-to-peer currency that does not rely on a centralized bank or government treasury. This year the collective value of all Bitcoins passed one billion dollars. The Times notes that Bitcoin “comes in pretty handy for people who do not want their transactions monitored.” A significant criticism of Bitcoin is how it facilitates illegal activity. For example, it thwarts enforcement of money laundering laws. Much Bitcoin activity occurs at  the Silk Road, an online marketplace for illicit goods like narcotics and firearms.

What makes Bitcoin interesting from a privacy perspective is that all Bitcoin transactions are registered in a publically-available log. This ledger shows payments as made to Bitcoin “addresses”: strings of about 33 numbers and letters. Unless someone knows your Bitcoin address, people that inspect the public ledger have no idea who is conducting these transactions. In other words, the public keys do not constitute personally identifiable information.

But, Bitcoin isn’t so different from good old paper greenbacks. To track down a particular person using Bitcoin to commit crimes, law enforcement could contact the other participant in the transaction, and get that person to disclose what they know. After all, most of the goods bought with Bitcoin are physical property, and have to be shipped to a real world address at some point. Savvy criminal Bitcoin users can use anonymization programs or use decoy addresses (analogous to what savvy criminal cash users can do) to obfuscate their trail, but of course that takes time, effort, and expertise. And then there’s the cashout. Because (at this point) not all financial transactions can be conducted with digital currency, people will need to trade Bitcoin for government-backed money, which brings them back into a world of close government regulation.

The Fifth Amendment’s protection against self-incrimination might be one area of law that becomes more relevant with Bitcoin. In re Boucher, 2009 WL 424718 (D. Vt. Feb. 19, 2009), rejected a defendant’s Fifth Amendment claim against a grand jury subpoena which ordered him to turn over a password encrypting files that the government suspected harbored child pornography. Because at the time of his arrest the defendant had accessed his hard drive in front of the arresting officers, and the officers were able to see the file names (which strongly hinted that the files would contain child porn), the court ruled that providing access to the files "adds little or nothing to the sum total of the Government's information about the existence and location of files that may contain incriminating information,” thus defeating any Fifth Amendment claim. The same result was reached in United States v. Kirschner, 823 F. Supp. 2d 665 (E.D. Mich. 2010); see also United States v. Doe, 670 F.3d 1335 (11th Cir. 2012) (finding no Fifth Amendment violation here because unlike in Boucher the government did not know what was in the encrypted files it wanted passwords for). So if the government does not have a certain amount of evidence that illegal activity is going on, they can't likely subpoena someone to decrypt their Bitcoin account. Banks would probably be a lot more willing to disclose financial transactions than would other Bitcoin users (putting aside any statutory restrictions on banks). The government could probably try to ban Bitcoin outright, but I'll leave for another day how wise or effective that would be.

At this point, it is still relatively costly and time-intensive for the government to identify illegal activity with Bitcoin and then track down participants in this activity. Still, people enthusiastic about financial privacy should hesitate before uncritically plunging into the world of Bitcoin.