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Sept. 27, 2021, 1:23 p.m. EDT

The crypto industry could take tax fight all the way to the Supreme Court

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Chris Matthews

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“I litigated this same issue back in the 1980s and 1990s and we lost miserably back then, every single time,” he said. “There’s no reasonable expectation of privacy because person A can always rat out person B.”

Carpenter to the rescue?

Van Valkenburgh argued that the Supreme Court has a much different attitude toward the third party doctrine today than it did when those cases were being fought more than 30 years ago as evidenced by the landmark 2018 case Carpenter v. United States.

In Carpenter, the Supreme Court determined that the common police practice of subpoenaing cellphone records to determine the location of potential suspects was a violation of the Fourth Amendment, even though someone voluntarily and implicitly agrees to phone companies accessing that information when they sign up for cellphone service.

“The Supreme Court said this information isn’t really voluntarily provided by customers, because cellphones are a necessity of daily life,” Van Valkenburgh said. “You can’t really be a functional part of the economy without having one, so it’s not really voluntarily.”

Furthermore, the court said that the information being sought by the government from a service provider has to be there for a “legitimate business purpose,” and that a cellphone company doesn’t really have a legitimate reason for keeping a full and complete record of a customers location.

“With Carpenter in mind, what’s the legitimate purpose of any random business person collecting the Social Security number of any customer who wants to transact in cash or cryptocurrency?” Van Valkenburgh wondered.

Blockchain and privacy

Even if the cryptocurrency industry and privacy advocates succeed in convincing federal courts that the reporting requirements in the bipartisan infrastructure bill and other similar laws are unconstitutional, that will be the beginning and not the end of a needed discussion around privacy and blockchain technology, says Paul Belonick, a professor of law and director of the center of innovation at UC Hastings.

Cryptocurrencies, after all, operate through public transaction ledgers. Anyone with sufficient technical knowledge can glean much information by studying these ledgers, and the government has displayed facility in using this information to track down criminals and recover ill-gotten gains.

This may result in an ironic outcome in which cryptocurrencies succeed in transforming the global financial system and weakening incumbent financial institutions that have become major partners in government enforcement, but do so in a way that makes surveillance potentially easier.

“We know that the government has been working, sometimes with private companies, to de-anonymize people on the blockchain,” Belonick told MarketWatch. “The government, without any policy intervention, could probably eventually de-anonymize most people.” 

Belonick said that if crypto and privacy advocates want to avoid that outcome, they should consider proactively pushing Congress to create laws that prevent that sort of activity without first getting a search warrant from the courts.

Hall, the criminal defense attorney, is doubtful that Congress will do anything to tie the hands of federal law enforcement. He pointed to the recent objections by Republican lawmakers to the possibility that the January 6th Commission might subpoena their phone records. “If they don’t like the third-party doctrine, Congress can just pass a law saying these records can’t be collected without a warrant.”

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