April 23, 2024 | Read Online

Byron Gilliam

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"Privacy is normal."

- Vitalik Buterin

Do We Have a Constitutional Right to Crypto Privacy?

We take our constitutional right to free speech for granted in the US, but this right to speak our mind is far from absolute.

When Walter Chaplinsky was convicted of "offensive conduct" for calling a town marshal "a God-damned racketeer" in 1942, he took his case to the Supreme Court, citing his constitutional rights — and lost.

The Supreme Court ruled that Chaplinsky's speech constituted "fighting words" and was therefore not protected by the First Amendment.

In 1968, when Marvin Miller was convicted of a misdemeanor for distributing advertisements for books and films the court deemed to be "obscene material," (including the salaciously titled Marital Intercourse) he similarly appealed on the basis that his business should be protected by the First Amendment.

The Supreme Court ruled against him too, finding that brochures advertising Miller's wares did not warrant First Amendment protection, in part because the books and films he offered lacked "serious literary, artistic, political or scientific value."

(I can only hope that newsletters are exempt from that high standard.)

Our constitutional right to privacy is similarly less than absolute.

In Katz v. United States (1967), the Supreme Court ruled that the Fourth Amendment guarantees a "reasonable expectation" of privacy, which means the FBI cannot tap your phone.

Unless, that is, they have a "reasonable expectation" that you may be doing something illegal, in which case they can.

When it comes to financial privacy, our rights are even less absolute.

In the 1976 case of United States v. Miller (no relation to the Miller of Marital Intercourse), the Supreme Court ruled that banking customers have no reasonable expectation of privacy in financial information voluntarily conveyed to their bank.

Any transaction processed with a US bank can therefore be treated by law enforcement as if they have a reasonable expectation to believe that you're doing something illegal.

That leaves us with only physical cash as a means to pay for things we don't want everyone to know we're paying for (like the first Miller's books and movies, for example).

But even there our right to privacy is far from absolute: The Bank Secrecy Act of 1970 limited your right to transact privately in cash to $10,000 — any transaction above that must be reported to the government.

That's $10,000 in 1970 dollars, which would be the equivalent of $80,497 in 2024 dollars — but the Bank Secrecy Act did not account for inflation and the limit has never been changed.

So it's easy to say that financial privacy in the US is at an all-time low.

Except that we now have crypto!

The Crypto Secrecy Act

Crypto seems purpose-built to comply with the third-party doctrine of US law as crypto transactions are peer-to-peer, with no third party from which law enforcement can request information.

Crypto is therefore like cash, but without the reporting limits.

This interpretation of the law is a "giant loophole," according to Senator Elizabeth Warren, who has proposed legislation to close it — she wants crypto protocols to be required to collect KYC information (names and addresses) and be able to provide it along with transaction data at the request of law enforcement, just as banks are required to do.

This is obviously impractical because storing data on a decentralized blockchain or protocol is not the same as storing it at a bank that has employees who can pick up and phone when the FBI calls with questions.

Bitcoin and Ethereum have no phones, let alone employees to pick them up.

That won't stop Warren-aligned lawmakers from demanding that blockchains and protocols act like banks, however — and their demands will presumably get louder as zero-knowledge proofs make transacting on blockchain increasingly private.

One zk-based protocol recently cited in a blog post by Vitalik, Intmax, offers a privacy solution that seems even more purpose-built to comply with current US law: "Our novel algorithm shifts communication and L1 data storage to the user side — with no data on L1."

Even Senator Warren would struggle to explain how the Bank Secrecy Act entitles her to data your store on your own personal device — that would be like the FBI kicking down your door to count the pennies in your bedroom piggy bank (without a warrant).

Somehow, though, I doubt that lawmakers will be deterred.

Peer-to-peer crypto seems perfectly protected by the letter of US law, but full financial privacy does not seem to be covered by the spirit of constitutional law.

The spirit of US law is probably best summed up as "it depends."

Vitalik is correct that privacy is normal.

But that doesn't mean our rights to it are absolute.

― Byron Gilliam

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