A lot of folks have been panicking since an article in BTCmanager described some proposed new legislation working its way through the U.S. Senate using the words “criminal” and “bitcoin” in the same sentence.
This immediately launched thousands of screaming cryptocurrency enthusiasts, now armed with the mistaken impression that Bitcoin is about to be criminalized in the U.S., into the stratosphere.
What the hell is this all really about, you ask?
In a line, the US Senate is moving a bill to move digital currency transactions clearly within the usual KYC/AML reporting frameworks already in place. Presumably this is being done to both bring digital currency regulation clearly in line with all other forms of money transfer business, and add another arrow into the quiver of prosecutors looking to take down the sophisticated criminal enterprises which use digital currency to stay out of sight and frustrate attempts to build cases.
@Beautyon_ argues that this attempted legislation is “unconstitutional and bad for America” on First Amendment (freedom of speech etc.) and Fourth Amendment (freedom from unreasonable searches and seizures, etc.) grounds.
Although eloquently written, it strikes me that this argument is… how shall I say it? Completely wrong.
Subject to the usual caveat that I’m an English lawyer and not yet US-qualified, three points:
This is not “Bitcoin Criminalization” or a “Bitcoin Ban.”
Senate Bill 1241 puts cryptocurrency business on a level footing with existing money transmitting business by dropping cryptocurrencies into the already-existing reporting framework for monetary transactions. The main thing to look out for, on my quick reading, is that it reclassifies cryptocurrency exchanges and anyone “issu(ing), redeem(ing) or cash(ing)” cryptocurrency as a “financial institution” under the existing law. They will therefore be required to, among other things, (a) keep records, (b) conduct enhanced due diligence designed to detect money laundering, and (c) not permit structuring of transactions to evade reporting if the law passes.
Unless I’m reading this incorrectly, Bitcoin would remain perfectly legal. Merely holding a balance would not trigger a reporting obligation. Failing to report certain kinds of Bitcoin transactions is what becomes a crime.
This will remove much of the edge cryptocurrencies currently enjoy in the form of regulatory arbitrage. It will make operating a cryptocurrency exchange a far more labor-intensive and tedious proposition. That said, the existing framework is presumptively constitutional so it should be well within the province of Congress to extend it in this way.
The First Amendment is irrelevant
…although I recommend reading Beaut’s argument anyway from the standpoint of working through a well-written a priori logical argument.
This Senate bill is an amendment to an existing federal law which seems to have ample constitutional justification under the Commerce Clause.
Beaut argues that software, being plaintext, attracts First Amendment protection as “speech” and therefore cannot be regulated.
He points us to the example of the encryption program PGP, which the U.S. government had banned from export in binary form (which it was able to do as any encryption program larger than 40 bytes was classified as a “munition”). The PGP team instead published the source code as a plaintext document in a book, which attracted 1st Amendment protection, and shipped the book abroad; recipients abroad then recompiled it and could use PGP themselves.
This argument does not work for the current situation with Bitcoin as nothing in the proposed amendment suggests that the publication of Bitcoin software is regulated in any way, shape or form, nor that people will be restrained from publishing on the Bitcoin network in any way they choose (unless that use is in furtherance of a crime).
A Bitcoin transaction is capable of being a monetary transaction. If it meets certain threshold criteria (size and whether it forms part of a series of transactions) it ought to be reportable. And that is indeed what the new Senate bill says. Not that the system can’t be used, but simply that transactions on it of substantial value by persons engaging in certain types of business will need to be reported.
The fact that Bitcoin or any other software is, at the end of the day, just a bunch of text constituting executables, as with PGP, doesn’t exempt these programs from the entirely constitutional regime that governs money transfer when these programs are used to facilitate money transfer.
Beautyon’s thinking about the First Amendment ignores/eviscerates the Congressional power granted by the Commerce Clause, which applies to business conducted with software. If the First Amendment overrode the Commerce Clause, 1A could be used as a bludgeon to exempt all online transactions from legal oversight, as anything online is necessarily software-driven (and therefore text-driven). For this reason the probability of the courts adopting that position is zero.
The 4th Amendment isn’t relevant either…
…because the blockchain is a public file, readable by all.
Beaut argues that if Bitcoin is subject to a disclosure regulation, so is all software; thus, he says, the Fourth Amendment to the US Constitution is under threat by the proposed amendment, because e-mail is also software and if they mandate disclosure of your Bitcoin without a warrant, they can also mandate disclosure of your e-mail without a warrant.
This is, to put it lightly, a stretch. The 4A states the right of the people to be free from unreasonable searches and seizures of their “persons, houses, papers and effects” and prevents the fruits of any such unlawful search or seizure from being introduced against that person in court.
I struggle to see how a write permission on a publicly-available blockchain balance is a “paper or effect.” Public keys are pure information. When we have possession of one, we can learn a great deal without needing to also know the associated private key; we know, for example, the transaction inputs and outputs associated with a given address. The Senate bill asks us to put a name to that already-public information if and only if we engage in the specified regulated activity.
Even if this information were an effect, the last time I looked, Bitcoin was 100% publicly readable by anyone, anywhere, at any time. This means, as far as my understanding of the Fourth Amendment goes, one does not really have a reasonable expectation of privacy on the blockchain any more than one has a reasonable expectation of privacy in a pile of garbage you leave out on a street corner. Thus a 4A violation is difficult to make out. (Admittedly the Monero/ZCash situation, where information that would be public on Bitcoin is encrypted, is a little different, but not much – so I’ll leave that aside for today.)
In most cases, then, telling the government which bit of the blockchain is yours, whilst annoying, does not act as a prior restraint on speech, does not implicate a privacy concern protected by the Fourth Amendment, does not materially change an already-constitutional regulatory framework and therefore does not undermine the foundations of the Republic.
Which is not to say that crypto-systems don’t implicate speech and privacy issues from time to time. They can and they do. They just don’t here.
Anyway. It’s a Sunday night, so I’m signing off. My tip to the Bitcoin community would be to chill out and don’t embarrass yourself by sounding off some total nonsense to your Congressman about how their “Bitcoin Ban is unconstitutional under the Fourth Amendment.”
If you are really that concerned, you’ll want to chat with a US-qualified public law lawyer or financial regulatory lawyer first.