Key Disclosure Laws Can Be Used To Confiscate Bitcoin Assets

By Jon Matonis
Forbes
Wednesday, September 12, 2012

http://www.forbes.com/sites/jonmatonis/2012/09/12/key-disclosure-laws-can-be-used-to-confiscate-bitcoin-assets/

Key disclosure laws may become the most
important government tool in asset seizures and the war on money
laundering. When charged with a criminal offense, that refers to the
ability of the government to demand that you surrender your private
encryption keys that decrypt your data. If your data is currency
such as access control to various amounts of bitcoin on the block
chain, then you have surrendered your financial transaction history and
potentially the value itself.

These laws will impact not only
money laundering prosecution but almost any asset protection strategy
that attempts to maintain an element of financial privacy such as
private banking or family trusts. Prior to all these money laundering
laws being enacted, I once heard it said that the practice of moving
money around was simply referred to as banking.

Doug Casey famously said
that “it’s a completely artificial crime. It wasn’t even heard of 20
years ago, because the ‘crime’ didn’t exist.” Furthermore he said, “The
War on Drugs may be where ‘money laundering’ originated as a crime, but
today it has a lot more to do with something infinitely more important
to the state: the War on Tax Evasion.” And, if they can’t track it from
the outside via the banks and financial institutions, they’ll track it
from the inside via access to an individual’s passwords and private
keys.

In the United States, relevant case law has revolved around the Fifth Amendment
privilege against self-incrimination as there is currently no specific
law regarding key disclosure. The definition of a password is alarmingly
broad too — all the way from an extension of your personal memory to
an illegitimate tool that only hides something tangible from law
enforcement.

The first case to address directly the question of
whether a person can be compelled to reveal his or her encryption keys
or password was In re Grand Jury Subpoena to Sebastien Boucher
in 2009. Here a magistrate judge ruled that producing the passphrase
for the encrypted hard drive would constitute self-incrimination, but on
appeal the District Court overturned that decision, holding that
decrypting and producing the complete contents would not constitute
self-incrimination since Boucher initially cooperated in showing some of
the computer files to border agents.

Next, there was the federal criminal case of United States v. Fricosu
in 2010 in which the Federal District Court ordered a criminal
defendant to decrypt the contents of an encrypted laptop. Although the
defendant claimed Fifth Amendment rights against self-incrimination and
the Electronic Frontier Foundation (EFF) filed an amicus curiae brief,
the Court sided with the government in ruling that since defendant
admitted to ownership of the laptop and knowledge of the passwords in a
recorded conversation, the existence of evidence was a “forgone
conclusion” and therefore Fifth Amendment privilege could not be
implicated. In early 2012, the Tenth Circuit Court of Appeals rejected
an appeal and let that decision stand.

In a blog post, Orin Kerr cited In re Weiss
(703 F. 2d 653) in summarizing testimonial obduracy and what a future
Court’s likely posture would be if defendant refuses to comply with a
key disclosure order or claims to have forgotten the password. On the
specific Fifth Amendment issue in United States v. Fricosu, Kerr states:

“If I’m reading Fricosu correctly, the Court is not saying
that there is no Fifth Amendment privilege against being forced to
divulge a password. Rather, the Court is saying that the Fifth Amendment
privilege can’t be asserted in a specific case where it is known based
on the facts of the case that the computer belongs to the suspect and
the suspect knows the password. Because the only incriminating message
of being forced to decrypt the password — that the suspect has control
over the computer — is already known, it is a “foregone conclusion” and
the Fifth Amendment privilege cannot block the government’s application.”

In another case upholding the constitutional right against forced decryption, the Eleventh Circuit Court of Appeals in United States v. Doe
on February 24th, 2012 overturned a contempt of court ruling for
refusing to decrypt. Arguing that without any specific knowledge of a
hard drive’s file contents or file existence, the government cannot
assert that certain items can be described with “reasonable
particularity” and therefore compelling a defendant to produce those
files would violate the Fifth Amendment’s protection against
self-incrimination. The Electronic Frontier Foundation (EFF), which
again filed an amicus curiae brief in the case, called it a major victory for constitutional rights in the digital age.

To
say the cryptocurrency bitcoin is disruptive would be an
understatement. Bitcoin not only disrupts payments and monetary
sovereignty, it also disrupts the legal enforcement of anti-money
laundering laws, asset seizure, and capital controls. It is very likely
that a key disclosure case will make it to the U.S. Supreme Court where it is far from certain that the Fifth Amendment privilege, as it relates to a refusal to decrypt bitcoin assets, will be universally upheld.

Many observers have suggested defensive techniques that deploy TrueCrypt disk encryption
with hidden volume partitions or PGP Whole Disk Encryption rendering
the entire computer unbootable thereby making even file time and date
stamps unavailable. Another legal strategy to complicate matters could
be to split the passphrase with another person and claim that you are
never in possession of the entire real passphrase. Then, at
least there would be “plausible deniability” as to who provided the
invalid portion of the passphrase or you would have a cellmate if held
in contempt.

AT THE INTERSECTION OF FREE BANKING, CRYPTOGRAPHY, AND DIGITAL CURRENCY