Texas cryptocurrency bill threatens financial privacy

A new bill that would require persons accepting payment in cryptocurrencies to check the payor’s identity before going through with the transaction, HB 4371, has been introduced in the Texas Legislature. The bill is problematic on several counts. In substance, it runs counter to our basic rights and our Constitution; in approach, it is unreasonably prejudicial against new technologies; and, in its drafting, it is difficult to parse and misunderstands fundamental aspects of the technology it seeks to regulate.

HB 4371 would infringe on individuals’ privacy and autonomy and is potentially unconstitutional. The bill would require individual citizens to spy on each other by forcing them to collect personal information from their transactional counterparts before accepting cryptocurrency payments. Should a Texan not want to provide or collect that personal information from the people with whom she is doing business, she is, in effect, banned from using cryptocurrency.

In a two-party cryptocurrency transaction, both parties retain a reasonable expectation of privacy with respect to the non-public details of their transaction. Government can always investigate the transaction, but if it wanted to search or seize information held by those parties, then a warrant based on probable cause and particularly describing the persons and places to be searched or seized would be required. HB 4371 forces all individuals to investigate each other, hand information over to each other, and—perhaps—forfeit eachother’s reasonable expectations of privacy over that information.

If your counterparty collects information from you that they otherwise would never have collected, and later she cooperates with a warrantless search, were your rights violated? Do you even have standing to challenge that search as warrantless in court? This raises difficult questions about the Fourth Amendment. Why can the government—without warrant—collect information through an order to its citizens, when it could not—without warrant—collect that information directly? We’ve recently released a comprehensive report dealing with this complicated area of constitutional law.

HB 4371 is brief and not clearly drafted, but it does not appear to require that persons retain the identity information that they are forced to “verify,” nor does it say that this identity information shall be available to law enforcement without a warrant. But if your counterparty collected your information according to the law, held on to it, and willingly complied with a warrantless search, then it would seem that you are out of luck.

HB 4371 unreasonably prejudices new technologies. The bill only applies to transactions made with certain types of cryptocurrencies and it does not apply to physical cash transactions. The bill doesn’t offer any justification for this limited scope. If it is aimed at preventing crime and money laundering, then it is underinclusive. Cash is a far more anonymous means of transacting than cryptocurrencies and it is far more widely used in criminal plots than are cryptocurrencies.

The proposed language in HB 4371 is confusing. The bill significantly and fundamentally misunderstands how cryptocurrency technology works. For example, the bill excludes transactions made in so-called “verified identity digital currency” from any identification requirements. And it defines “verified identity digital currency” as “a digital currency that allows the true identities of the sender and the receiver to be known before a person has access to another person’s digital wallet.” As it relates to cryptocurrencies, the term “wallet” is generally understood to mean a service or application that an individual uses to store the private keys that control her cryptocurrency holdings. No well-built cryptocurrency ever operates under the assumption that users will give the people they wish to pay “access” to their wallet. That would be like handing a cashier your real wallet full of twenty-dollar bills and trusting them to take out only what you owed them. That is not how cryptocurrencies work. To pay someone in cryptocurrency you use your wallet to create and sign a transaction; you would never give them the private keys that control all of your funds. To what, then, is is this definition meant to apply? Similarly, the definition of “verified identity digital currency” is ambiguous because no guidance is given on what it means for a digital currency to “allow[] the true identities of the sender and receiver to be known.”

Financial privacy is important for law-abiding citizens, not just for criminals. Indeed, it is foundational to an open society. Cryptocurrency technology is beginning to enable private electronic transactions and that is something worth celebrating rather than something to be hampered through law. As physical cash declines in popularity, we risk exposing our entire financial lives to the private intermediaries that process our payments. Intermediaries may fail to secure that data or misuse it for profit and control. Oppressive governments may use that data to surveil their populations and may order intermediaries to de-platform persons with politically unpopular views—effectively excluding them from all economic activity. Cryptocurrency, by contrast, embodies American values: freedom, self-sufficiency, and opportunity.

Cryptocurrency is electronic cash, with all the attendant social benefits and costs of physical cash. Like cash, criminals will unfortunately make use of cryptocurrency (just as they make use of cars, the internet, and other open technologies), but this does not mean that its costs outweigh its benefits to citizens. This is especially the case because law enforcement have tools—including the Banks Secrecy Act—to investigate and prosecute crimes that involve cash and cryptocurrency. Catching and prosecuting criminals does not require that we eliminate all financial privacy.

We have reached out to the sponsor of the bill and look forward to discussing these issues directly.