News

“DeFi Gives Financial Privacy — Will Regulation Take It Away?”

Andreessen Hoowitz has asked me to consult for them occasionally. They commissioned me with this piece for their Future site. This is the intro:

Our privacy rights regarding material we keep secret are protected by the Fourth Amendment. For example, the government cannot search our computers or homes unless they have a warrant that is based on specific probable cause.

Also, the government cannot just call us to testify in court against such evidence: The Fifth Amendment protects against this.

On the other hand, the Fourth Amendment has been read as providing little protection for material that we turn over to third parties — even to one trusted third party, such as a bank. This third-party doctrine, which provides the basis for the government’s ability to obtain information from financial intermediaries allows government officials to quickly access transaction data from businesses without the necessity of a warrant or probable cause. The Court also upholds the requirement that banks keep financial transaction records.[1])

Third-party doctrine has been well established, whether it is good or bad. But when technological innovation — such as DeFi (decentralized finance) — cuts out the third party, the government can no longer use the third-party doctrine to monitor such transactions.

So the question is: Can the government limit such DeFi tools and make it harder for people to use third party intermediaries to get the additional surveillance power the third-party doctrine provides?

Let me share with you a little bit of what I consider the most intriguing and theoretically interesting part.

Is it possible to access rights-protecting technologies without restriction?

[A] mandate that coders monitor who is using their code — essentially a prohibition on privacy-protection financial technologies — may well violate the Fourth Amendment….

If the government wants to end the distribution and creation of DeFi codes that are not intermediary-less,[6] the government would be doing so precisely to bring back the third party — not for the sake of financial necessity (the way that a third party had historically been necessary for electronic transactions), but for ease of surveillance.[7] The premise of the third-party doctrine is that “a person has no legitimate expectation of privacy in information he Voluntary turns over to third parties,” because he “assume[s]There is a risk that you will [third party]would disclose to the police [information].”[8] If the government takes away the option of a private transaction, and RequiresIf information must be given to third parties then it is not voluntary. These people are not taking on the disclosure risk: they have been mandated by the government.[9]

Likewise, the third-party doctrine rests on the theory that, by handing over informa­tion to a third party, a person “is deemed to surrender any privacy interest he may have had” in that information.[10]Therefore, in order to prevent privacy-protecting technology from being used again for transactions, government officials would require people to “surrender their private interest” by banning them[s]” that would otherwise be protected by the Fourth Amendment — something the government may not require….

Prohibitions against privacy-protecting instruments

Let me offer you an example: When a car driver is taken into custody, 1) the police can search his passenger compartment looking for weapons within their reach, and (2) the trunk must not be searched separately. If a state requires that every car on the road has a separate trunk, i.e. that it be an SUV, hatchback, or station wagon, drivers would have less Fourth Amendment protections.[11] Perhaps, by following the analogy to the broad reading of HR 3684, imagine that a state required unworkable record-keeping obligations of car manufacturers who make cars with separate trunks: Say that manufacturers were ordered to report the names and addresses of everyone who drives such a trunk-less car, even though the manufacturers lack any business relationship with many drivers (who might buy or borrow a car from a third party).

Assume a State required all vehicles on roads to have one trunk. This would mean that drivers are subject to fewer Fourth Amendment protections.

Although there’s no clear precedent, it would be unlikely to violate the Fourth Amendment. The government cannot, as an example, ignore the Fifth Amendment’s ban on “be.”[ing]Witness against a criminal case may be forced to give evidence [your]You are forced to give your consent in a civil case. Then, you can use the information in a criminal trial.[12] so it shouldn’t be able to circumvent the Fourth Amendment’s protection of privacy by denying you privacy-protecting tools.

Technology that is constitutionally protected by the Constitution has rights

In fact, courts recognize that some technologies are required to safeguard constitutional rights. Therefore, banning their use would violate these rights. Lower courts, for example, have held that the First Amendment allows government employees to be recorded in public spaces.[13] The courts began with the premise that the public has a First Amendment right to “access … information about their officials’ public activities.”[14] And they therefore held that the First Amendment must likewise protect the technology necessary to effectively gather that information — technology that lets one “record what there is the right for the eye to see or the ear to hear,” “corroborat[ing]Or lay[ing]For objective facts, it is important to leave aside any subjective perceptions.[15] …

You can view the entire piece if you are interested.