Investigation into alleged unlicensed money transmission business uncovers an additional charge

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

As always, Rosario summaries are “NMR” and Palley summaries are “SDP".

[related id=1] United States v. Stetkiw, 2019 U.S. Dist. LEXIS 111216 (E.D. Mich. decided July 3, 2019)[NMR]

This is a criminal case that has resulted in some new precedent in the Eastern District of Michigan relevant to crypto. This is just further evidence that blockchain and cryptocurrency are slowly edging their way into the mainstream. Alright, great, what’s this case about?

Homeland Security Investigations was investigating Bradley A. Stetkiw for potential violations of 18 USC §1960, e.g., the prohibition against running an unlicensed money transmission business, because of Stetkiw’s Bitcoin exchange service. As part of that investigation the government obtained a warrant to search a computer for image and data files related to his running of the service that may be potential evidence. During that search the special agent for HSI found an image of child pornography, and immediately stopped his search. The agent then procured a second warrant for searching for child pornography. That warrant was granted, and ultimately, Stetkiw was charged with crimes related to running an unlicensed money transmission business, and possessing child pornography. So, what is this particular ruling about?

Well, the Fourth Amendment to the Constitution states “…no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.” (emphasis added) In this case, Stetkiw’s lawyers filed a motion to suppress the evidence of child pornography that was discovered when searching for the bitcoin evidence. His lawyers claimed the search was not particular, was unreasonable, and as such the evidence of child pornography should be thrown out. The judge disagreed.

As the Court explained when discussing the Fourth Amendment and computer searches, in the Sixth Circuit (where the Eastern District of Michigan is located) “a computer search may be as extensive as reasonably required to locate items described in the warrant based on probable cause.” This doesn’t mean that the Government has carte blanche to search whatever and wherever they want. If they did, that would amount to what is known as a “general warrant,” and we have a prohibition on general warrants in this country largely due to the old British practice of bursting into colonists homes and rooting around for any evidence of anything they didn’t like. Incidentally, this practice was one of the reasons the colonists declared their Independence exactly 243 years ago as of today. Where was I?

The judge explained that in this case the warrant was particular for a couple of reasons. The warrant itself identified “all forms of storage… including photographic…” as potential locations of Bitcoin evidence, and the officer testified that he was looking for things like QR codes in image files. Additionally, Stetkiw’s own expert witness conceded that although it was not common for such evidence to be found in image files it was indeed possible. Given these reasons the Court found that the search itself was particular.

As to whether the search was reasonable, Stetkiw’s lawyers tried to argue that it was unreasonable to search the image files, because the agent didn’t use optical character recognition when searching. The Court didn’t buy this argument, because “individuals can ‘hide, mislabel, or manipulate files to conceal criminal activity, a broad expansive search of the hard drive may be required,’” and the use, or lack thereof, of OCR had no bearing on this fact.

Stetkiw’s case was not helped by the fact that the child pornography was deemed to be in plain view during the search, and that the judge felt that the agent was acting in good faith.

What’s this mean for crypto? Well, in this particular instance a judge found that searching image files for evidence related to bitcoin transactions was perfectly fine. It is worth mentioning that the judge was troubled by the fact that the agent during evidentiary testimony said that he effectively had a warrant to search whatever he wanted on the computer. The judge felt that statement sounded a lot like a general warrant. As such, the judge recommended that in the future additional ex ante review of search procedures should be conducted by the judge evaluating the warrant before the granting of the warrant. Maybe crypto will change the world after all.

The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part II of this week's analysis, Crypto Caselaw Minute, is above.