EFF: Bitcoin snooping scheme puts bosses' freedoms at risk

24 October 2014 -

Proposals to regulate New York merchants who handle digital currency fall foul of US campaign group, with First Amendment rights at stake

Jermaine Haughton

New York State proposals to bring in licensing for companies that use Bitcoin could threaten the privacy of business owners and their customers, according to leading US campaign group the Electronic Frontier Foundation (EFF). With the backing of social site Reddit and the Internet Archive, EFF has filed formal comments with the New York State Department of Financial Services opposing the planned “BitLicense” – arguing not only that it damages privacy and innovation, but infringes First Amendment rights to freedom of expression and association. EFF has noted that the new licence could force bosses to hand over biometric data, such as fingerprints, along with passport-style headshots.

“Digital currencies such as Bitcoin strengthen privacy and are resistant to censorship,” said EFF activism director Rainey Reitman. “We should consider this a feature, not a bug. It’s an innovative way of importing some of the civil liberties protections we already enjoy offline into the digital world.”

Since its 2009 creation by Satoshi Nakomoto – the Banksy of new-wave finance – Bitcoin has been adopted by a wide range of companies, selling everything from pizza to furniture. Under the New York plans, though, traders would be required to keep detailed records on every transaction for 10 years, including user identities, which the EFF argues could lead to severe privacy breaches.

In its State Department comments, EFF said: “Forcing companies to maintain detailed records about every transaction, no matter how mundane or insignificant, is burdensome and unnecessary. But we are even more concerned that every transaction would have to be linked to the names and physical addresses of all parties, and then kept for 10 years in case [the State Department] should wish to inspect that information.

“This is particularly invasive for individuals who may wish to make digital currency payments for sensitive purposes. The EFF and Internet Archive are concerned about this possibility because they are non-profit organisations that accept Bitcoin donations, and they believe there legitimate reasons why someone would prefer privacy in her financial transactions.”

New York financial regulators say that the “BitLicense” would actually open the doors for more virtual currency companies to conduct business in the State – and on that basis, the scheme would merely ensure that organisations are signalling their compliance with consumer-protection and anti-money laundering rules. The controversy follows in the wake of several scandals in the Bitcoin space, which in some quarters have undermined confidence in the currency. Most recently, around £934,000 of Bitcoins formerly held by cryptocurrency exchange Moolah have gone missing, after the exchange declared bankruptcy. The money is believed to be held by the company’s boss Alex Green, who currently can’t be found.

Despite those doubts, EFF notes that the proposed regulations fail to take into consideration the different functions of digital currencies, which have “expressive and associational uses” as well as for making payments. For example, the body says Bitcoin block chains frequently contain political speech, such as famous quotes and portraits of prominent historical figures. EFF Special Counsel Marcia Hofmann said: “The courts have long recognised that code is speech protected by the First Amendment. At their core, digital currency protocols are code. Attempts to regulate code must include robust protections to ensure constitutionally protected speech is not stifled, and the BitLicense proposal would undermine those First Amendment principles.”

Austin Walne – co-founder of advocacy group NYNeedsBitcoin.com – says a BitLicense would be excessive, and instead New York should provide a “BitSafeHarbour” to allow small, young startups using the currency the scope to grow into bigger businesses. “This safe harbour,” Walne said, “should include a set of industry standards and best practices that companies in the space would have to abide by to ensure consumer protection and public safety.”

Walne added: “BitLicense harms the New York tech ecosystem because we’ve already heard stories of Bitcoin companies planning to leave the State, or technologists preparing to block NY residents from their services.”

For more on these issues, check out this CMI Checklist guidebook Managing Finance.

Image of Bitcoin site under magnifying glass courtesy of Gil C / Shutterstock.