The Obama administration has created a surveillance state on a scale not seen since senator Joe McCarthy's infamous 1950s crackdown on suspected communists, according to the tech executive caught up in crossfire between the NSA and whistleblower Edward Snowden.

"We are entering a time of state-sponsored intrusion into our privacy that we haven't seen since the McCarthy era. And it's on a much broader scale," Ladar Levison, founder of Lavabit, told the Guardian. The email service was used by Snowden and is now at the center of a potentially historic legal battle over privacy rights in the digital age.

Levison closed down his service this month, posting a message about a government investigation that would force him to "become complicit in crimes against the American people" were he to stay in business. The 32-year-old is now stuck in a Kafkaesque universe where he is not allowed to talk about what is going on, nor is he allowed to talk about what he's not allowed to talk about without facing charges of contempt of court.

It appears that Levison – who would not confirm this – has received a national security letter (NSL), a legal attempt to force him to hand over any and all data his company has so that the US authorities can track Snowden and anyone he communicated with. The fact that he closed the service rather than comply may well have opened him up to other legal challenges – about which he also can not comment.

What he will say is that he is locked in a legal battle he hopes one day will finally make it clear what the US government can and can not legally demand from companies. "The information technology sector of our country deserves a legislative mandate that will allow us to provide private and secure services so our customers, both here and abroad, don't feel they are being used as listening posts for an American surveillance network," he says.

And in the meantime what he will not do is stay silent – within legal limits. "I will stand on my soapbox and shout and shout as loudly as I can for as long as people will listen. My biggest fear is that the sacrifice of my business will have been in vain. My greatest hope is that same sacrifice will result in a positive change," he says, words that closely echo Snowden's own feelings about becoming a whistleblower.

Levison first heard of Snowden when he revealed himself in the Guardian in June. The first he knew about Lavabit's involvement was when Snowden used a lavabit.com account to announce a press conference at Moscow's airport, where he was left in limbo following his flight from Hong Kong.

"It's not my place to decide whether what Snowden did is right or wrong," said Levison. "I understand the need for secrecy. I understand that the government needs to keep the names of people they are currently investigating and doing surveillance on secret. I am wholly opposed, and find it contrary to our way of life, for the government to keep the methods that they use to conduct that surveillance a national secret. What they are really doing is using that secrecy to hide un-American actions from the general public," he says.

The extent of government surveillance illustrated by Snowden's leaks shows that the Obama administration is willing "to sacrifice the privacy of the many so they can conduct surveillance on the few", Levison said.

As his legal woes mounted he and his lawyer, Virginia-based Jesse Binnall, set up a fund in the hope of raising some cash. "If there's one thing the government has it's no shortage of lawyers. My own tax dollars are being used to spy on me," he says. "If you took all the people we currently have employed as peeping toms and turned them into school teachers, we'd have a much smarter country," he said.

Levison said he is overwhelmed by the support he has received. The fund already has $140,000 – most of it in $5 and $10 donations.

"Mainstream America is starting to realise just how easy it is for their government to spy on them. And more importantly they are realising that their government is spying on them." The extent of all this surveillance would have a "chilling effect on democracy", he said.

Sitting in an office near his Dallas home, Levison looks by turns angry and determined. His dog Princess plays at his feet, begging treats. We go on and off the record, as he constantly attempts to parse what he can and cannot say.

Levison is not an easy man to get hold of. His phone rings off the hook, he doesn't answer it unless he knows the number, nor does he listen to voicemail. He has no email now that his own service is shut down and relies on texts or Facebook to stay in touch.

After the NSA revelations and what he has been through he says: "I'm not sure I trust any electronic communication that involves any commercial service," he says. Is it very frustrating? I ask. "I'm not sure I am allowed to say," he replies.

Lavabit was originally designed as "email by geeks for geeks", says Levison. After university he bought the name Nerdshack.com and was looking to do something with it. Email seemed like a good bet. "I wasn't thinking about security at all," he says. What eventually became Lavabit was a service aimed at tech-savvy, heavy email users – people exchanging 100-plus messages a day. Then came the Patriot Act and Levison decided he could – and should – offer more to his clients.

The Patriot Act was introduced in the wake of 9/11, handing new powers to the US authorities to gather information. "All of a sudden we felt vulnerable. We were willing to sacrifice basic freedoms. Like the freedom to communicate, to associate, for an enhanced feeling of security," said Levison.

Obama was a critic of the act before his election but Levison believes the government's willingness to push that authority has only expanded under his presidency. "What we have seen in recent years is their willingness to use those laws in ways personally I consider to be unconstitutional, unethical and immoral," he says.

The act led Levison to make a number of "very conscious decisions". He would not log or collect any information that was not a technical necessity. No names, addresses, no mobile number, no alternative emails. "I didn't need to know that," he says. "I was removing myself from the equation." But he still had his clients' emails. So Lavabit offered a system that allowed users to encrypt their emails in a way that they could only be read by someone with a password key – a key Levison did not keep.

The idea was to protect people's emails from phishers, scammers and unwanted intrusions. He finds it difficult to understand why people think there is something nefarious about using encryption. "We use encryption every day to protect information. Encryption is effectively part of our everyday life," he says. "It's that little lock you see in your browser everyday. Everytime you go to the bank or visit PayPal."

The US authorities did ask him on a couple dozen occasions to hand over information on certain users, and he did. "I never intended the service to be anonymous. There are things that I could have done that would have catered to criminals that I would not do," he said. "I was always comfortable turning over what I had available."

Levison cannot comment on specifics of what made him so uncomfortable this time that he closed his business but it was clearly a difficult decision. "I walked away from 10 years of my life, tens of thousands of man hours that I had yet to benefit from," he says. "I had to choose whether or not to compromise my ethics and my moral code to stay in business or do what I thought was right and shut down the business." As the NSA documents have shown, other larger companies have faced similar dilemmas and, often after legal battles, acquiesced and cooperated with the authorities.

"If it's illegal to offer a private way to communicate to Americans, I didn't want to remain in the email business," he says. "I think our constitution guarantees our right to communicate privately without fear of government surveillance. But the fact is Congress has passed laws that say otherwise."

Lavabit's closure has inspired others to follow suit. Silent Circle, another encrypted communications service, shut down and deleted its email program shortly after Lavabit. Founder Phil Zimmermann, who created the widely used Pretty Good Privacy (PGP) data encryption and decryption computer program, said he had seen "the writing on the wall".

Pamela Jones (aka PJ) closed her award-winning blog Groklaw this week citing Levison's decision to shutter Lavabit. "The owner of Lavabit tells us that he's stopped using email and if we knew what he knew, we'd stop too," she wrote in a final post. "I'm not a political person, by choice, and I must say, researching the latest developments convinced me of one thing – I am right to avoid it," she wrote. "What I do know is it's not possible to be fully human if you are being surveilled 24/7 … I hope that makes it clear why I can't continue. There is now no shield from forced exposure."

Karen Greenberg, director of the Center on National Security at Fordham Law School, said Levison along with Snowden and others were at the forefront of a debate over privacy that had been simmering since 9/11 and was now coming to a head. "This is a very dangerous moment for these individuals," she said.

There are numerous legal issues here – not just about encryption but about also about a person's right to publicly defend themselves, she said.

"I don't think legal precedent can tell us what is going to happen here. We are in a new conversation about how broadly national security letters can be used," she said. "What this illustrates is the way in which secrecy absolutely chills the conversation. He [Levison] is already treading on thin ice, if he talks at all he could be up on charges of contempt."

"How many individuals are going to have to – what they would see as – martyr themselves? But it's not just renegade kids. Facebook, Google and others have pushed back on national security letters too."

She said she expected the fight would now move to Congress where there is already some push back against the powers of the NSA and the scale of the US's surveillance operations. And from there to the legal system – perhaps one day ending up in the supreme court. The legal system is already showing some signs of rebellion. In a ruling released in March US district judge Susan Illston said that NSLs suffer from "significant constitutional defects" and violate the first amendment because of the way they effectively gag companies that receive them.

"There is a lot of sentiment among Americans that they know they are being surveilled and what does it matter. But hounding people is going to have repercussions," said Greenberg. "Knowing about Prism and the NSA's violations will sink in over time. Americans see privacy as one of their rights. What does it mean if you can't encrypt anything? It's a huge philosophical question with very large legal implications."

As for Levison he is learning to live life without email So far it's been difficult but not impossible. One day he hopes, when his legal woes are behind him: "I'll get my inbox back."