Why the US government wants to bring cryptocurrency out of the shadows

A US government request to trawl through the personal data of millions of users of the cryptocurrency exchange Coinbase signals the start of an effort to pull digital currencies like bitcoin into the mainstream, experts have said.

The “John Doe” summons, a broad order for data on all Coinbase users in 2013, 2014 and 2015, was filed by the Internal Revenue Service (IRS) in a federal court in California on 17 November.

In the summons, the IRS said that all of Coinbase’s users in that period “have not been or may not be complying with US internal revenue laws”.

Coinbase has said it will fight the request in court.

Cryptocurrencies – digital assets which exist entirely online but are exchangeable for goods or services – have grown in popularity in recent years, in part because they grant a degree of user anonymity. Coinbase is the largest bitcoin exchange and its best-known brand.

But user confidentiality has also caused headaches for governments, who worry the currencies are being used for drug dealing, money laundering or tax evasion. Digital currencies are currently taxed as an asset like gold, with capital gains tax due when there is an appreciation in value.

However, the extent to which bitcoin users with US tax liabilities have been declaring such assets is unclear.

In documentation supporting its petition, the IRS referred to three anonymous cases of taxpayers who had used virtual currencies to evade tax, two of which were “corporate entities with annual revenues of several million dollars” which used Coinbase wallets and concealed bitcoin transactions as “technology expenses” on their tax returns.

Several experts in cryptocurrency said that the IRS was on a “fishing expedition”, and pointed out that it followed an excoriating report by the US treasury’s inspector-general for taxation which said the IRS was not doing enough to regulate and investigate cryptocurrencies.

“The government has no idea that anybody has committed a crime,” said Jerry Brito, the executive director of Coin Center, a lobbying and research group focused on cryptocurrencies.

In a statement, Coinbase said: “Although Coinbase’s general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government’s request.”

It added: “In its current form, we will oppose the government’s petition in court.”

Some experts, though dismayed by what they saw as the overly broad and invasive nature of the request, said that more government scrutiny on cryptocurrencies was inevitable as they became more mainstream.

“It’s an indication of bitcoin’s growing adoption,” said Chris Burniske, an analyst at ARK Investment Management who focuses on bitcoin.

A Bitcoin sign at a pub in Sydney, Australia. Cryptocurrencies have grown in popularity in recent years.

A Bitcoin sign at a pub in Sydney, Australia. Cryptocurrencies have grown in popularity in recent years. Photograph: David Gray / Reuters/Reuters

“As more people use it, it is going to grow in a way which affects national and global economies, so the IRS needs more clarity on how citizens are using it,” he said. “Globally, we’re seeing regulators grapple with how to regulate and tax [cryptocurrencies].”

Others said that while they felt Coinbase was right to seek to narrow the scope of the request, some change was needed to bring bitcoin and its ilk out of the dark and into the world of mainstream finance.

“If bitcoin and other digital currencies are going to be viewed as legitimate financial instruments, there has to be some regulatory apparatus here,” said Kevin McIntyre, associate professor of economics at McDaniel College in Maryland.

“Certainly,” he added, “the tinfoil hat-wearing libertarian types who embrace the privacy of [bitcoin] are going to be very disappointed.”

Not all of them, however. Juan Llanos, an advisor in financial technology regulation and compliance, said he was seeing a lot of anger within the cryptocurrency industry at the IRS’s move, but also some schadenfreude from the more anarchistic parts of bitcoin’s user base.

“Coinbase has been attacked by ultra-anarchists from the beginning, because they are the closest to a digital bank there is,” he said. “Many anarchists – usually the early adopters of bitcoin – who are against the customs of Coinbase are celebrating,” he said.

This is not the first time the IRS has used blanket John Doe summonses as part of an investigation, though it is possible that the Coinbase request will be the largest of its kind.

In 2014, a federal judge approved similar summonses for FedEx, DHL and UPS to produce information about taxpayers who use an offshore asset-management service called Sovereign Management Legal, and in 2015 a judge approved another summons for US taxpayers with offshore accounts at Belize Bank International Limited.

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