By Laura Stavetski
Bitcoin is a virtual currency that allows its users to exchange any amount of money with anyone all over the world. Bitcoin operates with no central authority or banks and manages all of its transactions on a network. Many users have been drawn to Bitcoin due to its anonymity. Although all Bitcoin transactions are stored publicly and permanently on the network, the identity of the users behind the Bitcoin addresses remains anonymous and users are encouraged to change their Bitcoin addresses routinely in order to protect their privacy. However, is Bitcoin’s promise of anonymity about to change?
The United States Internal Revenue Service (“IRS”) recently filed a legal summons in the United States District Court for the Northern District of California seeking to identify several Bitcoin users and their financial activities. The IRS believes that many Bitcoin users have been using the virtual currency to violate United States tax laws. The summons, filed on November 17, 2016, identifies the defendants to the lawsuit as “United States persons who, at any time during the period January 1, 2013 through December 31, 2015, conducted transactions in a convertible virtual currency.” Further, the legal summons states the following:
Based upon a review of the petition and supporting documents, the Court has determined that the “John Doe” summons to Coinbase, Inc. relates to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue laws, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summons is issued) are not readily available from other sources.
The summons makes clear that the IRS has successfully tracked Bitcoin activity to the point of identifying that certain users may not be in compliance with United States tax laws. As stated above, the IRS has traced this activity back to Coinbase, Inc., an entity that provides Bitcoin wallets. Because Coinbase, Inc. is an entity that complies with the Anti-Money Laundering Laws, it is required to collect all personal information relating to the identity of its customers and therefore any transactions traced back to Coinbase wallets can reveal the identity of its users.
Many users of Bitcoin have grown concerned over the government’s recent tracking of cryptocurrency and its efforts to decrease the privacy of Bitcoin users. Should the government be permitted to interfere with cryptocurrency? It is likely that courts will enforce legal summons such as this due to the underlying suspicion of noncompliant activity. Although cryptocurrency may be evolving, the government may also have found a way to infiltrate the anonymity of Bitcoin users.
Student Bio: Laura is a Content Editor for the Journal of High Technology Law. She is currently a third year day student at Suffolk University Law School with a Business Law Concentration and Area of Focus in Taxation. She holds a B.A. in Economics from Roanoke College.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.