Coinbase's IRS Dispute Isn't Just About Bitcoin

Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and is a member of CoinDesk's product team.

The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday, exclusively to our subscribers.

This past week saw yet another move in the ongoing scuffle between the IRS and cryptocurrency exchange Coinbase.

If you haven't been following the story, here’s a summary:

In November, the IRS presented Coinbase with a summons requiring the company to disclose client transactions between 2013 and 2015. Coinbase has hinted that they'd rather not.

Shortly thereafter, a Coinbase customer presented a motion against the IRS, alleging the subpoena was too broad.

This week, the IRS responded, saying what effectively amounted to "go away". It claims that since this client has identified himself as a Coinbase user, he is now excluded from the original summons, and his motion is irrelevant (which would make sense if all they wanted was the clients’ names, but the summons asks for much more than that).

This case has the bitcoin community understandably concerned. Aside from the violation of privacy, there is the strong impression that this is prosecutorial.

Simply through association with Coinbase, clients appear to be under IRS suspicion.

The IRS is probably only after high-net-worth individuals, but the damage is done. If the request is successful, bitcoin users and businesses are likely to feel vulnerable, even when they've done nothing wrong.

But, the potential harm in terms of sentiment is not the most pressing concern. A deeper issue is insufficient regulation.

According to a November report from the Treasury Inspector General for Tax Administration, the IRS does not have a coherent virtual currency strategy.

When policy isn't being put to practice, this leads to confusion and unpredictability, neither of which create a good environment for development.

Usually, businesses and individuals are willing to comply with reasonable rules. Not knowing what those rules are leads to unnecessary expenditure and reluctance to engage.

Yet even that isn’t the main problem. A bigger concern is that we don’t know how to regulate cryptocurrencies.

Bitcoin is eight years old, and lawmakers still don't have a clear idea of what to do about it.

That's not to say progress isn't being made.

Several institutions and governments are studying the problem, establishing working groups and publishing papers. A few seem to be moving down a path that the respective local ecosystems appear happy with.

To be fair, virtual currencies are still a minuscule part of the world economy, so they understandably haven't been a priority. Their presence is growing, however, and the disruptive threat is becoming more obvious.

Also, we are facing completely new circumstances. History is not lending us a hand here. Never before have we had such interpersonal connectivity, and the fallout from lack of control over information is not limited to the field of finance.

Add to the mix the slippery concept of bitcoin and similar cryptocurrencies, and the confusion becomes even more understandable.

They don't belong to any specific jurisdiction, no-one controls them, and no official organization can influence where they go.

Which brings us to the question: Is it possible to regulate this new technology?

It helps to consider what type of regulation we want, and what it is we're trying to control. Consumer protection rules already exist in many jurisdictions. Anti-money laundering disclosure requirements are already part of the financial landscape. Neither are technology-specific.

Tax evasion isn’t, either. Cryptocurrencies may provide a vehicle, but the tech is not the problem here. The IRS move against Coinbase isn't about bitcoin – it’s about lack of information.

The implied threat and the accompanying publicity of the legal action will push some transactions elsewhere, perhaps to less cooperative environments. In the process, it threatens to damage a young network with significant potential to contribute to economic development.

Clear guidelines on disclosure requirements for individuals and businesses will help avoid the collateral damage from shortsighted summonses, but a sharper focus on what really matters will help clarify what rules are needed.

Just as this new technology is making us rethink the concept of value, so we need to re-evaluate what regulation is for, and what is needed to enforce it.

The issue is not cryptocurrencies or even their uses. The issue is information: what is necessary, and who provides it.

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