Amicus Urges Court to Deny Enforcement of IRS Summons to Coinbase

UNITED STATES
Petitioner,
v.
COINBASE, INC.
Respondent.

UNITED STATES DISTRICT COURT FOR
THE NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION

NOTICE OF MOTION AND MOTION OF DIGITAL CURRENCY
AND LEDGER DEFENSE COALITION TO FILE AN AMICUS CURIAE
BRIEF IN SUPPORT OF RESPONDENT COINBASE, INC.
WITH RESPECT TO THE UNITED STATES’ REQUESTS FOR ENFORCEMENT

TO ALL PARTIES AND THEIR ATTORNEYS OF RECORD:

PLEASE TAKE NOTICE THAT the Digital Currency and Ledger Defense Coalition (DCLDC) hereby moves the Court for leave to file a brief amicus curiae in the above-captioned case in support of Respondent Coinbase, Inc. A copy of the proposed amicus brief is appended to this motion. Coinbase, Inc. consents to this motion; the government opposes it.

I. STANDARD FOR MOTION FOR LEAVE TO FILE BRIEF OF AMICUS CURIAE

District courts have discretion to permit third parties to participate in an action as amici curiae. Woodfin Suite Hotels, LLC v. City of Emeryville, No. C 06-1254 SBA, 2007 U.S. Dist. LEXIS 4467, at *7 (N.D. Cal. Jan. 9, 2007). Such discretion is generally exercised liberally as there are no strict prerequisites that must be established to qualify for amicus status. Id. at *8. The sole criterion is that the applicant must demonstrate that its “participation is useful or otherwise desirable to the court.” Id. (quoting In re Roxford Foods Litig., 790 F. Supp. 987, 997 (E.D. Cal. 1991)).

District courts frequently accept amicus briefs from non-parties where the legal issues in a case “have potential ramifications beyond the parties directly involved.” Sonoma Falls Devs., LLC v. Nev. Gold & Casinos, Inc., 272 F. Supp. 2d 919, 925 (N.D. Cal. 2003) (quoting Cobell v Norton, 246 F. Supp. 2d 59, 62 (D.D.C. 2003)). The parties and the Court ppreviously contemplated that such briefs will be filed in this matter. See STIPULATION AND ORDER (DKT. NO. 22 at 3) (several parties “have indicated that they may wish to file amicus curiae briefs in this action”); id. at 7 (setting an August 3 due date for amicus briefs).

II. STATEMENT OF IDENTITY AND INTEREST OF AMICUS CURIAE

The DCLDC is a 501(c)(3) non-profit organization that protects individual constitutional rights and civil liberties as they relate to digital currency (e.g., bitcoin) and its related blockchain technology. DCLDC members are academics and attorneys — including former federal prosecutors — with extensive digital currency and blockchain technology legal experience. The attorneys that make up the DCLDC come from over 60 law firms that range in size from the largest firms in the world to prominent local boutiques. These attorneys collectively represent hundreds of individuals and entities utilizing digital currency and blockchain technology. The DCLDC has a strong interest in the matter due to its interest in protecting the rights of those at the forefront of technological innovation. The DCLDC has as no parent companies or stockholders and no financial interest in this action.

III. DCLDC’S EXPERTISE WILL BENEFIT THIS COURT

On the basis of its familiarity with the fields of digital currency and blockchain technologyand related areas of law, amicus DCLDC meets the broad discretionary standard for filing an amicus curiae brief. “[T]he potential ramifications [of this case] beyond the parties directly involved” are broad, as the outcome will determine the scope of the privacy rights of virtual currency users – and customers of financial institutions more generally. Sonoma Falls, 272 F. Supp. 2d at 925.

The DCLDC seeks to apprise the Court of the revolutionary innovations that are bitcoin and blockchain technology. These innovations should be fostered and properly sheltered from actions that will discourage their development. These technologies have advanced — and continue to advance — fields such as finance and healthcare and are the vanguard of a technological revolution akin to e-mail and the World Wide Web in the 1990s and 2000s. The DCLDC also seeks to advise the Court that any suggestion that the use of bitcoin and blockchain is inherently suspicious is spurious fear mongering. Bitcoin and blockchain are high regulated technologies that do not exhibit the shroud of anonymity that the Petitioner suggests. DCLDC likewise wishes to inform the Court of the important privacy rights at issue here. The summons at issue is undoubtedly the first of many to come for the bitcoin industry. Significant privacy policy concerns therefore come into play with respect to the otherwise completely legal conduct of buying, selling, and holding bitcoins. In light of at least the foregoing, the DCLDC seeks to offer its analysis of these issues to assist the Court in its deliberations.

IV. CONCLUSION

For the foregoing reasons, the above-listed amicus respectfully request this Court’s leave to submit the attached brief amicus curiae.

August 3, 2017

Respectfully submitted,

Colby B. Springer
POLSINELLI LLP
Three Embarcadero Center, Suite 2400
San Francisco, California 94111
T: 415.248.2100
F: 415.248.2101

Brian E. Klein
bklein@bakermarquart.com
BAKER MARQUART LLP
2029 Century Park East, Sixteenth Floor
Los Angeles, California 90067
T: 424.652.7800
F: 424.652.7850

Jeffery T. Gorham
jgorham@FBTlaw.com
FROST BROWN TODD LLC
201 N. Illinois St., Suite 1900
Indianapolis, IN 46204
T: 317.237.3828
F: 317.237.3900

Attorneys for Amicus Curiae
Digital Currency and Ledger Defense Coalition

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BRIEF OF AMICUS CURIAE DIGITAL CURRENCY AND
LEDGER DEFENSE COALITION IN SUPPORT OF RESPONDENT
COINBASE, INC. WITH RESPECT TO THE UNITED STATES'
REQUESTS FOR ENFORCEMENT

INTEREST OF AMICUS CURIAE

The Digital Currency and Ledger Defense Coalition (“DCLDC”) is a 501(c)(3) non-profit organization that protects individual constitutional rights and civil liberties as they relate to digital currency (e.g., bitcoin) and its related blockchain technology. DCLDC members are academics and attorneys — including former federal prosecutors — with extensive digital currency and blockchain technology legal experience. The attorneys that make up the DCLDC come from over 60 law firms that range in size from the largest firms in the world to prominent local boutiques. These attorneys collectively represent hundreds of individuals and entities utilizing digital currency and blockchain technology.¹ The five DCLDC Board members carry a wide array of experience: representing entrepreneurs and companies developing new technologies (including criminal defense representations); testifying before Congress on digital currency issues; and chairing the American Bar Association’s digital currency and blockchain technology conference.² The DCLDC has a strong interest in the denial of the IRS’s petition to enforce the John Doe Summons due to its interest in protecting the rights of individuals and companies at the forefront of technological innovation.

SUMMARY OF THE ARGUMENT

The importance of the pending case to the digital currency and blockchain industries cannot be understated. The John Doe Summons (Summons) issued to Coinbase by the IRS, even its more narrowed form, remains overly-broad and amounts to fishing with dynamite. There are at least three reasons that conclusively call for denial of the IRS’s petition to enforce the Summons.

First, it must be kept in mind that bitcoin and its supporting blockchain technology are revolutionary innovations that should be fostered and not discouraged through actions like the Summons. These technologies bring much needed advancements and innovations to numerous fields like finance and healthcare. There are countless compelling reasons to use bitcoins and, of course, it is not illegal to buy, sell, and hold bitcoin. Those engaging with bitcoin today are in the vanguard of a technological revolution much like those who first used e-mail in the early 1990s.

Second, the IRS’s position is fundamentally flawed in that it is predicated upon the supposed “suspicious nature” of bitcoin holders. The IRS makes this spurious claim because the bitcoin industry is allegedly lightly regulated and transactions are allegedly essentially anonymous. Nothing could be further from the truth. The space is highly regulated and bitcoin transactions are traceable — including by law enforcement.

Third, granting even the narrowed Summons strips people of important privacy rights. The Summons is undoubtedly the first of many to come for the bitcoin industry. It and the ones that follow will only serve to discourage people from engaging in the otherwise completely legal conduct of buying, selling, and holding bitcoins because of invasion of privacy concerns. Public policy concerns strongly weigh in favor of denying the IRS’s petition.

The Court should deny the IRS’s petition to enforce the Summons.

DISCUSSION

1. Bitcoin is a Revolutionary Technology with Vast Potential

Bitcoin and the blockchain technology on which it relies are groundbreaking technologies. The industries they foster are exploding with growth and activity. Bitcoin and blockchain technology are changing the world for the better and should be encouraged.

a. Bitcoin’s Revolutionary Technology

Bitcoin emerged in 2009. It was created partly in response to the electronic commerce bubble in order to provide the then-unmet needs for more privacy, lower transaction costs, a solution to double spending, and protection from online thefts of national currency based electronic cash like PayPal.

Bitcoin is a form of electronically created and held digital currency that uses peer-to-peer technology to operate with no central authority such as a government or bank. Each bitcoin transaction is recorded on an online ledger — much like an accounting ledger — that anyone in the world can check to verify the transaction took place. This online ledger is called the “blockchain.” Bitcoins are produced by people and businesses running computers all around the world using software that solves mathematical problems. Attached as Exhibit A is a one-page infographic that explains how the bitcoin network operates and how transactions take place.

There are many different ways to obtain bitcoins. One way is through exchanging traditional currency, such as the U.S. dollar, for bitcoins on an online exchange such as Coinbase. A user may also obtain bitcoins in exchange for goods or services. Many law firms, including some whose attorneys are members of the DCLDC, accept payment in bitcoins as do many companies. One may also obtain bitcoins through “mining.” Miners use special software to solve complex math problems in order to validate the authenticity of new network transactions. In exchange for their work, miners earn bitcoins.

Bitcoin uses public-key cryptography in which two cryptographic keys — one public and one private — are generated. Once a bitcoin is spent by a user, that bitcoin cannot again be spent by the user thus eliminating the problem of double spending that hindered earlier digital currencies. Each user is assigned a public and private key for which to conduct and authenticate their bitcoin transactions. While bitcoin usage allows for a certain degree of privacy, it is not completely anonymous; hence the “pseudo-anonymous” characteristic of bitcoin. Researchers have found that through using sophisticated computer analysis on the blockchain, transactions involving large quantities of bitcoins can be tracked. When paired with current law enforcement tools, it is possible to gain information on the individuals transacting with the bitcoins.

b. Bitcoin’s Promising Present and Vast Potential

Bitcoin has enjoyed a meteoric rise since its inception in 2009 because of its groundbreaking nature. Noted Silicon Valley venture capitalist and co-author of the first Internet browser, Marc Andreessen, had this to say about bitcoin’s importance:

Bitcoin at its most fundamental level is a breakthrough in computer science – one that builds on 20 years of research into cryptographic currency, and 40 years of research in cryptography, by thousands of researchers around the world.³

Bitcoin solves the problem “of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet” through the blockchain technology it employs to record transactions.⁴ Solving this problem permits one to transfer any type of digital information in a quick, secure, and verifiable fashion anywhere in the world. The ownership and transfer of stock, bonds, homes, healthcare documents, and other types of records could be recorded on a public (or private) blockchain, eliminating the need for third-parties and drastically reducing the expenses and redundancies that plague current verification systems. People, companies (including IBM and NSADAQ), and even governments around the world are therefore racing to build these applications.

Because of its groundbreaking nature, venture capitalists like Andreessen have poured money into bitcoin and blockchain technology-related companies. A total of $1.75 billion has been invested from 2012 to the present.⁵ Coinbase has over 8.8 million users, 29 million wallets, and 46,000 merchants accepting bitcoins via its payment network, including Dish Network, Expedia, and Overstock.com.⁶

This is not about potential applications that may never get built. As exemplified by Coinbase, bitcoin already has numerous current uses that prove its immense worth:

• Bitcoin has increasingly become accepted around the world for its use in storing value, including derivatives, commodities, and securities products.⁷

• Bitcoin provides the billions of consumers around the world that do not have access to traditional banking opportunities a mobile platform to store and transact money.⁸ Bitcoin can be transacted outside of normal banking business hours and does not require a visit to a brick-and-mortar branch.

• Bitcoin is an excellent platform for transferring money internationally; its transaction fees are lower than most currency exchange fees or Western Union.⁹ Indeed, low-income consumers have had difficulties accessing traditional banking opportunities not just in California¹⁰ and the United States,¹¹ but also in other parts of the world,¹² where the infrastructure simply does not exist otherwise.¹³

• Bitcoin affords protections to merchants because transactions are non-reversible, eliminating the possibility for chargebacks or credit fraud, or data privacy leaks by hackers or scammers. This also protects consumers, who ultimately have a lower risk of credit phishing scammers and/or hackers from collecting, and ultimately exploiting, sensitive financial data.¹⁴

Bitcoin and its underlying blockchain technology offer so much promise of a better world for the future that two Harvard Business School professors recently pointed out:

The technology at the heart of bitcoin and other [digital] currencies, blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically. With blockchain, we can imagine a world in which contracts are embedded in digital code and stored in transparent, shared databases, where they are protected from deletion, tampering, and revision. In this world every agreement, every process, every task, and every payment would have a digital record and signature that could be identified, validated, stored, and shared. Intermediaries like lawyers, brokers, and bankers might no longer be necessary. Individuals, organizations, machines, and algorithms would freely transact and interact with one another with little friction. This is the immense potential of blockchain.¹⁵

As of today, there at least 1,000 digital currencies, with a total market cap around $100 billion.¹⁶ Bitcoin is but one such current, but the leader with a market cap of approximately $45 billion. Bitcoin has spawned an industry of many other digital currencies that offer other functions: Ethereum’s ether token, which memorializes self-executing “smart contracts”¹⁷; Litecoin offers faster transaction times than bitcoin¹⁸; and Ripple, which “enables banks to send real-time international payments across networks.”¹⁹

There are countless uses for bitcoin that serve legitimate, cutting-edge purposes. Those who use it are in the vanguard of a technological revolution.

2. The IRS’s Petition Is Fundamentally Flawed

The IRS’s petition is defective at its core. The IRS’s suspicion that bitcoin users are underreporting their taxable income is based on a faulty premise. Specifically, the IRS suspects that bitcoin transactions are less regulated through fewer reporting requirements and are more anonymous that other types of financial transactions.²⁰ The IRS contends that those who use bitcoins are inherently suspect of falsely reporting their taxable income because of the nature of bitcoin. This is simply not true.

It cannot be overlooked that the bitcoin community is full of responsible people and companies adopting a technology that will change the world for the better. There is nothing suspect about using bitcoin. Just as there is nothing inherently suspect about people who embrace other emerging technologies such as drones and artificial intelligence.

Additionally, people and companies engaging in bitcoin-related business are heavily regulated by many regulatory authorities. FinCEN regulates bitcoin businesses that operate like Coinbase in the same way it regulates traditional money services businesses.²¹ Coinbase abides by the same FinCEN reporting requirements as companies such as Western Union, by filing “Suspicious Activity Reports” meeting FinCEN-prescribed thresholds. Numerous states, including Washington and New York, have regulations that cover bitcoin-related businesses. Many states have considered even stricter regulations than those covering traditional financial services businesses.²² On July 25, 2017, the SEC issued guidance covering what are known as Initial Coin Offerings,²³ and the CFTC has stated that its regulations can apply to bitcoin-related transactions.²⁴ Contrary to the IRS’s claims, the bitcoin space is awash in both state and federal regulatory oversight from many regulatory authorities.

Bitcoin is also anything but anonymous. Bitcoin transactions can be tracked via the blockchain, which is a publicly viewable ledger.²⁵ Because bitcoin transactions can be reverse-engineered via the blockchain, using bitcoin for money laundering or other illicit purposes “does not seem . . . particularly attractive.”²⁶ The European Union recently issued a report concluding that criminal use of digital currencies is “quite rare” due to transaction fees and a lack of sophistication when it comes to the technology tied to using them.²⁷

Recent federal law enforcement actions in the Northern District of California, too, demonstrate that bitcoins are anything but anonymous or untraceable. For example, on March 25, 2015, two former federal agents were charged with bitcoin money laundering and wire fraud for which bitcoin tracing analysis was used.²⁸

The tenor of the IRS’s position, that bitcoins are inherently used to subvert the law could not be further from the truth.

3. Granting the Summons Sets a Dangerous Precedent, Stripping People of Important Privacy Rights and Discouraging Behavior that Should be Encouraged

Bitcoin users are entitled to a certain level of privacy regarding their personal transactions. Granting the Summons will strip Coinbase customers of their privacy rights and surely lead to more such IRS summons of U.S.-based digital currency companies. Over-zealous government surveillance will discourage people from engaging in otherwise legal behavior.²⁹ Governmental hostility towards digital currency companies will only foster off-shore operations as companies will seek to avoid expansive intrusions such as the current IRS Summons. Allowing for enforcement of the Summons will in fact create the very behavior of which the IRS complaints.

Samuel Warren and Louis Brandeis understood privacy as the “right to be let alone.”³⁰ Others think “the right to privacy recognizes the sovereignty of the individual,”³¹ and “respect for a person’s privacy is respect for her as an autonomous subject.”³² Daniel Solove perhaps said it best:

Part of what makes a society a good place in which to live is the extent to which it allows people freedom from the intrusiveness of others. A society without privacy protection would be suffocating, and it might not be a place in which most would want to live.³³

Those sentiments are captured in many laws and regulations, going back as far as the Fourth Amendment and more currently the federal Right to Financial Privacy Act.

The Summons is undoubtedly the first of many to come for the bitcoin industry. The IRS — as it openly acknowledges — has a history of pursuing other industries with similar types of John Doe summonses. The importance of the Court’s review of the IRS’s petition cannot be overstated. Any ruling here in favor of the IRS will have far reaching effects throughout the bitcoin industry.

Surveillance of legal activities in an attempt to ferret out potential illegal behavior inhibits people from engaging in those activities at all.³⁴ Granting the Summons sets a dangerous precedent for the IRS to thwart technological innovation, strip consumers of their data privacy rights, and discourage individuals from engaging in an otherwise legal activity.

CONCLUSION

For all the above reasons, the DCLDC respectfully requests that this Court deny the IRS’s petition to enforce the Summons.

August 3, 2017

Respectfully submitted,

Colby B. Springer (Bar No. 214868)
POLSINELLI LLP
Three Embarcadero Center, Suite 2400
San Francisco, California 94111
T: 415.248.2100
F: 415.248.2101

Brian E. Klein (Bar No. 258486)
BAKER MARQUART LLP
2029 Century Park East, Sixteenth Floor
Los Angeles, California 90067
T: (424) 652-7800
F: (424) 652-7850

Jeffery T. Gorham, appearance pro hac vice
FROST BROWN TODD LLC
201 N. Illinois St., Suite 1900
Indianapolis, Indiana 46204
T: (317) 237-3828
F: (317) 237-3900

Attorneys for Amicus Curiae
Digital Currency and Ledger Defense Coalition