On January 11, 2017, San Francisco-based Coinbase, Inc., filed a motion to intervene in federal court to challenge a summons recently served upon it by the Internal Revenue Service (IRS). Coinbase, which is registered as a money services business with the United States Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) and licensed in 34 states (plus the District of Columbia and Puerto Rico), is one of the largest cryptocurrency exchanges that serves bitcoin transactions and storage for 190 countries worldwide.
On November 17, 2016, the federal government filed a petition in the District Court for the Northern District of California seeking permission to serve a summons on Coinbase to obtain customer data on anyone who “conducted transactions in a convertible virtual currency” between January 1, 2013, and December 31, 2015. On November 30, 2016, the Court granted the petition, and the IRS served the summons on Coinbase on December 6, 2016.
The summons, which is “extraordinarily broad” and which would set a dangerous precedent, seeks the following information over the three year period:
1. Account/wallet/vault registration records for each account/wallet/vault owned or controlled by the user during the period stated above including, but not limited to, complete user profile, history of changes to user profile from account inception, complete user preferences, complete user security settings and history (including confirmed devices and account activity), complete user payment methods, and any other information related to the funding sources for the account/wallet/vault, regardless of date.
2. Any other records of Know-Your-Customer due diligence performed with respect to the user not included in paragraph 1, above.
3. For any account/wallet/vault with respect to which the registered user gave any thirdparty access, control, or transaction approval authority, all powers of attorney, letters of wishes, corporate minutes, or other agreements or instructions granting the third party such access, control, or approval authority.
4. All records of account/wallet/vault activity including transaction logs or other records identifying the date, amount, and type of transaction (purchase/sale/exchange), the post transaction balance, the names or other identifiers of counterparties to the transaction; requests or instructions to send or receive bitcoin; and, where counterparties transact through their own Coinbase accounts/wallets/vaults, all available information identifying the users of such accounts and their contact information.
5. For each merchant user for which you act as Payment Service Provider, records of all payments processed, including records identifying the user of the wallet charged, if a Coinbase user, or the address of the wallet charged, if not, the date and amount of the transaction, and any other information that will enable the merchant to identify the transaction.
6. All correspondence between Coinbase and the user or any third party with access to the account/wallet/vault pertaining to the account/wallet/vault, including but not limited to letters, memoranda, telegrams, telexes, facsimiles, e-mail, letters of instruction, and memoranda of telephone or oral instructions received.
7. All periodic statements of account or invoices (or the equivalent).
8. All records of payments to or from the user by checks, wire or other electronic transfer, ACH transaction, PayPal transfer, credit or debit card transaction, money order, transfer to or from other digital currency wallet address, or any other method, including records reflecting the form, manner, nature, and purpose of such payment including, but not limited to, ABA routing number and other routing information, payment instructions, and any and all invoices, billing statements, receipts, or other documents memorializing and describing such transaction.
9. All exception reports produced by your AML system, and all records of investigation of such exceptions.
Due to this overbroad summons, on December 13, 2016, Coinbase customer and managing partner of Berns Weiss LLP, Jeffrey K. Berns, filed a motion challenging the IRS summons for overreaching. On December 27, 2016, the government filed its opposition to the motion and, in an attempt to avoid Mr. Berns’ challenge, the IRS withdrew the summons as it pertains only to him.
On January 3, 2017, Mr. Berns filed a reply to the government’s opposition, arguing, among other things, that the government’s withdrawal of the summons as to Mr. Berns was further evidence of bad faith on the part of the IRS. Other than Mr. Berns’ identity, no other information, and document listed in the summon to Mr. Berns was produced to the IRS. If the IRS did not need those documents about Mr. Berns, then it did not need those documents as to Coinbase’s other customers.
On January 11, 2017, Coinbase filed a motion to intervene in the court proceeding in order to also challenge the IRS summons:
“The motion to intervene is made on the grounds that Coinbase has an interest in the subject matter of this proceeding, and that disposition of the action may, as a practical matter, impair or impede Coinbase’s ability to protect that interest. Coinbase’s interest is not adequately represented by the existing parties.”
Mr. Berns' motion was originally scheduled to be heard by the federal court on January 19, 2017, but has been rescheduled by the court clerk for a hearing on February 16, 2017, which is the same time that Coinbase's motion will be heard.