Extensive IRS-Chainalysis Partnership Further Revealed

ETHNews has learned that the Internal Revenue Service signed an agreement with Chainalysis that is set to begin on September 7, 2017. The $124,000 deal will connect the nation’s tax agency with the self-described “leading provider of Anti-Money Laundering software for Bitcoin” through September 2018.

On August 22, 2017, the Daily Beast discovered the original partnership between the Internal Revenue Service (IRS) and Chainalysis, which became public as a result of a Freedom of Information Act (FOIA) request made by the media company. The IRS-Chainalysis partnership extends all the way back to August 2015. Since then, the IRS has paid Chainalysis $88,798.84 for its services.

Against the backdrop of the tax agency’s summons to Coinbase, it’s clear that the IRS is trying in earnest to connect the dots on cryptocurrency tax evasion. The IRS summons to Coinbase ranges from January 1, 2013, through December 31, 2015, but the IRS only enlisted Chainalysis in August 2015.

Readers might wonder why the tax agency sought records from over four years ago. Remember that the price of bitcoin in January 2013 was only about $15. Price data on CoinMarketCap doesn’t even go back that far! To find the price of bitcoin back then, I had to dig for a post by Ethereum founder Vitalik Buterin, then the co-founder of a mildly eccentric publication called Bitcoin Magazine. Obviously, bitcoin is worth much more today, as the digital currency surges past $4,000 per coin. Accordingly, the ramification of back taxes on early bitcoin adopters could be absolutely massive!

With the assistance of Chainalysis, the IRS could potentially track bitcoin transactions to identify suspicious wallet addresses from the early days of the digital currency. If its Coinbase summons prevails, then the IRS could simply link those allegedly evasive wallet addresses to customers’ names and physical addresses. When reached for comment, a Coinbase representative said that the exchange is “not able to provide comment on this topic at this time.”

The horrifying impact could extend farther if the IRS is subsequently able to subpoena other exchanges or wallet providers. The tax man might even go beyond American borders to target international exchanges that provide services to American customers.

Who would have imagined that the power of a public ledger could be used so invasively?

Speaking to the Daily Beast, Jonathan Levin, co-founder of Chainalysis, argued that government agencies must be able to trace virtual currency. However, the depth of the IRS inquiry was never quite so clear – or quite so frightening. If Uncle Sam links wallet addresses with personal identities, then the government could conceivably track citizens’ digital finances indefinitely.

The partnership of Chainalysis and the IRS is another threat to one of the core values of blockchain technology – while bitcoin transactions are essentially public, the very thing that gives the network its decentralized power is also something that threatens the financial privacy of millions of cryptocurrency users. In essence, Chainalysis’ services will allow the IRS to conduct a hands-free audit. This is plug and play, and there’s little to stop the tax agency from prying into the financial affairs of its citizens.