Cryptocurrencies were created with the intention of challenging the status quo and to create an economy out of the control of governments and give power to the people. And since the inception of cryptocurrencies, they have always run into trouble with the law, mainly because of their pseudo-anonymous nature. Law enforcement sees their potential to be used for terrorism funding, money laundering, and other illegal activities. After the bust of the silk road, cryptocurrencies were been watched closely for illegal activities, and once the price of cryptocurrencies began to spike the tax authorities stepped in. Even though the law pertaining taxation of digital currencies vary most jurisdiction have some form of tax on cryptocurrencies. Recently, exchanges have become the new target of IRS and other tax agencies. Some exchanges like Coinbase has 6 million users but there are only 10,000 people showing holdings in a digital asset in their filling. This makes these exchanges a gold mine for the IRS.
The first big profile fight between a cryptocurrency exchange and a tax agency happened between IRS (Internal Revenue Service) and Coinbase. Coinbase was asked to hand over the data of its customers. This lead to a year-long court battle at the end of which Coinbase was forced to hand over the records of users who handled cryptocurrencies worth more than 20,000 dollars through their accounts in a year between 2013 and 2015. This happened after a federal judge ruled against Coinbase. Around 14,355 users will be affected, revealing their username, date of birth, taxpayer ID and address. The ruling is narrower than the original request made by IRS, but this could be used in all future cases involving cryptocurrencies. Many users were pissed that they didn’t receive advance notice of the data handover. The court fight could be seen as an effort by Coinbase to show its user it really cares about them and the company had no option but to hand over the data.
Kraken, a San Francisco based exchange, received 475 requests from law enforcement agencies in 2018, compared to 160 in 2017, underscoring the increased scrutiny this industry has received from regulators. According to the company’s compliance report out of the 475 requests that were made, 315 came from with the United States, which includes 67 from the Federal Bureau of Investigation, another 19 from the Securities and Exchange Commission and finally, 18 from the Department of Justice. Even though the company complied with the request, they complained the fact that it was too much work and really expensive to deal with the subpoenas. This they say will discourage many startups, as compliance is acting as an entry barrier. This has lead to many exchanges refusing services to US customers.
Shapeshift is a cryptocurrency exchange based in Switzerland. The company published a report “Pulling Back The Curtain: How ShapeShift Handles Law Enforcement Compliance” on its blog on Friday, January 18. Shapeshift receives requests for data from law enforcement agencies which includes transaction IDs, crypto addresses (in or out of the Shapeshift system), cryptocurrency or crypto asset information, identity information (names, emails, IP addresses) etc. The highlight of the report was the fact that in 2018 the number of requests has spiked by 175 percent in the last quarter. Majority of the requests came from the United States. The process is usually opaque and the company is not always told why the information is necessary.
More such actions can be expected in the near future as governments all over the world are trying to increase revenue, but it’s unlikely that any of the exchanges will have to face closure as long as they comply with the requests from governments. Crypto purists believe that governments should not interfere in the crypto and it should be left for the community to manage. It’s clear that governments are not going to leave crypto alone. Large corporations, banks, and investment firms are finally starting to adopt crypto and regulations on taxation is key as none of them want a surprise tax bill like the ones received by the Coinbase users. Once the regulations regarding Crypto are finalized, it will be easier for investors to comply. Most governments are optimistic about this new technology as most of them believe it can bring positive impact as long as it is implemented in the right way.
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