The U.S. government is seeking the identity of Coinbase users for tax purposes, sparking fears that Bitcoin’s anonymity may be compromised.

According to a legal summons filed in the Northern California District Court, the U.S. Internal Revenue Service (IRS) seeks to identify several Coinbase users and their financial activity, based on evidence that they may have violated U.S. tax laws:

“Based upon a review of the petition and supporting documents, the Court has determined that the “John Doe” summons to Coinbase, Inc. relates to the investigation of an ascertainable group or class of persons, that there is a reasonable basis for believing that such group or class of persons has failed or may have failed to comply with any provision of any internal revenue laws, and that the information sought to be obtained from the examination of the records or testimony (and the identities of the persons with respect to whose liability the summons is issued) are not readily available from other sources.”

As indicated by the summons, two things are clear: one, the IRS has tracked Bitcoin-related activity sufficiently to be able to determine that certain users may not be in compliance with tax law, and two, this activity has been traced back to Coinbase wallets. As Coinbase is an AML/KYC compliant entity, they are required to collect personal information concerning the identity of their customers, meaning that transactions traced back to Coinbase wallets can reveal the real identity of its users.

A somber awakening for pro-privacy Bitcoin enthusiasts

The summons implicating Coinbase reveals a grim reality for the most privacy-conscious Bitcoin fans: the government is tracking cryptocurrency transactions, and will move on them to de-anonymize users if a suspicion arises of legally noncompliant activity.

Julio Alejandro, founder of Blockchain-based activist organization the Humanitarian Blockchain, sees the arrival of harsh realities to the happy-go-lucky world of Bitcoin as an event that will push cryptocurrency underground:

“Bitcoiners are Hakuna Matata utopians. They believe in a “no worries, trouble free” alternative electronic world where peace, trade and anonymity are essential to live and let others live with in their virtual jungles. As innovations are reduced by taxation, transhumanism, sharing economies and crypto-anarchist movements - where most technological advancements are imagined - will dilute and their physical members will be forced to act and hide in an underground radical, threatening, subcultural movement harder to lead or moderate.”

Is greater financial privacy more than what Bitcoin can provide?

As Bitcoin shows its potential privacy vulnerabilities, the need becomes pressing for currencies that expand beyond its original privacy offerings. According to Eric Sammons, consultant for Dash, the quest for financial privacy necessitates a currency that is both difficult to trace and also prioritizes usability:

“Although Bitcoin was initially touted as an "anonymous" currency, people who understand the technology have always known it's actually easily trackable. This sweeping action by the IRS demonstrates why it's important for the crypto world to be advancing both convenience and anonymity in its currency, such as what Dash is trying to do.”

Virgil Vaduva, creator of peer-to-peer emergency response and ridesharing app Cell 411, supports Monero as a necessary evolution beyond Bitcoin in order to maintain financial privacy:

“Monero should not be looked at as an exclusive crypto currency used to evade taxation or purchase illegal items online, however it can be the perfect tool that users can use to express dissatisfaction with their government's high taxation, spending of tax funds, war expenditures and using taxpayer funds to expand the police state. In other words, Monero is the perfect currency to give users the privacy they seek and also give them the means by which they can use civil disobedience to protest abusive government policies, no matter where in the world they are living.”