The Bitcoin community at large and the Internet boards have been abuzz this week over the IRS (Internal Revenue Service, the national tax authority) of the United States launching a privacy attack on Bitcoin wallet provider Coinbase’s user base. As we have reported, by utilizing what is known as a “John Doe” summons, this potentially could give all of Coinbase’s user information to the agency. Late on Friday, Coinbase announced that they will seek court action in opposition to this manoeuvre.

Protecting Customer Privacy

This puts Coinbase in an interesting position, like the one Apple Inc. was in last year when the U.S. Government wanted a backdoor to their software to access Apple iPhone users. The mandate that wallet providers like Coinbase will have to comply with is the AML/KYC regulations that would create a collection of personally identifiable information on a central server that any hacker or government can potentially access. Coinbase is mindful of the government’s concerns as can be seen in their blog post titled “Protecting Consumer Privacy.”

“Our customers may be aware that the U.S. government filed a civil petition yesterday in federal court seeking disclosure of all Coinbase U.S. customers' records over a three year period. The government has not alleged any wrongdoing on the part of Coinbase and its petition is predicated on sweeping statements that taxpayers may use virtual currency to evade taxes.”

However, protecting user information, as Apple also noted in their legal matter, is a key principle of their business and social contract with their user base. Users are expecting protection of their personal information in exchange for their business. Coinbase has not been found to do anything wrong but is getting prepared to go to court over this approach by the IRS.

“Although Coinbase's general practice is to cooperate with properly targeted law enforcement inquiries, we are extremely concerned with the indiscriminate breadth of the government's request. Our customers’ privacy rights are important to us and our legal team is in the process of examining the government's petition. In its current form, we will oppose the government’s petition in court. We will continue to keep our customers informed on developments in this matter.”

This attack on Coinbase’s wallet users is actually a good thing for Bitcoin’s ecosystem in the long run. Companies such as Facebook, Twitter, Gmail, Skype, etc. are all either are censoring and micromanaging users themselves or have government programs invading user privacy and violating constitutional rights at will.

It is a matter of convenience versus security. Using Coinbase may be convenient and may be as safe or even safer than using your own wallet, but there is a price to pay for centralizing your information - surveillance, in addition to online hacks targeting user information or the Bitcoins saved or both.

At least corporations like Apple and Coinbase are fighting back, but it really is up to the Bitcoin users to protect their privacy. If a corporation is in a country and its national government puts pressure on them to give in, there’s not much they can do to protect its users’ privacy for long. Coinbase is taking the next step in this legal battle. This should be appreciated, but if Bitcoin users are going to flock to one centralized online destination, it will create problems that could be easily avoided.

The idea behind Bitcoin is to protect funds yourself, not to create Bitcoin online banks. We did not see anything about millions of user’s personal information being collected on a central server in Satoshi Nakamoto’s White Paper. We may have been made to believe that centralized banks should handle our funds but whenever the Bitcoin community treats exchanges or wallet providers like banks, this generates a large problem, either in theft, which some have said has happened at Coinbase before or embezzlement or even a government attack.

This should be seen as a lesson that using and creating a centralized Bitcoin database makes you a lot less secure than it would be otherwise. Let us begin handling our own funds, as Satoshi intended and avoid the desire to accumulate it in one place, making a central pot of information, for the regulators to cull. In life, there may be strength in numbers, but in a centralized financial destination like Coinbase or any online destination, this can become a huge weakness.

Decentralization is Bitcoin’s greatest strength, and many Bitcoin users are missing that point. It might be time to get back to basics, even if it is less convenient to do so.