In a precedent-setting victory for the United States tax authorities, a California federal court has ruled in favor of the IRS serving Coinbase Inc. with a “John Doe” summons. The IRS requires the approval of a federal court in order to issue said summons, which covers virtually all Coinbase users who were clients from 2013 to 2015.

The extent of this back-door surveillance is stunning in its depth and scope. Let’s review what the official “John Doe” summons requires of Coinbase:

“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.”

In addition, the details needed for every single transaction: “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.”

Impact on Bitcoin wallet owners at Coinbase

What exactly set all this in motion, affecting several million Bitcoin wallet owners at Coinbase? The official summons identifies exactly one taxpayer, identified as “Taxpayer 1,” and two companies - Taxpayers 2 and 3 - who deal in Bitcoin and who knowingly used Bitcoin to avoid paying taxes required by the IRS. So, in other words, the summons has implicated three taxpayers and Coinbase is now unable to protect the identities of users. Northern California Federal Court Judge Jacqueline Scott Corley sees that as more than enough proof of a system-wide issue at Coinbase.

“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.”

Understand that the IRS can issue this “John Doe” summons as long as they have a U.S. federal court’s approval. Any federal court approval, meaning they could have gone from federal court to federal court until they received it, therefore the end result was inevitable. This amounts to a national judicial rubber stamp. There is no check or balances against the IRS to prevent them from any overreach.

“As the use of virtual currencies has grown exponentially, some have raised questions about tax compliance,” said Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division, in an official statement. “Tools like the John Doe summons authorized today send the clear message to U.S. taxpayers that whatever form of currency they use – Bitcoin or traditional dollars and cents – we will work to ensure that they are fully reporting their income and paying their fair share of taxes.”

Attacks on other Bitcoin exchanges

It should be safe to assume that the IRS will utilize this to attack any and all other Bitcoin wallet providers of any notable size, and most likely any sizable Bitcoin exchanges. The U.S. government is renowned worldwide for taking a global view when it comes to Americans and their taxes, and it is the only nation that taxes citizens regardless of their location - see FATCA and GATCA for more information.

The moral of the story seems to be that Bitcoin owners are deemed guilty until proven innocent in the U.S. federal court. Three out of a few million wallet owners constitutes a tax evasion crime wave that must be stopped, and the violation of the Fourth Amendment of the Constitution should be overlooked in the pursuit of tax revenue. Score one for mass surveillance.

This might be a good time to start investing in a personal hardware wallet, or some other less-centralized source of Bitcoin storage. Coinbase was trying to avoid this outcome to prevent people from looking elsewhere when it comes to wallet creation and Bitcoin funds storage. However, the concept of creating a massive financial honeypot for authorities and regulators to swarm is just as dangerous as keeping huge caches of Bitcoin funds at an exchange for hackers and embezzlers to take. The ethos of Bitcoin is for you to be your own bank and, with each passing day, the wisdom of doing just that becomes more and more profound.

As of the writing of this article on Wednesday night, Coinbase had no official comment on these developments, either on their corporate blog or on the Twitter feed of CEO Brian Armstrong.