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Case 3:17-cv-01431-JSC Document 54-1 Filed 08/03/17 Page 1 of 13

1 Colby B. Springer (SBN 214868) Brian E. Klein (Bar No. 258486)


cspringer@polsinelli.com bklein@bakermarquart.com
2 POLSINELLI LLP BAKER MARQUART LLP
Three Embarcadero Center, Suite 2400 2029 Century Park East, Sixteenth Floor
3 San Francisco, California 94111 Los Angeles, California 90067
T: 415.248.2100 T: 424.652.7800
4
F: 415.248.2101 F: 424.652.7850
5
Jeffery T. Gorham (Admitted Pro Hac Vice)
6 jgorham@fbtlaw.com
FROST BROWN TODD LLC
7 201 N. Illinois Street, Suite 1900
8 Indianapolis, Indiana 46204
T: 317.237.3828
9 F: 317.237.3900

10 Attorneys for Amicus Curiae


Digital Currency and Ledger Defense Coalition
11
12 UNITED STATES DISTRICT COURT FOR
THE NORTHERN DISTRICT OF CALIFORNIA
13
SAN FRANCISCO DIVISION
14
15 UNITED STATES CASE NO. 17-CV-01431-JSC
16
Petitioner, BRIEF OF AMICUS CURIAE DIGITAL
17 CURRENCY AND LEDGER DEFENSE
v. COALITION IN SUPPORT OF RESPONDENT
18 COINBASE, INC. WITH RESPECT TO THE
COINBASE, INC. UNITED STATES REQUESTS FOR
19
ENFORCEMENT
20 Respondent.

21

22

23
24

25

26
27

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BRIEF OF AMICUS CURIAE DCLDC ISO COINBASE, INC.
Case No. 17-CV-01431-JSC
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1 INTEREST OF AMICUS CURIAE

2 The Digital Currency and Ledger Defense Coalition (DCLDC) is a 501(c)(3) non-profit
3 organization that protects individual constitutional rights and civil liberties as they relate to digital
4
currency (e.g., bitcoin) and its related blockchain technology. DCLDC members are academics
5
and attorneysincluding former federal prosecutorswith extensive digital currency and
6
blockchain technology legal experience. The attorneys that make up the DCLDC come from
7

8 over 60 law firms that range in size from the largest firms in the world to prominent local

9 boutiques. These attorneys collectively represent hundreds of individuals and entities utilizing

10 digital currency and blockchain technology.1 The five DCLDC Board members carry a wide
11 array of experience: representing entrepreneurs and companies developing new technologies
12
(including criminal defense representations); testifying before Congress on digital currency
13
issues; and chairing the American Bar Associations digital currency and blockchain technology
14
conference.2 The DCLDC has a strong interest in the denial of the IRSs petition to enforce the
15

16 John Doe Summons due to its interest in protecting the rights of individuals and companies at the

17 forefront of technological innovation.

18 SUMMARY OF THE ARGUMENT


19 The importance of the pending case to the digital currency and blockchain industries
20 cannot be understated. The John Doe Summons (Summons) issued to Coinbase by the IRS, even
21
its more narrowed form, remains overly-broad and amounts to fishing with dynamite. There are
22
at least three reasons that conclusively call for denial of the IRSs petition to enforce the
23
Summons.
24

25 1
For a complete list of participating attorneys, please visit www.dcldc.org.
2
26 The DCLDC does not represent or advise Coinbase or any of the intervenors; the DCLDC does
not provide legal representation at all. Coinbases outside legal counsel includes Grant Fondo of
27 Goodwin Procter, who is both a founding member of the DCLDC and a Board member. Mr.
Fondo did not participate in the DCLDC decision to submit this brief or its contents.
28
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1 First, it must be kept in mind that bitcoin and its supporting blockchain technology are

2 revolutionary innovations that should be fostered and not discouraged through actions like the
3 Summons. These technologies bring much needed advancements and innovations to numerous
4
fields like finance and healthcare. There are countless compelling reasons to use bitcoins and, of
5
course, it is not illegal to buy, sell, and hold bitcoin. Those engaging with bitcoin today are in the
6
vanguard of a technological revolution much like those who first used e-mail in the early 1990s.
7

8 Second, the IRSs position is fundamentally flawed in that it is predicated upon the

9 supposed suspicious nature of bitcoin holders. The IRS makes this spurious claim because the

10 bitcoin industry is allegedly lightly regulated and transactions are allegedly essentially
11 anonymous. Nothing could be further from the truth. The space is highly regulated and bitcoin
12
transactions are traceableincluding by law enforcement.
13
Third, granting even the narrowed Summons strips people of important privacy rights.
14
The Summons is undoubtedly the first of many to come for the bitcoin industry. It and the ones
15

16 that follow will only serve to discourage people from engaging in the otherwise completely legal

17 conduct of buying, selling, and holding bitcoins because of invasion of privacy concerns. Public

18 policy concerns strongly weigh in favor of denying the IRSs petition.


19
The Court should deny the IRSs petition to enforce the Summons.
20
DISCUSSION
21
1. Bitcoin is a Revolutionary Technology with Vast Potential
22
Bitcoin and the blockchain technology on which it relies are groundbreaking
23
24 technologies. The industries they foster are exploding with growth and activity. Bitcoin and

25 blockchain technology are changing the world for the better and should be encouraged.
26
27

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1 a. Bitcoins Revolutionary Technology

2 Bitcoin emerged in 2009. It was created partly in response to the electronic commerce
3 bubble in order to provide the then-unmet needs for more privacy, lower transaction costs, a
4
solution to double spending, and protection from online thefts of national currency based
5
electronic cash like PayPal.
6
Bitcoin is a form of electronically created and held digital currency that uses peer-to-peer
7

8 technology to operate with no central authority such as a government or bank. Each bitcoin

9 transaction is recorded on an online ledger much like an accounting ledger that anyone in the

10 world can check to verify the transaction took place. This online ledger is called the
11 blockchain. Bitcoins are produced by people and businesses running computers all around the
12
world using software that solves mathematical problems. Attached as Exhibit A is a one-page
13
infographic that explains how the bitcoin network operates and how transactions take place.
14
There are many different ways to obtain bitcoins. One way is through exchanging
15

16 traditional currency, such as the U.S. dollar, for bitcoins on an online exchange such as Coinbase.

17 A user may also obtain bitcoins in exchange for goods or services. Many law firms, including

18 some whose attorneys are members of the DCLDC, accept payment in bitcoins as do many
19
companies. One may also obtain bitcoins through mining. Miners use special software to
20
solve complex math problems in order to validate the authenticity of new network transactions.
21
In exchange for their work, miners earn bitcoins.
22
Bitcoin uses public-key cryptography in which two cryptographic keysone public and
23
24 one privateare generated. Once a bitcoin is spent by a user, that bitcoin cannot again be spent

25 by the user thus eliminating the problem of double spending that hindered earlier digital
26 currencies. Each user is assigned a public and private key for which to conduct and authenticate
27
their bitcoin transactions. While bitcoin usage allows for a certain degree of privacy, it is not
28
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1 completely anonymous; hence the pseudo-anonymous characteristic of bitcoin. Researchers

2 have found that through using sophisticated computer analysis on the blockchain, transactions
3 involving large quantities of bitcoins can be tracked. When paired with current law enforcement
4
tools, it is possible to gain information on the individuals transacting with the bitcoins.
5
b. Bitcoins Promising Present and Vast Potential
6
Bitcoin has enjoyed a meteoric rise since its inception in 2009 because of its
7

8 groundbreaking nature. Noted Silicon Valley venture capitalist and co-author of the first Internet

9 browser, Marc Andreessen, had this to say about bitcoins importance:

10 Bitcoin at its most fundamental level is a breakthrough in computer


science one that builds on 20 years of research into cryptographic
11 currency, and 40 years of research in cryptography, by thousands of
12 researchers around the world.3

13 Bitcoin solves the problem of how to establish trust between otherwise unrelated parties

14 over an untrusted network like the Internet through the blockchain technology it employs to
15 record transactions.4 Solving this problem permits one to transfer any type of digital information
16
in a quick, secure, and verifiable fashion anywhere in the world. The ownership and transfer of
17
stock, bonds, homes, healthcare documents, and other types of records could be recorded on a
18
public (or private) blockchain, eliminating the need for third-parties and drastically reducing the
19

20 expenses and redundancies that plague current verification systems. People, companies

21 (including IBM and NSADAQ), and even governments around the world are therefore racing to

22 build these applications.


23
Because of its groundbreaking nature, venture capitalists like Andreessen have poured
24
money into bitcoin and blockchain technology-related companies. A total of $1.75 billion has
25

26 3
Marc Andreessen, Why Bitcoin Matters, The New York Times (Jan. 21, 2014),
27 https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/?mcubz=0.
4
Id.
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1 been invested from 2012 to the present.5 Coinbase has over 8.8 million users, 29 million wallets,

2 and 46,000 merchants accepting bitcoins via its payment network, including Dish Network,
3 Expedia, and Overstock.com.6
4
This is not about potential applications that may never get built. As exemplified by
5
Coinbase, bitcoin already has numerous current uses that prove its immense worth:
6
Bitcoin has increasingly become accepted around the world for its use in storing value,
7 including derivatives, commodities, and securities products.7
8
Bitcoin provides the billions of consumers around the world that do not have access to
9 traditional banking opportunities a mobile platform to store and transact money.8 Bitcoin
can be transacted outside of normal banking business hours and does not require a visit to a
10 brick-and-mortar branch.
11
Bitcoin is an excellent platform for transferring money internationally; its transaction fees
12 are lower than most currency exchange fees or Western Union.9 Indeed, low-income
consumers have had difficulties accessing traditional banking opportunities not just in
13 California10 and the United States,11 but also in other parts of the world,12 where the
infrastructure simply does not exist otherwise.13
14
15 Bitcoin affords protections to merchants because transactions are non-reversible,
eliminating the possibility for chargebacks or credit fraud, or data privacy leaks by
16
5
Coin Desk, Bitcoin Venture Investments, www.Coindesk.com, www.coindesk.com/bitcoin-
17 venture-capital/ (last visited July 31, 2017).
6
Coinbase, About, www.Coinbase.com, www.coinbase.com/about?locale=en-US (last visited July
18
31, 2017).
7
19 Kevin Helms, Europol Discusses Bitcoins Legitimate Uses This Year, Bitcoin News (July 6,
2017), https://news.bitcoin.com/europol-bitcoin-store-of-value-legitimate-payment-method/.
8
20 Id.
9
Alex McAdams, Why I Use Bitcoin and Why You Should Too, The Motley Fool (February 9,
21 2014), https://www.fool.com/investing/general/2014/02/09/why-i-use-bitcoin-and-why-you-
22 should-too.aspx.
10
Adam Carolla, Interview with California Lt. Gov. Gavin Newsom, Adam Carolla Show (March
23 1, 2013), available at www.adamcarolla.com/lt-gov-gavin-newsom-and-dennis-miller/.
11
James Surowiecki, The Underground Recovery, The New Yorker (April 29, 2013), available at
24 www.newyorker.com/magazine/2013/04/29/the-underground-recovery.
12
Trevor Smith, Bitcoin is Growing Rapidly in the Developing World, But Who is Using It?,
25 Inside Bitcoins (July 21, 2017), www.insidebitcoins.com/news/bitcoin-is-growing-rapidly-in-the-
26 developing-world-but-who-is-using-it/63683.
13
George Basiladze, Five Legitimate Reasons to use Anonymous Bitcoin, Finance Magnates (June
27 12, 2016), www.financemagnates.com/cryptocurrency/bloggers/five-legitimate-reasons-to-use-
anonymous-bitcoin/.
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1 hackers or scammers. This also protects consumers, who ultimately have a lower risk of
credit phishing scammers and/or hackers from collecting, and ultimately exploiting,
2 sensitive financial data.14
3 Bitcoin and its underlying blockchain technology offer so much promise of a better world
4
for the future that two Harvard Business School professors recently pointed out:
5
The technology at the heart of bitcoin and other [digital] currencies, blockchain
6 is an open, distributed ledger that can record transactions between two parties
efficiently and in a verifiable and permanent way. The ledger itself can also be
7 programmed to trigger transactions automatically. With blockchain, we can
8 imagine a world in which contracts are embedded in digital code and stored in
transparent, shared databases, where they are protected from deletion,
9 tampering, and revision. In this world every agreement, every process, every
task, and every payment would have a digital record and signature that could be
10 identified, validated, stored, and shared. Intermediaries like lawyers, brokers,
and bankers might no longer be necessary. Individuals, organizations,
11 machines, and algorithms would freely transact and interact with one another
12 with little friction. This is the immense potential of blockchain.15

13 As of today, there at least 1,000 digital currencies, with a total market cap around $100

14 billion.16 Bitcoin is but one such current, but the leader with a market cap of approximately $45
15 billion. Bitcoin has spawned an industry of many other digital currencies that offer other
16
functions: Ethereums ether token, which memorializes self-executing smart contracts17;
17
Litecoin offers faster transaction times than bitcoin18; and Ripple, which enables banks to send
18
real-time international payments across networks.19
19

20
14
Id.
21 15
Sarah Carmichael, Voices from the January-February 2017 Issue, Harvard Business Review
22 (January 13, 2017), available at https://hbr.org/ideacast/2017/01/voices-from-the-january-
february-2017-issue.html.
16
23 Coin Market Cap, CryptoCurrency Market Capitalizations, www.CoinMarketCap.com,
www.coinmarketcap.com/all/views/all/(last visited July 31, 2017).
24 17
Nathaniel Popper, Ethereum, a Digital Currency, Enables Transactions that Rival Bitcoins,
New York Times (March 27, 2016), available at
25 www.nytimes.com/2016/03/28/business/dealbook/ethereum-a-virtual-currency-enables-
26 transactions-that-rival-bitcoins.html.
18
Coin Desk, What is the Difference Between Bitcoin and Litecoin?, www.Coindesk.com (last
27 updated April 2, 2014), http://www.coindesk.com/information/comparing-litecoin-bitcoin/.
19
See, generally, www.ripple.com.
28
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1 There are countless uses for bitcoin that serve legitimate, cutting-edge purposes. Those

2 who use it are in the vanguard of a technological revolution.


3 2. The IRSs Petition Is Fundamentally Flawed
4
The IRSs petition is defective at its core. The IRSs suspicion that bitcoin users are
5
underreporting their taxable income is based on a faulty premise. Specifically, the IRS suspects
6
that bitcoin transactions are less regulated through fewer reporting requirements and are more
7

8 anonymous that other types of financial transactions.20 The IRS contends that those who use

9 bitcoins are inherently suspect of falsely reporting their taxable income because of the nature of

10 bitcoin. This is simply not true.


11 It cannot be overlooked that the bitcoin community is full of responsible people and
12
companies adopting a technology that will change the world for the better. There is nothing
13
suspect about using bitcoin. Just as there is nothing inherently suspect about people who embrace
14
other emerging technologies such as drones and artificial intelligence.
15

16 Additionally, people and companies engaging in bitcoin-related business are heavily

17 regulated by many regulatory authorities. FinCEN regulates bitcoin businesses that operate like

18 Coinbase in the same way it regulates traditional money services businesses.21 Coinbase abides
19
by the same FinCEN reporting requirements as companies such as Western Union, by filing
20
Suspicious Activity Reports meeting FinCEN-prescribed thresholds. Numerous states,
21
including Washington and New York, have regulations that cover bitcoin-related businesses.
22
Many states have considered even stricter regulations than those covering traditional financial
23
24

25 20
See Petition at 2 (Dkt. No. 2 at 2).
21
26 U.S. Department of Treasury - Financial Crimes Enforcement Network, Application of FinCEN's
Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, www.fincen.gov
27 (March 18, 2013), available at https://www.fincen.gov/resources/statutes-
regulations/guidance/application-fincens-regulations-persons-administering.
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1 services businesses.22 On July 25, 2017, the SEC issued guidance covering what are known as

2 Initial Coin Offerings,23 and the CFTC has stated that its regulations can apply to bitcoin-related
3 transactions.24 Contrary to the IRSs claims, the bitcoin space is awash in both state and federal
4
regulatory oversight from many regulatory authorities.
5
Bitcoin is also anything but anonymous. Bitcoin transactions can be tracked via the
6
blockchain, which is a publicly viewable ledger.25 Because bitcoin transactions can be reverse-
7

8 engineered via the blockchain, using bitcoin for money laundering or other illicit purposes does

9 not seem . . . particularly attractive.26 The European Union recently issued a report concluding

10 that criminal use of digital currencies is quite rare due to transaction fees and a lack of
11 sophistication when it comes to the technology tied to using them.27
12
Recent federal law enforcement actions in the Northern District of California, too,
13
demonstrate that bitcoins are anything but anonymous or untraceable. For example, on March
14
25, 2015, two former federal agents were charged with bitcoin money laundering and wire fraud
15

16 for which bitcoin tracing analysis was used.28

17
22
Peter Van Valkenburgh, Tracking Bitcoin Regulation State by State, Coin Center (June 2, 2017),
18
www.coincenter.org/entry/tracking-bitcoin-regulation-state-by-state
23
19 U.S. Securities Exchange Commission, U.S. Securities Laws May Apply to Offers, Sales, and
Trading of Interests in Virtual Organizations, www.sec.gov, (July 25, 2017), available at
20 https://www.sec.gov/news/press-release/2017-13.
24
In the Matter of Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, Before the Commodity
21 Futures Trading Commission, CFTC Docket No. 15-29, September 17, 2015.
25
22 Nicholas Godlove, Regulatory Overview of Digital Currency, 10 Okla. J. L. & Tech 71 (2014).
26
Sarah Meiklejohn, et al., A Fist Full of bitcoins: Characterizing Payments Among Men with No
23 Name,
University of California, San Diego (December 2013), available at
24 http://cseweb.ucsd.edu/~smeiklejohn/.
27
Econo Times, Criminals Too Stupid To Use Bitcoin And Ethereum, EU Report Says,
25 www.econotimes.com (July 10, 2017), http://www.econotimes.com/Criminals-Too-Stupid-To-
26 Use-bitcoin-And-Ethereum-EU-Report-Says-793723.
28
Madison Pauly, A DEA Agent Who Helped Take Down Silk Road Is Going to Prison for
27 Unbelievable Corruption, Mother Jones (October 9, 2015), http://www.motherjones.com/crime-
justice/2015/10/silk-road-investigator-sentencing-corruption-force/.
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1 The tenor of the IRSs position, that bitcoins are inherently used to subvert the law could

2 not be further from the truth.


3 3. Granting the Summons Sets a Dangerous Precedent, Stripping People of Important
Privacy Rights and Discouraging Behavior that Should be Encouraged
4

5 Bitcoin users are entitled to a certain level of privacy regarding their personal

6 transactions. Granting the Summons will strip Coinbase customers of their privacy rights and
7 surely lead to more such IRS summons of U.S.-based digital currency companies. Over-zealous
8
government surveillance will discourage people from engaging in otherwise legal behavior.29
9
Governmental hostility towards digital currency companies will only foster off-shore
10
operations as companies will seek to avoid expansive intrusions such as the current IRS
11
12 Summons. Allowing for enforcement of the Summons will in fact create the very behavior of

13 which the IRS complaints.

14 Samuel Warren and Louis Brandeis understood privacy as the right to be let alone.30
15 Others think the right to privacy recognizes the sovereignty of the individual,31 and respect
16
for a persons privacy is respect for her as an autonomous subject.32 Daniel Solove perhaps
17
said it best:
18
Part of what makes a society a good place in which to live is the extent to
19
which it allows people freedom from the intrusiveness of others. A
20 society without privacy protection would be suffocating, and it might not
be a place in which most would want to live.33
21
Those sentiments are captured in many laws and regulations, going back as far as the Fourth
22
Amendment and more currently the federal Right to Financial Privacy Act.
23
24 29
Daniel Solove, Ive Got Nothing to Hide and Other Misunderstandings of Privacy, 44 San
Diego L. Rev. 745 at 765 (2007); see also Christopher Slobogin, Transaction Surveillance by the
25 Government, 75 MISS. L.J. 139, 140 (2005).
30
26 Samuel D. Warren & Louis D. Brandeis, The Right to Privacy, 4 HARV. L. REV. 193 (1890).
31
Smith v. City of Artesia, 772 P.2d 373, 376 (N.M. Ct. App. 1989).
32
27 Beate Rssler, The Value of Privacy, 117, R.D.V. Glasgow trans., Polity Press 2005) (2001).
33
See Ive Got Nothing to Hide and Other Misunderstandings of Privacy, supra, FN 29.
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1 The Summons is undoubtedly the first of many to come for the bitcoin industry. The

2 IRSas it openly acknowledgeshas a history of pursuing other industries with similar types of
3 John Doe summonses. The importance of the Courts review of the IRSs petition cannot be
4
overstated. Any ruling here in favor of the IRS will have far reaching effects throughout the
5
bitcoin industry.
6
Surveillance of legal activities in an attempt to ferret out potential illegal behavior
7

8 inhibits people from engaging in those activities at all.34 Granting the Summons sets a

9 dangerous precedent for the IRS to thwart technological innovation, strip consumers of their

10 data privacy rights, and discourage individuals from engaging in an otherwise legal activity.
11 CONCLUSION
12
For all the above reasons, the DCLDC respectfully requests that this Court deny the IRSs
13
petition to enforce the Summons.
14
15

16 August 3, 2017 Respectfully submitted,

17 /s/__Colby B. Springer__________________
Colby B. Springer (Bar No. 214868)
18 POLSINELLI LLP
19 Three Embarcadero Center, Suite 2400
San Francisco, California 94111
20 T: 415.248.2100
F: 415.248.2101
21
Brian E. Klein (Bar No. 258486) Jeffery T. Gorham, appearance pro hac vice
22 BAKER MARQUART LLP FROST BROWN TODD LLC
23 2029 Century Park East, Sixteenth Floor 201 N. Illinois St., Suite 1900
Los Angeles, California 90067 Indianapolis, Indiana 46204
24 T: (424) 652-7800 T: (317) 237-3828
F: (424) 652-7850 F: (317) 237-3900
25
Attorneys for Amicus Curiae
26
Digital Currency and Ledger Defense Coalition
27
34
Id.
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EXHIBIT A
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