Coinbase has offered to provide a cryptocurrency investigations tool called “Coinbase Analytics,” to a number of US agencies, including the Drug Enforcement Administration (DEA) and the Internal Revenue Service (IRS). In doing so, Coinbase has ignited fierce debate in the digital currency community about privacy.
The publicly available procurement documents show that each of the IRS and DEA intend to purchase licenses to use the Coinbase Analytics platform to monitor Coinbase's users legal compliance. The IRS documents also suggests a connection between Coinbase's proposed offering and their 2019 acquisition of Neutrino. The IRS document also say:
In addition to the Bitcoin Blockchain, Coinbase Analytics (fka Neutrino) allows for the analysis and tracking of cryptocurrency flows across multiple blockchains that criminals are currently using.
Coinbase Analytics also provides some enhanced law enforcement sensitive capabilities that are not currently found in other tools on the market.
Searches of public databases on US government contracts suggest that Coinbase has yet to be officially engaged by the DEA or IRS as proposed. However, according to a US Government database of contract data reports, Coinbase's registration to offer products and services to the U.S. government became active on 28 April 2020, with an expiration date of 13 April 2021.
In an statement to CoinDesk, a Coinbase spokesperson said:
Coinbase Analytics data is fully sourced from online, publicly-available data, and does not include any personally-identifiable information for anyone, regardless of whether or not they use Coinbase
The digital currency community on twitter has not responded to the news enthusiastically. A twitter poll made by trader and analyst John Rager with 5,000 responses supposedly found that up to 66% of users "would be willing to delete or stop their Coinbase account" as a result of the news and there are reports of more than US$200M in Bitcoin leaving Coinbase in withdrawals following the above news breaking.
Notwithstanding that the DEA and IRS, in addition to regulators all over the world, have been using digital asset investigation tools for some time, it remains to be seen whether greater disclosure between exchanges and regulators will actually lead to users abandoning exchanges in favour of unregulated exchanges in any material way.