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Coinbase Analytics: Controversy or Maturing Market?

Published
August 10, 2020
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    Coinbase has become one of the largest and most reputable cryptocurrency exchanges in the world. When news broke that it launched a tool to help government agencies with compliance and investigations, many members of the crypto community responded with revived calls to #DeleteCoinbase and discourage attempts by crypto companies to help governments deanonymize individuals and transactions.

    Despite the pushback, the launch of improved compliance and investigation software could help crypto assets become more mainstream. Most compliance regulations are designed to protect customers and prevent financial crimes like tax fraud, although federal law enforcement agencies have a long history of overreaching with surveillance tools.

    Let’s take a closer look at the Coinbase controversy and the future of crypto analytics, compliance and investigation tools.

    Coinbase Analytics Controversy

    Coinbase acquired the blockchain intelligence startup, Neutrino, for $13.5 million last year. According to Block Digest, Neutrino’s founders were directly affiliated with Hacking Team—a controversial information technology firm that purportedly sold offensive surveillance capabilities to governments, law enforcement agencies, and corporations around the world, including governments with a questionable human rights record.

    The crypto community promptly responded with a #DeleteCoinbase campaign to encourage users to abandon the platform. Coinbase ultimately decided to part ways with the team members associated with Hacking Team, but the company didn’t abandon its efforts to assist governments in crypto surveillance. In June 2020, The Block found that Coinbase has been trying to sell blockchain analytics to several government agencies.

    Coinbase told The Block and other reporters that Coinbase Analytics’ data was 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. While acknowledging that the tool would be used for government compliance and investigation use cases, they reiterated that it only streamlined access to public data.

    Ongoing Culture War

    The debate between crypto privacy advocates and mainstream adoption has been around since the beginning. While Bitcoin was originally built to lower transaction costs and enable micropayments, the pseudo-anonymous nature of transactions attracted privacy-conscious individuals and those that wanted an alternative to inflation-prone fiat currencies controlled by governments and central banks.

    Bitcoin Price

    Bitcoin prices soared since the involvement of hedge funds and institutions. Source: CoinDesk

    The dual goals of these two groups has created many differences of opinion, particularly when it comes to government involvement. Those hoping that cryptocurrencies will become legitimate asset classes or a global reserve currency welcome government oversight to ensure an orderly market, but those focused on privacy would rather avoid any government intervention and steer clear of politics.

    Coinbase Analytics and other analytics providers are attempting to fulfill the need for compliance tools needed to facilitate the entry of crypto into the mainstream financial system. While early crypto adopters may cringe at the idea of governments monitoring crypto transactions, these kinds of tracking measures may be necessary to comply with a large web of regulations affecting conventional financial institutions.

    Evolution of Rules

    Governments have historically taken a strict stance on cryptocurrencies. In many cases, governments feared that pseudo-anonymous currencies would be used to purchase illicit goods, evade taxes or launder money. The Internal Revenue Service (IRS), for example, has consistently threatened crypto users with fines and penalties if they fail to report capital gains on their tax returns—they’ve even sent out numerous warning letters.

    Crypto Regulations

    Crypto Regulations Around the World. Source: ComplyAdvantage / VisualCapitalist

    More recently, governments have taken a different approach and proposed regulations to govern and support the industry’s growth. For example, the Crypto Currency Act of 2020 would clarify what government agencies would be responsible for various types of crypto assets and the Token Taxonomy Act would exempt small purchases made with cryptocurrencies from capital gains taxes.

    Crypto compliance software could help governments better understand the market and target regulations. For example, the IRS could send out targeted letters to those evading taxes rather than sending threatening letters to everyone registered with a crypto exchange and the DEA could minimize the chances of mix ups with non-criminal crypto activity. The goal is to support the industry’s growth in assets and financial services.

    That said, crypto regulations remain at an early stage in the United States and across many other jurisdictions. The IRS has provided unclear guidance for crypto users, traders and investors when it comes to forks or airdrops, while initial coin offerings (ICOs) have been scrutinized by the SEC. The evolution of government regulations could eventually provide more clarity in these areas to support the industry’s growth.

    The Bottom Line

    Crypto has evolved from a privacy-focused culture a decade ago to a multi-billion-dollar asset class seeking legitimacy. Along the way, privacy advocates have had to contend with increasing government regulation and efforts to ensure compliance with global banking regulations. Coinbase’s move to provide services to government agencies represents a controversial step in that direction by providing surveillance of public data.

    In addition to compliance software, crypto users have access to a growing number of professional money management, technical analysis and tax reporting solutions. These tools help bridge the gap between conventional financial services and crypto while making it easier to ensure that they’re compliant with tax authorities. Crypto-focused funds have also made it easier for investors to build these assets into their portfolios.

    ZenLedger can help you keep up with evolving government regulations by automatically recording important crypto transactions across exchanges and wallets, calculating your capital gain or loss, and auto-filling popular IRS forms, such as Form 1040 Schedule D and Form 8949. You can even use the platform to identify tax loss harvesting opportunities, which can reduce the amount of capital gains or ordinary income tax that you owe for the year.

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