1 1 UNITED STATES DISTRICT COURT 2 NORTHERN DISTRICT OF CALIFORNIA - SAN FRANCISCO 3 HONORABLE JACQUELINE SCOTT CORLEY, U.S. MAGISTRATE JUDGE 4 5 6 7 8 9 - - UNITED STATES OF AMERICA, ) ) PETITIONER, ) Case No. ) vs. ) 3:17-cv-01431-JSC ) COINBASE, INC., ) ) RESPONDENT. ) _____________________________________ ) 10 11 12 13 TRANSCRIPT OF THE OFFICIAL ELECTRONIC SOUND RECORDING 2:18 P.M. - 3:22 P.M. MOTION TO ENFORCE IRS SUMMONS NOVEMBER 9, 2017 SAN FRANCISCO, CALIFORNIA 14 APPEARANCES: 15 FOR THE PETITIONER: 16 17 18 DEPARTMENT OF JUSTICE - TAX DIVISION BY: Amy T. Matchison, Trial Attorney Ben Franklin Station Washington, DC 20044 202.307.6422 Fax: 202.307.0054 U.S. DEPARTMENT OF JUSTICE United States Attorney's Northern District of California Tax Division BY: Colin C. Sampson, AUSA 450 Golden Gate Avenue San Francisco, California 94102 415.436.7020 Fax: 415.436.7009 19 20 21 22 23 (APPEARANCES CONTINUED ON PAGE 2) 24 25 TRANSCRIBED BY: VICTORIA L. VALINE, CSR 3036, RMR, CRR VictoriaValineCSR@gmail.com UNITED STATES DISTRICT COURT 2 1 APPEARANCES: (CONTINUED) 2 3 FOR THE PETITIONER (Continued): 4 5 6 7 8 FOR THE INTERVENORS JOHN DOE 1 AND JOHN DOE 2: 9 10 Department of Justice Tax Division Civil Western BY: Landon M. Yost, Esq. 555 4th Street NW Washington, DC 20001 202.307.2144 BERNS WEISS, LLP Attorneys at Law BY: Lee A. Weiss, Esq. 585 Stewart Avenue, Suite L-20 Garden City, New York 11530 516.222.2900 Fax: 818.999.1500 11 12 FOR THE INTERVENOR JOHN DOE 4: 13 14 15 16 17 18 FOR THE RESPONDENT: BERNS WEISS, LLP Attorneys at Law BY: Lee A. Weiss, Esq. 585 Stewart Avenue, Suite L-20 Garden City, New York 11530 516.222.2900 Fax: 818.999.1500 GOODWIN, PROCTER LLP Attorneys at Law BY: Grant P. Fondo, Esq. 135 Commonwealth Drive Menlo Park, California 94025-1105 650.752.3100 Fax: 650.853.1038 19 20 21 22 23 24 25 UNITED STATES DISTRICT COURT 3 1 APPEARANCES: (CONTINUED) 2 3 4 5 FOR THE RESPONDENT: GOODWIN, PROCTER LLP Attorneys at Law BY: Steven A. Ellis, Esq. 601 S Figueroa Street, 41st Floor Los Angeles, California 90017-5704 213.426.2500 6 7 8 9 GOODWIN PROCTER LLP Attorneys at Law BY: Juan A. Suarez, Esq. 601 S. Figueroa Street, Suite 4100 Los Angeles, California 90017 213.426.2500 10 11 12 13 LAW OFFICES OF MICHAEL T. LEMPRES Attorney at Law BY: Michael T. Lempres, Esq. 71 Walnut Avenue Atherton, California 94027 650.690.6661 14 15 16 17 18 19 20 21 22 23 24 25 UNITED STATES DISTRICT COURT 4 1 SAN FRANCISCO, CALIFORNIA; NOVEMBER 9, 2017 2 3:22 P.M. 3 --o0o-- 4 (TRANSCRIBER'S NOTE: Due at times to counsels' 5 failure to identify themselves when speaking, certain speaker 6 attributions are based on educated guess.) 7 --o0o-- 8 THE CLERK: 9 States versus Coinbase, Inc. 10 MR. FONDO: 11 Good afternoon, your Honor. THE COURT: 13 MR. LEMPRES: Good afternoon. And your Honor, Mike Lempres (inaudible) legal office of Coinbase. 15 THE COURT: Good afternoon. 16 MR. ELLIS: Good afternoon, your Honor. 17 18 19 20 21 Steven Ellis, Goodwin, Procter for Coinbase. MR. SUAREZ: Good afternoon, your Honor. Juan Suarez VP of Legal for Coinbase. MR. WEISS: Good afternoon, your Honor. Lee Weiss for Intervenor John Doe Number 4. 22 THE COURT: 23 MS. MATCHISON: 24 Matchison for the United States. 25 Grant Fondo for Coinbase. 12 14 Calling civil action C-17-1431, United THE COURT: Number 4. Good afternoon. Good afternoon, your Honor. Good afternoon. UNITED STATES DISTRICT COURT Amy 5 1 2 MS. MATCHISON: Landon Yost as well. 3 4 THE COURT: Okay. Good afternoon. So now we're here, all the intervenors have been 5 allowed and everything. 6 enforcement petition. 7 MS. MATCHISON: 8 THE COURT: 9 And with me here is Collin Sampson and And so now we're here on the IRS's Yes, your Honor. And so let's start with the requirement that it be for a legitimate purpose, which, as we know, the 10 Ninth Circuit has said is a minimal showing, right, here, and I 11 guess I don't understand why -- why wanting to figure out if 12 people who transact in bitcoin investments are paying their 13 taxes on their gains, why that's not a legitimate purpose of 14 the IRS. 15 16 17 18 19 MR. FONDO: Your Honor, a couple of points if I could, your Honor. First of all, I think that it is not legitimate in the scope and the manner in which this petition has been done. THE COURT: Well, I think the breadth of it is a 20 different matter, and that probably goes more to relevance of 21 what's being sought, but I think the legitimate purpose is 22 really that, is it illegitimate? 23 Is there an improper purpose? 24 MR. FONDO: Yes. 25 THE COURT: Is there bad faith? Really -- UNITED STATES DISTRICT COURT 6 1 MR. FONDO: Yes. 2 THE COURT: -- so to speak. 3 MR. FONDO: And your Honor, I wouldn't say there's bad So -- 4 faith in the context that IRS is up to no good, essentially, or 5 lying, or cheating, or anything of that sense, but we do 6 think -- and this probably goes more to the relevancy issue and 7 also the abuse of process issue, which I'll get to, but we do 8 think in that context this Court's process has been abused, but 9 I'll table that for a second and direct it. 10 I think under this decision such as in the Humble and in 11 the matter regarding the tier oil leases -- the tier oil 12 leases, those cases kind of address what we have here, which we 13 have a situation where there is nothing that the declarations 14 and the evidence that's submitted has indicated that these 15 users that are being identified at Coinbase have done anything 16 wrong or otherwise not complying with their various 17 obligations. 18 THE COURT: But there doesn't have to be probable 20 MR. FONDO: Correct. 21 THE COURT: Right? 22 MR. FONDO: But there's got to be something. 23 THE COURT: Well, there has to be relevant to 19 24 25 cause. determine the correctness of any return, right? And what they have said is, we know there's billions of UNITED STATES DISTRICT COURT 7 1 dollars of bitcoins that are being traded. 2 that very few people -- very few are actually declaring any 3 gains from bitcoin transactions. 4 it's being underreported. 5 MR. FONDO: We know they say That seems to suggest that Why isn't that a legitimate purpose? Well, then I think they could target 6 anybody. 7 bitcoin at any place, and I don't think it's -- 8 9 10 They could target every single -- any single owner of THE COURT: Well, though, that might go to relevance and burden and how much, right? That's where we get -- they narrowed it. 11 So I wouldn't have enforced the earlier summons, I know -- 12 and that's fine because the IRS says they think it is valid, 13 but they did narrow it. 14 ask you this. 15 But the question is -- well, let me How should they determine if people are paying? See, unlike banks and cash where the banks are required to 16 notify the government of every transaction over $10,000 and 17 report the interest, you don't have to do that with bitcoin at 18 all. 19 MR. FONDO: But, your Honor, the IRS was instructed 20 by -- there's a report, right, September 2016, and there are 21 prior reports that say the IRS was essentially admonished by 22 their inspector, the treasury inspector, in general, to do 23 certain things. 24 25 To issue, for example, greater information relating to compliance to their rules. They were actually asked to do the UNITED STATES DISTRICT COURT 8 1 2 third-party reporting that you're referring to. And instead of doing those measures -- in a declaration, 3 one of the declarations submitted by -- one of three submitted 4 by the lead agent actually references that we have third party 5 reporting that number goes up dramatically about compliance 6 with the law. 7 There -- instead what they chose to do was issue -- to 8 take this process. 9 said we don't have enough resources to do what you want us to They, in fact, responded to that report and 10 do, and instead what they've chosen to do is essentially an 11 enforcement action. 12 13 14 And I think when the government uses a powerful tool like this, I think they have to use it wisely. THE COURT: Is that -- is it more powerful than 15 actually requiring -- so really, because they're going to go 16 run to Congress if that's what you're saying. 17 rather than that all these bitcoin exchanges have to do the 18 same side of reporting and disclosing that the banks do? 19 20 You really would Is that what you're saying? MR. FONDO: So, your Honor, one comment -- we're also 21 talking about the privacy of individuals, of U.S. citizens. 22 And so there is a concern here that this tool has been 23 used to essentially invade into that privacy. 24 limited -- I mean, it's a tool that Congress gave to the IRS 25 and there's a lot -- and that burden is quite low admittedly, UNITED STATES DISTRICT COURT It is a 9 1 but, your Honor, there's still that burden, and there's still 2 that sense you have to have a legitimate purpose, and then in 3 the context -- we also cite the press release that the IRS had 4 issued, which basically said they're using this as essentially 5 an educational tool -- this action as an educational tool, and 6 that's not what these are supposed to be -- 7 8 9 THE COURT: No. No. No. That's what the Humbolt -- the H case, the Fifth Circuit. MS. MATCHISON: Humble, yes. 10 THE COURT: Humble, that's it. 11 MR. FONDO: Yes. 12 THE COURT: -- case said, but they're not doing that. 13 They're not education. 14 they supposed to figure out -- because you're not going to 15 argue to me that people make money off their bitcoin shouldn't 16 have to pay taxes on their gains, right? They want -- I'll go back to, how are 17 MR. FONDO: I'm not. 18 THE COURT: Okay. 19 20 So how is the IRS supposed to enforce that? MR. FONDO: Well, your Honor, I think that in this 21 context -- I think it goes back to those cases because in those 22 cases, too -- so remember, too, they're not targeting any 23 individuals. 24 25 The vast majority of these summons are used in the context of, there's a couple of individuals out there that are doing UNITED STATES DISTRICT COURT 10 1 something wrong or something's going on where there's illegal 2 activity -- 3 4 THE COURT: Or they're trying to find out if they're doing something wrong. You don't have to have probable cause. 5 MR. FONDO: 6 trying to use that standard. 7 THE COURT: It's an investigation tool. 8 MR. FONDO: It is. 9 THE COURT: Yes. 10 MR. FONDO: No, I recognize that. 11 THE COURT: Okay. 12 MR. FONDO: I just -- I just think that those cases No. I understand. Your Honor, I'm not 13 are applicable, because if you look at those cases, you look at 14 what the Court's decided, which was they said listen, there may 15 be that these people who were, for example, doing the leases 16 are not paying taxes that is appropriate, but there's no 17 evidence that this oil company has any more or higher degree of 18 these people that are failing to pay taxes than anybody else. 19 20 21 And there was other -- I mean, there were other aspects in one of those cases too, which was education -THE COURT: But what do you mean, so they should do 22 the subpoena on every single bitcoin exchange, is that the 23 objection? 24 MR. FONDO: No, your Honor. 25 THE COURT: They need to start somewhere, right? UNITED STATES DISTRICT COURT 11 1 MR. FONDO: Well, they do. Yes. But I think, your 2 Honor, at what point then -- as long as they think -- I mean, 3 we can also attack their premise. 4 Their premise was not originally filed with the petition, 5 the original ex parte application, and if you look at the 6 evidence that they submitted, they submitted three examples of 7 people committing supposedly crimes. 8 One of those people they say they were using virtual 9 currency, not bitcoin, and that was also someone that was 10 doing -- excuse me, had been doing abusive things for the 11 priors. 12 The other two sets of transactions that they point to -- 13 this is an investigation -- an action that's been going on for 14 two and a half years. 15 2014, and the best they came up with, your Honor, is they came 16 up with the example that I gave you before, and then the two 17 other examples where there's two people using bitcoin to 18 basically use it in an improper way relating to deductions. 19 20 21 22 23 24 25 They started this process in June of There's nothing indicating that the way they were using it is going to be somehow picked up in Coinbase. And, in fact, what's interesting in that declaration your Honor is -THE COURT: Wait. Wait. Wait. I don't understand the pick -- what do you mean -MR. FONDO: Most of these transactions you see the UNITED STATES DISTRICT COURT 12 1 transaction action history, you see where did they buy it at 2 and what did they sell it. 3 making a profit or loss. 4 So you can see whether someone is As I understand the statements of the declaration -- and I 5 may be misinterpreting it, but as I understand it, the way 6 they're explaining it is that these individuals were using the 7 bitcoin as some type of deduction, like that these were 8 expenses for business expenses when they, in fact, were not. 9 What's also of note there, your Honor, is they don't say 10 those bitcoins were going through Coinbase. 11 last sentence they say, by the way these guys have wallets -- 12 or these companies have coin-based wallets. 13 They put in the But there's no linking, that I'm aware of as I read that 14 declaration, that says, and those were the wallets that were 15 being used in this illegal activity. 16 THE COURT: I guess I just read it as a little more 17 general from that, which is what I said at the beginning. 18 only have about 800 to 900 of the electronic files which are 19 the vast, vast majority of all returns that report any gain 20 that we can tell from bitcoin. 21 the amount of bitcoin that's out there these days. 22 MR. FONDO: We That seems a little low given So if I can address that, that's based on 23 one survey that was done by the IRS. 24 original petition, they added it on later. 25 not sure if it was done by the lead agent or at his direction. It was not part of the It's also -- I'm UNITED STATES DISTRICT COURT 13 1 It's not clear to me. 2 THE COURT: What case requires that? 3 MR. FONDO: No. 4 THE COURT: That's going -- that's a minimal burden, 5 right? 6 minimal burden. 7 I'm just saying -- You're arguing something that's not even close to a MR. FONDO: Well, your Honor, the other aspect of 8 that, though, is they didn't use -- I mean listen, you're 9 obviously persuaded by that, but let me just address it. 10 THE COURT: You should. 11 MR. FONDO: So -- but -- but when you look at what 12 they did, they didn't use -- they used the term "bitcoin," but 13 they didn't use a lot of other terms like cryptocurrency, 14 digital currency. 15 It may be that people used other terms. It's hard -- they also, as we noted, they don't identify 16 any of the paper returns. 17 Honor, and I recognize -- but I just don't think that's 18 necessarily enough to issue a summons of this magnitude to 19 Coinbase. 20 21 22 THE COURT: at all. So I recognize the numbers, your You don't have any cases that support that I mean, that's not the minimal burden. I mean maybe if you came forward with evidence and could 23 show no, all our account holders they all pay their taxes on 24 that, here we actually do this, but you can't and you don't. 25 That's okay. I understand. But you completely, I UNITED STATES DISTRICT COURT 14 1 think -- that's not a minimal burden. 2 legitimate -- I mean, we're on a 3 MR. FONDO: I understand. 4 THE COURT: -- it's legitimate -- you would agree it's 5 legitimate for them to investigate whether people making money 6 on their bitcoin transactions are paying the taxes that they 7 should. 8 9 10 11 That's a legitimate purpose, right? MR. FONDO: Generally, it is a legitimate purpose, yes, your Honor. THE COURT: Okay. Is there anything you'd like to add? 12 Ms MATCHISON: 13 MR. WEISS: 14 So -- all right. The only thing, I think I -- May I -- I'm sorry, just the Court -- or the government, may I briefly be heard on behalf of the -- 15 THE COURT: 16 (Simultaneous talking.) 17 MS. MATCHISON: No, you may be heard, but let's -- Just the one thing I would like to 18 point out is a lot of what counsel is talking about seems to be 19 challenging the ex parte determination, your Court's order 20 approving the issuance of the summons. 21 determinations actually cannot be challenged now. Now we're 22 talking about enforcement within a separate test. And so I 23 think it's just important to keep in mind that the factors and 24 the things that were already determined on the ex parte are 25 actually not part of the government's showing. Those ex parte factual UNITED STATES DISTRICT COURT 15 1 So when you mentioned that he -- the petition -- the ex 2 parte petition didn't include certain information, there were 3 two different petitions here. 4 different standards that the government has to meet and has 5 met. 6 THE COURT: Okay. They're talking about two But even the legitimate purpose it 7 kind of overlaps with -- the first one is ex parte. 8 that's what it says, but judges don't like being held to things 9 that we've done that were ex parte. 10 candid. 11 I'll fix it. MS. MATCHISON: 13 THE COURT: All right. 15 MR. WEISS: Weiss. 16 THE COURT: Weiss. 17 MR. WEISS: Thank you. 18 In any event, just to be If I feel like I made a mistake when it was ex parte, 12 14 I know All right. Let me hear from Mr. Weiss, right? Just to sort of amplify a point that counsel for Coinbase 19 made on the cases. 20 One are the sort of inherent tax avoidance activity, the 21 offshore accounts, you know, the hundred dollar bill cases, the 22 legal tax shelters, that's clearly not at issue here. 23 The other -- the other cases the IRS already has The cases sort of fall into two categories. 24 significant evidence of noncompliance with the tax code. 25 the barter cases, they've already audited the bartering firms, UNITED STATES DISTRICT COURT In 16 1 and they have evidence that, you know, 103 of 107 taxpayers 2 didn't comply. 3 4 5 In the tipping cases they audited 27 Minnesota restaurants and found that 19 were compliant, something like that. Here all they have is a survey that I don't think really 6 proves that there's any significant noncompliance. 7 number as -- there's no sort of denominator of that. 8 have is hey, these are only the people who reported, but 9 there's no indication of what was happening between 2013 and There's no All we 10 2015 with bitcoin that there should be substantially more 11 people reporting gains. 12 THE COURT: Than 800 to 900? 13 MR. WEISS: Again, based on their searches. I don't 14 know how that one affidavit is frankly persuasive that those 15 are the only people who reported, and there's certainly no 16 indication -- 17 THE COURT: Well, because that's what they said. I 18 mean, that they did that search and that's what they came up 19 with. 20 MR. WEISS: But there's no affidavit that says that 21 that search is -- was the correct search. 22 that search was performed after the summons was already issued, 23 I think is also troubling. 24 25 And the fact that I don't know how you can make a -- you know, a prima fascia case for a summons that you issued with evidence that UNITED STATES DISTRICT COURT 17 1 you created later -- 2 3 THE COURT: case. But now we're here -- 4 5 MR. WEISS: 10 THE COURT: Right. But her point is that ship has MR. WEISS: Not for the enforcement petition I'm sailed. 8 9 The prima fascia case is their first burden for the enforcement petition. 6 7 Now you're challenging the prima fascia talking about. They have to make a prima fascia case for the enforcement petition. 11 THE COURT: Okay. But I guess I don't understand -- 12 there's no -- Coinbase hasn't presented to me any evidence that 13 all their account holders pay their taxes. 14 They've come forward with some evidence that there's 15 reason to believe that a lot of people aren't paying taxes on 16 the bitcoin gain. 17 be totally innocent reasons, maybe they're not making gain as 18 you said. 19 hasn't come out, as you've complained, with regulations that 20 would make it clear to a taxpayer as what they should do, and 21 there may be a lot of reasons, but again, why isn't that a 22 legitimate purpose? 23 MR. WEISS: It could be for a lot of reasons. It could Maybe they don't think they have to because the IRS Well, I think under that theory looking at 24 any taxpayer to see if they've paid their taxes is a legitimate 25 purpose. I don't think that's the rubber -- you know, I think UNITED STATES DISTRICT COURT 18 1 2 that would be a rubber stamp. Obviously, the IRS looking at tax compliance is a 3 legitimate purpose, but there has to be some reasonable basis 4 for suggesting that there's not tax compliance -- 5 THE COURT: And what case says that, that there has to 6 be a reasonable basis for suggesting there's not tax 7 compliance? 8 9 10 Because what the statute says is, which may be relevant to determine correctness of any return. MR. WEISS: But to have a legitimate investigative 11 purpose you have to have a reason for doing the investigation 12 in the first place. 13 THE COURT: 14 Okay. What case says that? That, to issue a summons that's what needs to -- 15 MR. WEISS: I'm not talking about issuing -- 16 THE COURT: Okay. 17 MR. WEISS: I'm talking about enforce -- I'm talking 18 about enforcing the summons. 19 a supposed task force on this since 2013 and the only evidence 20 they bring forth is some computer searches they performed after 21 the summons was issued that this task force apparently never 22 engaged in, and there's no indication from any of the 23 investigators of any facts demonstrating noncompliance, I just 24 don't see how that -- how that indicates there's a reason -- 25 But I think when the IRS has had (Simultaneous talking.) UNITED STATES DISTRICT COURT 19 1 2 3 THE COURT: There's also no facts demonstrating compliance. MR. WEISS: I don't think it's our burden to 4 demonstrate -- to demonstrate compliance any more than in the 5 example of the IRS should, you know, subpoena the banks for the 6 ATM records, it wouldn't be the taxpayers' burden to 7 demonstrate that they're complying with their -- 8 9 THE COURT: Well, someone pointed out the ATM records don't really have anything to do with the correctness -- it's 10 not relevant to the correctness of a return, which is what 11 we're looking at here. 12 MR. WEISS: But under the argument that reviewing tax 13 compliance is a -- that would -- your Honor's making a 14 relevance argument there, but to the extent -- 15 16 THE COURT: Well, because that's where I actually think it comes down to as opposed to legitimate purpose. 17 I mean, I think what the Supreme Court was concerned with 18 is when the IRS abuses its power, at times it has done, right, 19 to put pressure on people or for whatever reason, because the 20 IRS is people, that they used it for some illegitimate purpose 21 they were using their summons, but it's within to investigate 22 compliance with the tax laws and that's what they're doing. 23 MR. WEISS: But if they have been investigating for 24 almost four years and they've developed no real evidence, I 25 don't see the argument that this isn't a research project. UNITED STATES DISTRICT COURT 20 1 2 THE COURT: And they're using the summons to try to develop that evidence. 3 MR. WEISS: But -- 4 THE COURT: How else would you develop it? 5 MR. WEISS: The IRS has substantial powers besides the 6 John Doe -- besides the John Doe summons. 7 looked at the 900 people who reported and seen if they reported 8 correctly. 9 those returns for correctness. 10 11 12 They could have There's no indication that the IRS even reviewed THE COURT: Okay. All right. Did you want to add anything more on legitimate purpose? MR. FONDO: I mean, your Honor, so just -- so I just 13 want to clear what Coinbase actually wants to cooperate with 14 the government. 15 very much. 16 or no one is saying Coinbase is doing anything wrong. 17 -- you know, Coinbase -- 18 As the government has said, we appreciate it They said that, you know, Coinbase is not at issue, THE COURT: To the contrary. We just The reason they gave the 19 subpoena to you is because you're a very legitimate company and 20 they thought you would have the records. 21 22 23 MR. FONDO: Yes, your Honor. We appreciate that. Thank you for saying that, your Honor. But -- and so we just want to -- we are willing to 24 cooperate and that's why we think going to the legislative or 25 regulatory perspective approach as recommended by the inspector UNITED STATES DISTRICT COURT 21 1 general for the treasury is the appropriate approach for us. 2 THE COURT: Well, it may be a better approach or 3 whatever, but it's certainly way above my pay grade to say I 4 can't enforce a summons, because I believe a better policy or 5 whatever approach, is to go this way, right? 6 Go do your lobbying and do whatever you want and come 7 in and, you know, that's fine. 8 No. 9 But I can't say that, no. No. No. I have to give tremendous, the Court does, discretion to 10 the agency in terms of how they choose to investigate not just 11 here, whether it's criminal, other agencies all the time, they 12 do that, but I do think your real complaint is about the 13 relevance prong and the breadth, right? 14 MR. FONDO: Mmmm-hmmm. 15 THE COURT: In fact, there was a hope and an 16 attempt -- good faith attempt to see if you could resolve the 17 summons issue, and so I assume that's because you were willing 18 to produce some records, otherwise there wouldn't have been 19 any, you know, attempt. 20 So -- let's go to the relevance then, and let's go through 21 them. 22 the magic number? 23 three-year period had a single transaction of $20,000 or more; 24 is that right? 25 And the first is, and maybe you can tell me why, what's It's any account holder who in the MS. MATCHISON: In the four categories if they had UNITED STATES DISTRICT COURT 22 1 over that amount, your Honor. 2 that bought and held, they would do nothing, and people that 3 were identified by Coinbase on 1099s. 4 5 THE COURT: MS. MATCHISON: It's buy, send, sell, and receive, your Honor. 8 9 So but what are the four categories then? 6 7 Right. So excluding, though, people THE COURT: Buy -- so is it -- is it cumulatively, or they had one transaction, they bought $20,000 in one day, or 10 they sold $20,000 in one day, or they received $20,000 in one 11 day, or they sent $20,000 in one day? 12 MS. MATCHISON: Yes. And cumulative, as well, in that 13 year. 14 activities of users is what the government is trying to get at. 15 16 So getting up to a threshold, your Honor, of certain THE COURT: Okay. But I thought it was in any single transaction, $20,000? 17 MS. MATCHISON: 18 MR. FONDO: 19 MS. MATCHISON: 20 MR. FONDO: Let me just double check that. Your Honor, if I may clarify that? Go ahead. My understanding is that the United States 21 keeps information from users with at least the equivalent of 22 $20,000 in any one transaction type, buy, sell, send, or 23 receive in any one year during the 2013 to 2015 -- 24 THE COURT: Oh, in any one transaction. 25 MR. FONDO: Right. UNITED STATES DISTRICT COURT 23 1 2 THE COURT: So if over the course of the year you bought $20,000, you sold $20,000 -- 3 MS. MATCHISON: 4 THE COURT: Right. -- you received $20,000, but if you 5 received $5,000 and you bought $10,000, you wouldn't fall 6 within the summons. 7 MS. MATCHISON: 8 THE COURT: 9 10 yeah. Okay. That is correct, your Honor. Or if you -- oh, put it another way -- Or if you bought 15,000 and you sold 5,000, you would not be within the scope of the summons. 11 MR. FONDO: I think -- I think you would. 12 THE COURT: Well, you said -- 13 (Simultaneous talking.) 14 MS. MATCHISON: 15 THE COURT: Any one transaction type. 16 MR. FONDO: Right. 17 THE COURT: So maybe your number's too high. 18 MR. FONDO: No. 19 THE COURT: What -- so is that how you calculated MR. FONDO: We didn't calculate it, your Honor, they 23 THE COURT: The number of account holders then? 24 MR. FONDO: Oh, oh the account holders, yes. 20 25 It's not too high, your Honor. it? 21 22 In any single transaction type. did. Yes. UNITED STATES DISTRICT COURT Yes. 24 1 THE COURT: 2 UNIDENTIFIED SPEAKER: 3 THE COURT: 4 UNIDENTIFIED SPEAKER: 5 THE COURT: You got it -- 6 MR. FONDO: Yeah. 7 THE COURT: Okay. 8 MR. FONDO: I misspoke, your Honor. 9 THE COURT: They read it that way, so it has to be in Because what you did that is different -We did. You did -Yes, your Honor. Yeah. 10 any single transaction type over the course of the year you did 11 at least $20,000. 12 threshold? 13 Okay. MS. MATCHISON: And why -- why did you choose that Your Honor, in consultation with 14 Coinbase and getting a better understanding of the user 15 activity and in a desire to provide a bright line for Coinbase 16 to ease some of the burden, that seemed to be kind of a natural 17 breaking point of numbers. 18 THE COURT: Okay. 19 MR. FONDO: So, your Honor, I think it's certainly a So why isn't that relevant? 20 heck of a lot better than where we were. 21 frankly, how they picked that number as far as why that number 22 versus 25 or 30, and so, your Honor, I don't -- I don't think 23 there's a real basis, necessarily, to select that number. 24 25 I'm not sure, quite I also question about are they really going to be examining 14,000 records? UNITED STATES DISTRICT COURT 25 1 THE COURT: Well, you mean -- well, let me ask you -- 2 well, I thought they said -- the agent said that it would be, 3 they would use -- 4 MS. MATCHISON: So the IRS intends to review all of 5 the information, but will they audit every single one of those 6 14,000 -- 7 THE COURT: 8 MS. MATCHISON: 9 No. Audit is a completely different -Exactly. The service uses audit and examined somewhat the same, and so when you say "examined," 10 they'll certainly look at the information that (indiscernible) 11 examination will be started for all of those 14,000, and it 12 likely wouldn't be appropriate, but they do intend to touch all 13 the information, review all the information, conduct risk 14 assessment, look to see if, you know, people filed tax returns 15 or not, and then determine what sort of action is appropriate 16 beyond that. 17 So that could be numbers of things. It could be sending a 18 letter asking for corrective returns. 19 letter educating taxpayers of their obligations, or starting an 20 audit. 21 22 THE COURT: It could be sending a Or it could be, if you determined somebody didn't have any gains, nothing, right? 23 MS. MATCHISON: 24 THE COURT: 25 MS. MATCHISON: Yes. You would do nothing. Absolutely. UNITED STATES DISTRICT COURT 26 1 2 THE COURT: But you do intend to look at all of the accounts, that's the question. 3 MS. MATCHISON: 4 MR. FONDO: So I mean -- 5 THE COURT: It's not -- it's not that many. Yes, your Honor. I mean, 6 you guys work at a big civil law firm and those numbers 7 actually pale compared to some cases we're aware of. 8 9 MR. FONDO: Well -- no, it's true, your Honor, but it is 14,000 U.S. citizens' records -- excuse me, users and 10 customers, and it's 8.9 million records, and we just have a 11 concern -- setting aside the records perspective, that's a 12 burden on our side, obviously, for Coinbase to produce it, but 13 that's a lot of people. 14 seen -- I mean we started at 500,000, right, your Honor, and 15 there really wasn't any basis for that number. 16 And we don't think -- we haven't And I'm not sure what the articulated basis for this 17 number is other than it's a smaller number. 18 sort of our concern here, your Honor, about that -- that 19 this -- I mean, I'm jumping ahead a little bit about the abuse 20 of process (indiscernible) I'll stop -- 21 22 23 THE COURT: No. No. And so it goes to Just go ahead. I mean it all -- if it's all weaved together, then go ahead. MR. FONDO: Well, your Honor, the concern we have here 24 is that this is the government. 25 this tool. They came in. They've used Congress has said you have this tool. UNITED STATES DISTRICT COURT We've also 27 1 created these restrictions on it coming through your Honor 2 because we're concerned about it being abused. 3 We think in this context it has been abused. We think 4 both in the petition, the ex parte, and also with trying to 5 enforce it, and even through the narrowing of it. 6 What I mean by that, your Honor, is they came in -- the 7 government came in and submitted two declarations. 8 declarations were saying that we were looking for -- after two 9 and a half years of working this through the internal IRS Both those 10 system what they came up with was a request that we want 11 basically every record from every U.S. citizen for the period 12 of three years. 13 And if Coinbase had not stood up and said we think this is 14 improper, and there's you know, when the IRS comes calling, 15 there's a pressure point, right? 16 Any time the government, particularly the IRS and if 17 you're a company, so if I -- if Coinbase had said, you know 18 what, for whatever reason we're afraid of them, we don't want 19 to spend the litigation costs, whatever reason said, we're not 20 going to fight it, we would have produced 484,000 customers' 21 records that the government has now said we don't need and we 22 don't want. 23 That's an extraordinary difference. I recognize that when there's kind of discovery-type 24 requests, discovery requests get narrowed and that would be 25 fine, but not in this context when it's the government. UNITED STATES DISTRICT COURT And 28 1 two, they've got two declarations saying that this information 2 is relevant, and I think it goes to the credibility of that 3 request. 4 After two and a half years, how -- how could they not come 5 up with some type of number that says (indiscernible) this is 6 de minimis. 7 one transaction for a dollar, for example, but that would have 8 been included in the original request. I don't think the IRS really needs someone who did 9 They certainly could have figured out if somebody simply 10 buys bitcoin and holds it, which is a lot of -- what a lot of 11 people do because the price keeps going up, that they wouldn't 12 need that information -- 13 THE COURT: Hence, people have gains. 14 MR. FONDO: Well, but they -- only when they sell it, 15 your Honor. 16 THE COURT: Exactly. 17 MR. FONDO: Only when they sell it. 18 THE COURT: Right. 19 MR. FONDO: During this time period it was not going 20 21 up. No, I understand. It's going up a lot now. So, your Honor, the concern we have here is that this 22 process has been abused. 23 obligation is to come into this Court in submitting 24 declarations and making requests is to do an appropriately 25 focused request. That part of -- part of their And they -- UNITED STATES DISTRICT COURT 29 1 2 THE COURT: to private civil litigators, right? 3 4 MR. FONDO: Well, I don't think it does, your Honor. I think the government has a different burden. 5 6 Boy, it's a good thing that doesn't apply THE COURT: What case says that? What case says that I can actually not enforce the summons 7 because they asked for something that was too broad to begin 8 with? 9 I do have an obligation to narrow it -- That actually would be contrary, which the cases all say 10 MR. FONDO: Yes. 11 THE COURT: -- if I need to, but it doesn't say, and And I -- 12 if I need to narrow it, boy, I have to not enforce it because I 13 shouldn't have had to narrow it in the first place. 14 MR. FONDO: No, but, your Honor, I think that when 15 they come in and make -- again, I'm not talking about going 16 from 20,000 to 14,000, what I'm saying is that the abuse of the 17 process is also abuse of this courtroom, right, to issue 18 certain things and to issue an order, and I think when they ask 19 you to issue an order that is wildly overbroad, and they have 20 declarations that say this is what we need, and this is what 21 we're seeking, I think that that is, through your inherent 22 ability as a judge, to say that's an abuse of this process, and 23 that's our concern here. 24 25 If Coinbase had not stood up and said we're not going to do this, we think this is excessive, it would have been UNITED STATES DISTRICT COURT 30 1 2 produced. I think what it's saying is, is part of this is saying 3 listen, you've got to get it right. 4 half years, you've got to try and focus and be more diligent, 5 quite frankly, about what type of request you're asking, and 6 simply asking for every single record of every single user for 7 a three-year period is clearly overbroad. 8 THE COURT: 9 MS. MATCHISON: If you spend two and a Okay. But, your Honor, that's not what the 10 law says and that's not what we're here to talk about. 11 The requests have been narrowed, and the test for 12 enforcement is the factors that are articulated under Powell; 13 is the summons issued for a legitimate purpose, are the records 14 relevant to that purpose, that investigation, is the 15 information already in IRS's possession, and have the 16 administrative steps been followed? 17 That's the test for good faith for the government's 18 enforcement of a summons. 19 requirements of Powell, and the burden is now upon Coinbase and 20 John Doe 4 to come forward with specific evidence to rebut the 21 government's good faith. 22 The government has satisfied those And we haven't seen -- I haven't seen specific evidence or 23 specific facts or circumstances, all we've seen is somewhat, 24 you know, naked allegations of improper purpose, and that's not 25 what the law requires. UNITED STATES DISTRICT COURT 31 1 THE COURT: They're not even claiming really improper 2 purpose that it was too broad. 3 have not issued, if it was overbroad, the summons the first 4 time. 5 fault, it should be with the Court. I mean, if anything, I should It's done in ex parte, really, if you wanted to lay 6 MR. FONDO: Well, no, your Honor, I think if they had 7 submitted something in the declaration that said, we're asking 8 for 500,000 records, but we really only need 14,000, you 9 wouldn't have issued the order. 10 THE COURT: Well, they're not saying they really only 11 need 14,000, but let's go through and -- I understand the 12 argument. 13 I'm not -- I'm not prepared to accept that. I think that would be beyond what any court has said and 14 beyond how or what -- what the improper purpose or the bad 15 faith that the courts have talked about when they refused to 16 enforce, but I do think though when we're talking about 17 relevance, that it is, like discovery, it's an iterative 18 process. 19 forward and you would say even with $20,000 of transactions a 20 year, there's no way there's going to be a gain, but you 21 haven't because you can't because now they've picked a number 22 that there's a good chance there will be some gain that should 23 have been reported. 24 know, I don't know that I looked into that at all, but a lot of 25 these other things though, go to, for example, the know your And that while initially, you know -- if you had come It may be little or it may be big, you UNITED STATES DISTRICT COURT 32 1 customer due diligence. 2 one of these records? 3 MS. MATCHISON: How is that relevant for every single First of all, I think that -- I think 4 what we've learned, and Coinbase can correct me, is they don't 5 actually collect know your customer data for every customer, so 6 it might only be at a certain threshold, like banks, if this 7 even applies to the -- 8 THE COURT: 9 MS. MATCHISON: 10 11 Okay. -- 14,000, so it may not be everyone. Additionally, the IRS has to verify identity, and oftentimes in cases -- 12 THE COURT: 13 MS. MATCHISON: Why? Why do we have to verify identity? 14 Because when they're looking at someone's taxable event and 15 something that would generate gain to a certain person, they 16 have to confirm that the person whose name on that account is 17 actually the person that transacted that before they go look at 18 that person's tax return. 19 20 21 22 So the know your customer due diligence information is important to the IRS to have -THE COURT: Why don't -- if you have their name, their address, and their tax I.D. number -- 23 MS. MATCHISON: 24 THE COURT: 25 Yes. -- why can't you confirm it with that? Then you pull up their report -- their tax return -- UNITED STATES DISTRICT COURT 33 1 MS. MATCHISON: 2 THE COURT: 3 MS. MATCHISON: 4 Right. -- and you see if they reported it. Yes, your Honor. I think that -- so the IRS is gathering information for 5 its investigation and it's not just the kind of bare bones 6 information to just identify these people and look at their 7 returns, they're also gathering other information that might be 8 useful in examinations if it goes forward. 9 THE COURT: 10 11 12 Well -- MS. MATCHISON: So rather than come back and issue some -THE COURT: No. No. No. Then you come back. See, 13 then you come back, because it may turn out that of those 14 14,000 whatever account holders there's only 5,000, or 3,000, 15 or 2,000, or according to Coinbase, maybe only two, that you're 16 actually then going to do that, and then you do your subpoena 17 for that, because it's not relevant until you've sort of made 18 that determination. 19 What you're saying is it may become relevant, but -- but 20 why can't you do it in a two-step process? 21 you're in a hurry, because you haven't been in a hurry. 22 MS. MATCHISON: Well, I mean, your Honor, the IRS 23 could set a two-step process. 24 for the IRS to have to do that. 25 You can't tell me It would be wildly inefficient Again the test for relevance is it may shed light on the UNITED STATES DISTRICT COURT 34 1 correctness of a return. 2 the correctness of every single return to be relevant, and the 3 IRS is not limited to just names and amounts when it issues a 4 John Doe summons, it's a larger scale of relevance, it's not a 5 strict -- 6 THE COURT: It's not that it has to shed light on But let's say you get the account and it 7 shows that the person had no gain, they actually lost, why then 8 do you need any of that other stuff? 9 10 MS. MATCHISON: don't know that the IRS would. 11 THE COURT: 12 MS. MATCHISON: 13 Your Honor, at that point I don't -- I Then it's not relevant. Not relevant to that taxpayer, your Honor. 14 THE COURT: 15 MS. MATCHISON: Yes. But we're not talking about -- we're 16 not able to parse because we don't have the information, we're 17 not aware of which taxpayers have gain, and which taxpayers 18 don't. 19 THE COURT: 20 MS. MATCHISON: 21 THE COURT: 22 But you will be. If we get that information, yes. You will be. And then if there's additional information that you need, 23 then you get it then, as opposed to getting it now for 24 everyone, even though many of them you'll never need it. 25 In other words, why shouldn't that? Why should the IRS be UNITED STATES DISTRICT COURT 35 1 able to get everything just because it wants to do it all at 2 once, when what you're saying is, admittedly a lot of it may 3 turn out to be completely irrelevant. 4 We put them to the burden of producing, you to the burden 5 of keeping it, organizing, whatever, why shouldn't it be like 6 we would do in a -- 7 MS. MATCHISON: 8 THE COURT: 9 MS. MATCHISON: Well -- -- normal case? Well, first of all, I'm not admitting 10 that largely most of it will be irrelevant. 11 The IRS is not in a position of knowledge like Coinbase is. 12 13 14 We don't know who these people are. they've done. We don't know. We don't know what We don't -- we don't know. The law does not limit the IRS to just giving names in a 15 John Doe summons. 16 to get the most information it can up front rather than coming 17 back and issuing additional summons and having those enforced. And the IRS, for efficiency reasons, wants 18 Could that be done? 19 But I do think that, again, the standards for relevance Yes. 20 for a summons enforcement, it's a very generous view of 21 relevance. 22 23 24 25 THE COURT: Except that you don't have any cases that have enforced a summons this broadly for all this, right? MS. MATCHISON: Well, you know, a lot of the offshore credit card summonses were this broad, but they didn't go to UNITED STATES DISTRICT COURT 36 1 enforcement, a lot of the companies simply complied. 2 3 4 5 6 THE COURT: case. That's what I'm saying, you don't have a Right, you don't have a case. So maybe it's -- today's been first impression day, we might as well get another one. MS. MATCHISON: But it's not unprecedented, your 7 Honor, is my point, for the IRS to ask this kind of 8 information. 9 and so we haven't had to establish -- It's just that other companies haven't fought it, 10 THE COURT: 11 MS. MATCHISON: 12 13 I'm not --- law. It's not that the IRS is somehow breaking ground here in these requests. THE COURT: I'm not faulting you for asking. 14 saying, why can't we do it the way I'm suggesting? 15 wrong with that? 16 I'm just What is What is wrong with saying, we're not going to require them 17 to produce driver's license, passport pictures, all these 18 things given to the IRS, when the IRS admittedly may have 19 absolutely zero need for it for many of these people. 20 And we're talking about thousands of -- potentially, you 21 don't know, some of the account holders could be one in the 22 same -- potentially thousands of people. 23 we've asked for it before and we've gotten it. 24 25 Okay. And you say well, But you haven't had a court say, hands off. can't do anything about that. I You have -- you get everything UNITED STATES DISTRICT COURT 37 1 2 that you want. MS. MATCHISON: Well, again though, I think under 3 Powell the question is whether or not the summons was issued 4 for a legitimate purpose, and then are the records result 5 relevant to that investigation, to that purpose. 6 would be relevant to the IRS's investigation. 7 THE COURT: 8 MS. MATCHISON: 9 THE COURT: Those records Only if there is a gain. Yes, your Honor. Right? So I've -- right? Because you 10 wouldn't -- you wouldn't say to me, if you were actually 11 investigating a particular taxpayer and you knew that they 12 didn't have any a gain that it would be relevant, it wouldn't, 13 but that's essentially because you've decided to do -- which I 14 understand because you don't really have any other way of doing 15 it -- a broad swath, a large amount of account holders. 16 Well, that's okay -- I think it's okay. They don't think 17 it's okay. 18 take it in steps if you're going to do it that way. 19 know -- I don't know why we should have all these other 20 communications back and forth with Coinbase. 21 I think it's okay, but I think then you have to MS. MATCHISON: I don't Again, because your Honor, in the 22 IRS's institutional experience communications have been 23 valuable again to determining identity or to having some sort 24 of revelation of a transaction. 25 are in those communications. And again, we don't know what They could be very relevant to UNITED STATES DISTRICT COURT 38 1 what sort of trades people were doing, what sort of trades 2 people might have been doing off of the Coinbase platform and 3 other sorts of things. 4 If there were other users -- other third party using 5 accounts or other people transacting on their account for which 6 other taxable events might accrue at different taxpayers if the 7 IRS wants to -- 8 9 THE COURT: It could be. But first, why don't you look at the account records and see if there's anything at all 10 to lead you to believe that maybe these other things would be 11 relevant, because right now you don't know. 12 Just as you came and said, you don't know. I think you 13 should take it -- when you're dealing with 14,000 account 14 holders, why not just take it in a step? 15 16 MS. MATCHISON: Yes. Or alternatively we could just get it all now and spare 17 your Honor having to issue all these other summonses and come 18 back separately for enforcement. 19 20 21 THE COURT: Need is one person versus 14,000 people and all their records, right? There is, legitimately, a concern about the government 22 simply going and gathering up all the information it wants and 23 holding it when it has no reason to have it. 24 25 And I do think that that is a role for the courts to play, particularly when you're going to do a broad, right? UNITED STATES DISTRICT COURT 39 1 MS. MATCHISON: 2 THE COURT: 3 because it's a burden to me. 4 the oath that I took. 5 Well, yes, your Honor. I'm not going to say oh, no I'll do that MS. MATCHISON: I think that would -- that's not I understand, your Honor, but I'm also 6 not saying there's no reason to have this information. 7 is a reason in the course of the IRS's investigation of this to 8 have this information. 9 THE COURT: There might be. You can't tell me for any 10 particular one of those John Does that there is. 11 You don't know. 12 There You can't. And all I'm saying is, why don't you wait to see if there 13 is, because the first question -- and it was right in your 14 papers -- was that is what you want to find out is if they had 15 any gains and if they reported them. 16 17 18 19 20 21 That's the first step. Right? Why don't we just take that first step? No broader than necessary, right? No broader than necessary to achieve its purpose. MS. MATCHISON: you're looking at. I'm not sure those are our papers Are those ours? 22 THE COURT: 23 MS. MATCHISON: 24 MR. FONDO: We like that, your Honor. 25 THE COURT: But that's the Bisceglia -- Bisceglia Oh, that's a draft order. Never mind. UNITED STATES DISTRICT COURT 40 1 (pronunciation) -- Bis-ceg-lia -- that's not my words, the 2 Supreme Court's words -- I don't know who wrote that. 3 Okay. So let's then go through -- so with respect to the 4 first categories, like what is the -- I don't even pretend to 5 understand what the wallet and the key is. 6 MS. MATCHISON: 7 MR. FONDO: Would you like to explain it, or -- Your Honor, I think it does come down to 8 the core of what you're addressing. 9 achieve their goal is, they need to know who the individual is 10 through social security number, name, and then what were there 11 transactions. 12 THE COURT: And address. 13 MR. FONDO: And address. All they really need to That's all. 14 And that will tell them, did this person pay taxes or not? 15 And so all the other -- all the other issues, you know, 16 the bitcoin address, et cetera, and some of the KYC information 17 I think is -- I'm not going to say (indiscernible) you said it 18 better than I would, your Honor. 19 just comes down to, as you've sort of indicated, which is name, 20 address, social security number, and then the transaction 21 number. 22 THE COURT: 23 request number one. 24 25 So -- so I think it really Well, let's look at -- so let's look at MS. MATCHISON: First of all, your Honor, we would need the wallet address and/or the public key, depending upon UNITED STATES DISTRICT COURT 41 1 how the transactions were conducted on the exchange of bitcoins 2 so that we would be able to trace it -- 3 THE COURT: 4 MS. MATCHISON: 5 I think you said --- so it's not enough to say just the name and the address. 6 THE COURT: 7 MS. MATCHISON: You need one or the other, not both. Right. I believe what Coinbase has 8 represented in their papers is that they generally only use 9 wallet addresses and not public keys. Certainly to the extent 10 that a public key is used and not a wallet address, then we 11 would want that information. 12 THE COURT: 13 MS. MATCHISON: What is a wallet address? So a wallet address is -- and there 14 are probably people in this room smarter than me on this one, 15 but my understanding is that when you transact on an exchange 16 like bitcoin, you essentially keep in your wallet your bitcoins 17 to trade. 18 And so a wallet address is generated every time you have a 19 transaction with somebody, and then that -- it's like one of 20 those huge long alpha-numeric things that goes on the 21 blockchain, and then I think a wallet address and a public key 22 are related, but a private key is the thing that validates the 23 transaction that actually exchanges the bitcoin between 24 different parties. 25 But my understanding is the wallet address is essentially UNITED STATES DISTRICT COURT 42 1 an identifier of the user of the account. 2 THE COURT: 3 MS. MATCHISON: 4 THE COURT: 5 Like the account number? Yes, essentially. So the wallet address is like the account number? 6 MS. MATCHISON: 7 MR. FONDO: It's more of an identifier, your Honor. 8 THE COURT: Of the? 9 MR. FONDO: Of the transaction. 10 THE COURT: Okay. It's like an identifier. It's -- And -- are the transactions, 11 though, that a particular account holder does, connected by the 12 wallet -- 13 MR. FONDO: I'm sorry. 14 THE COURT: -- address? 15 16 17 Say that again, your Honor? In other words the number, the wallet number -- I do one trade on X day, another trade on Y day, are my wallet -MS. MATCHISON: There will be a different -- I believe 18 Coinbase has said there's a different wallet address for every 19 transaction. 20 THE COURT: 21 MS. MATCHISON: 22 23 Okay. So I believe those would be kept in your wallet. THE COURT: But wouldn't they -- on the account 24 statements or whatever you produce, it's going to have that 25 wallet number anyway. UNITED STATES DISTRICT COURT 43 1 2 MR. FONDO: Honor, but your talking like create a spreadsheet? 3 4 UNIDENTIFIED SPEAKER: 7 8 9 10 11 12 Let me just address -- I apologize -- 5 6 So we don't have account statements, your THE COURT: No, you can -- you can actually get up and talk. UNIDENTIFIED SPEAKER: the question? I apologize your Honor. What's Where are we? THE COURT: Well, I don't know what a wallet -- MS. MATCHISON: I think she's trying to figure -- out what is -UNIDENTIFIED SPEAKER: I understand. So this is part 13 of the problem by the way, your Honor, we've got some very 14 broad requests from people who don't really know what they're 15 looking for. 16 And what they're submitting to us is putting Coinbase in a 17 very difficult position in terms of burden and everything else. 18 19 The wallet -- I'm sorry, public keys are essentially irrelevant to our part of this process. 20 THE COURT: 21 UNIDENTIFIED SPEAKER: Okay. And those that do have a wallet 22 have a wallet that tend to be consistent with the individual, 23 it could open more than one, but it tends to be consistent 24 within that. 25 And then that wallet address is something that we will UNITED STATES DISTRICT COURT 44 1 often -- we do provide forward and it can be identified in the 2 blockchain. 3 4 THE COURT: Okay. MS. MATCHISON: 6 THE COURT: 8 9 It seems that would be relevant -- 5 7 All right. It's a -- -- with the way you're identifying transactions going to a particular account holder. UNIDENTIFIED SPEAKER: The answer, I think is no. We can provide transaction records without that -- without that 10 specific wallet address. 11 reason it's relevant for us, just to let you know, your Honor, 12 is we built our systems in a very careful way to try to protect 13 PII at every level we possibly can. I'm not sure why that would -- the 14 THE COURT: 15 UNIDENTIFIED SPEAKER: 16 PII? I'm sorry. Personal identifiable information. 17 THE COURT: 18 UNIDENTIFIED SPEAKER: Yes. Just to try to make sure that 19 we're protecting a customer's privacy and to make sure that 20 we're complying with the laws and everything else. 21 And this process is going to require quite a lot of work 22 that we don't normally do. 23 to try to break stuff out in a way we don't normally have. 24 25 THE COURT: There will be system changes for us Well, you better get used it because you're going to start getting more summons. You're going to UNITED STATES DISTRICT COURT 45 1 get them from, you know, grand jury summons and the like. 2 ubiquitous, it's going to be treated just like any other bank 3 account out there that banks are required to turn over that 4 information every day. 5 6 UNIDENTIFIED SPEAKER: No, understood your Honor. We actually do respond to the summonses all the time. 7 THE COURT: 8 UNIDENTIFIED SPEAKER: 9 It's time. Yes. Or subpoenas rather, all the We have a team that does nothing but respond to valid 10 subpoenas. 11 we're able to do it in a much more efficient way, and we have 12 systems set up to do that. 13 They're actually much more specific than this, and THE COURT: So what would be your proposal as you 14 would give the government, at least at this first stab, all the 15 information that they need? 16 UNIDENTIFIED SPEAKER: I think what your Honor's 17 described is something that seems fair to me, which would be 18 let's take this a step at a time, give them the information 19 that they need to identify -- 20 THE COURT: 21 UNIDENTIFIED SPEAKER: But what is that information? Transaction history would 22 allow -- something to identify the individual and the 23 transaction history that connects to that so they can see what 24 happened in the course of the -- 25 THE COURT: But how is that produced? UNITED STATES DISTRICT COURT 46 1 2 3 MR. FONDO: It's going to have to be created, your THE COURT: It would have to be created. Honor. See that -- 4 that -- anytime you get to something that's being created, then 5 that's a problem, right? 6 through you. 7 the records that are maintained. 8 9 10 11 12 13 Because now it's being filtered I think they're entitled to see the summons of MR. FONDO: I don't believe we can produce -- we don't keep a list of wallet addresses that we can produce like this in this way. UNIDENTIFIED SPEAKER: I don't think -- there's not a button we can push to send stuff over to them in this form. MS. MATCHISON: Well -- and your Honor, I -- that is 14 somewhat surprising. 15 to Coinbase, but it shouldn't be one that's unanticipated or 16 uncontemplated, certainly considering that a lot of their 17 obligations to FinCen or any of the 36 states in which they 18 operate as money transmitters, require them to maintain, 19 preserve, and produce upon demand a lot of this exact same 20 information. 21 22 23 THE COURT: Again, I understand there's a burden here Well, maybe is that how it's couched then? That you want what they are required to produce to X state? MS. MATCHISON: Well, they have different requirements 24 in every state. 25 like Connecticut and New York are the most robust. Certainly, I think that the requirements of UNITED STATES DISTRICT COURT And they do 47 1 capture most of the categories of information that we've asked 2 for here, including the know your customer due diligence 3 information. 4 MR. FONDO: But it's different, your Honor, when 5 you're producing for 14,000 people. 6 request for a certain person, they can do that, that's what 7 they do. So if you ask for a 8 But then you ask it for 14,000, and then it's do you 9 really want -- then do you have -- you make the decision about 10 do you have 25 people in a room pressing a button for each 11 client, or do you -- so, I mean, it's maintained and they're 12 compliant, but it's not as simple as maybe we all would like. 13 MS. MATCHISON: But, your Honor, just because they've 14 set up their systems in a manner that makes this information 15 difficult to produce, is not a reason to find the request 16 unenforceable. 17 18 19 20 21 THE COURT: No. I understand. Why are like complete user preferences -- complete user setting, security settings, and -MS. MATCHISON: Your Honor, the IRS is no longer seeking -- 22 THE COURT: 23 MS. MATCHISON: Oh, I'm looking at the old one -So request number one is now limited 24 to name, address, tax I.D. number, date of birth, account 25 opening records, copies of passport or driver's license, all UNITED STATES DISTRICT COURT 48 1 wallet addresses and public keys for all the accounts, wallets, 2 and vaults. 3 THE COURT: 4 MS. MATCHISON: Okay. And then that last part about the 5 public keys was modified in our papers once we had the response 6 from Coinbase essentially vetting that generally they only use 7 wallet addresses and not public keys. 8 9 10 So we conceded that to the extent that a wallet address or a public key had been used, we just would like that information. 11 12 THE COURT: Okay. And what then would that request -- that narrowed request in particular? 13 UNIDENTIFIED SPEAKER: Your Honor, the account opening 14 records, I'm not sure why those are necessary. 15 to get records that relate to who owns what account, but I 16 think -- you know, it's not clear to me exactly what account 17 opening records means, necessarily, either. 18 clarification on that. 19 THE COURT: Okay. All right. They're going Maybe we can get The know your customer 20 due diligence, I don't -- I think that's something that can 21 wait. 22 Number 3 -MS. MATCHISON: Number 3, your Honor, is another one 23 that has been omitted by the IRS to just agreements or 24 instructions granting a third party access, control, or 25 approval -- UNITED STATES DISTRICT COURT 49 1 2 3 THE COURT: I understand (indiscernible) too, that's, sort of, we don't know if that's relevant. Four is the same, right, as before? 4 MS. MATCHISON: 5 THE COURT: 6 MS. MATCHISON: 7 THE COURT: Exactly. And that -- and that request Okay. Number 5, I think we knew that can wait. 10 11 That's the actual transaction. we do want the transaction specific information. 8 9 Actually request number four -- MS. MATCHISON: And number 5, your Honor, the IRS is no longer seeking enforcement on 5. 12 THE COURT: 13 MS. MATCHISON: 14 THE COURT: Okay. 15 MR. FONDO: Your Honor, if I may? 16 THE COURT: Yes. 17 MR. FONDO: I just wanted to back up to number four. 18 THE COURT: Yes. 19 MR. FONDO: There's a -- at the end of that request it Oh, at all? No. 20 says, all available information identifying the users of such 21 accounts and their contact information. 22 broad to me, your Honor. 23 24 25 THE COURT: That seems pretty Well, it seems redundant of number one, Right? MS. MATCHISON: Your Honor, it's any counterparties. UNITED STATES DISTRICT COURT 50 1 So any counterparties that are identified in transactions, if 2 there is additional information that Coinbase has on those 3 contacts, the IRS on would like that. 4 5 MR. FONDO: So why would that be relevant unless there was a transaction that was improper? 6 MS. MATCHISON: Because it also might lead to other -- 7 other taxpayers who have taxable events that have failed to 8 comply with tax laws and have failed to report it. 9 10 MR. FONDO: your Honor, which is beyond -- 11 12 MS. MATCHISON: THE COURT: think. MS. MATCHISON: 16 THE COURT: 18 This is very much a Well, that's just an investigation, I 15 17 No, your Honor. part of the IRS's investigation -- 13 14 This is now going back to that idle hope, All right. -- which is into tax noncompliance. They're just investigating the bitcoin. And six? MS. MATCHISON: I don't -- Six, your Honor, is limited to just 19 the correspondence between Coinbase and the user or any third 20 party about access to the account, about any kind of closing 21 the account or any sort of transaction activity. 22 THE COURT: Well, that can wait until you have a 23 reason to believe that there's a return to investigate or a 24 non-return, I guess. 25 And then the last one is all periodic statements of UNITED STATES DISTRICT COURT 51 1 account or invoices. Do you have those? 2 MR. FONDO: We do not, your Honor. 3 THE COURT: Okay. 4 MS. MATCHISON: So they don't have those. One thing I do believe they have a 5 cost basis report that they can -- a cost basis for taxes 6 report that they can run for customers upon request. 7 the extent they ran that for any of the customers that are 8 covered by the summons, that would certainly be of interest to 9 the IRS. 10 THE COURT: To the extent they ran it. 11 -- they're not required to create it. 12 it. 13 14 15 UNIDENTIFIED SPEAKER: And to I don't think So to the extent you ran There's not a lot based (indiscernible) -THE COURT: There's not a lot. It would suggest maybe 16 there's something to investigate, but those people who actually 17 had it ran are probably the -- you're least likely to 18 investigate, right? 19 MS. MATCHISON: 20 UNIDENTIFIED SPEAKER: I would hope -I'm sorry, your Honor. We make 21 actually make that available -- that information available to 22 the individuals themselves. 23 THE COURT: 24 UNIDENTIFIED SPEAKER: 25 not a lot of people that have done it. Oh, I see. So I don't mean to say there's I just mean -- UNITED STATES DISTRICT COURT 52 1 (Simultaneous talking.) 2 THE COURT: 3 You mean you just go to the website and you -- and you do what? 4 UNIDENTIFIED SPEAKER: You can look up the history of 5 transactions, the number of transactions, and also if you don't 6 have that (indiscernible) you can also look up the historic 7 record of prices of different currencies over time. 8 9 THE COURT: to match it yourself? 10 11 But is it matched for you or do you have In other words, does your -- UNIDENTIFIED SPEAKER: If we have the information, we match it for you, if we don't, you have to match it yourself. 12 MS. MATCHISON: That was our understanding your Honor, 13 that to the extent they have the basic information, they would 14 supply that to the users, and if they didn't, then they didn't. 15 MR. FONDO: Well, but I think that's different, your 16 Honor. 17 didn't run the -- they would only occasionally run actual 18 reports. 19 What he's saying is you can visually see it, but they THE COURT: All right. 20 you ran you'd have to produce. 21 don't have to produce them. 22 MS. MATCHISON: 23 THE COURT: 24 MS. MATCHISON: 25 Right. So the reports, I guess that If you didn't run them, they If they don't exist -- Okay. Because my understanding is, if you were to run that for every single user for every single UNITED STATES DISTRICT COURT 53 1 transaction, you may not even be able to do that; is that 2 right, or do you have an ability to do that? 3 MR. FONDO: I don't know. 4 THE COURT: Well, I don't know that I would make them 5 create reports, that's the thing. 6 can make them create a report, but if the report is there, it's 7 there, but if it hasn't been created -- it should be in the 8 transaction history, in any event. 9 All right. 10 thinking. 11 (indiscernible). 12 13 I don't think I have to -- Well, that's sort of not ruling, that's my I mean, here, if Mr. Weiss wants to say anything, MR. WEISS: Well, your Honor, they're Coinbase's records so I'm not going to speak for them, and I -- 14 THE COURT: I did allow you to intervene. 15 MR. WEISS: Yes, but they know their records better 16 than I do. 17 THE COURT: Yes. 18 MR. WEISS: Certainly, I will say, and I'll defer to 19 them. 20 does seem like a much more preferable way to do this. 21 Them creating a spreadsheet with transaction activity I mean, I've traded on these platforms. You don't -- when 22 you just trade on a platform, you don't know what your wallet 23 address is. 24 sure how that really helps the IRS. 25 That's just a tool that Coinbase uses. So I'm not I mean, I'll defer to Coinbase, but if you were to trade, UNITED STATES DISTRICT COURT 54 1 it looks -- it looks -- it's the same interface and it looks 2 familiar for any sort of online service, it's -- you know, it's 3 got your transaction history and it's all there, and I assume 4 it would probably be easier for them to just import that into a 5 spreadsheet than go through these wallet addresses. 6 I'm concerned as to why the IRS is so interested in the 7 wallet addresses and doesn't want the spreadsheet. 8 troubling to me. 9 What they really want are the transactions. That seems If this is 10 all in good faith and they want -- they really just want buy, 11 sell, transfer and Coinbase has the ability to provide that, I 12 don't know why they need any information besides that. 13 THE COURT: Well, maybe they may be able to work 14 something out now. 15 been an argument that it shouldn't be enforced at all. 16 I mean, until today, right, there's sort of So there may be a way of working it out. Certainly, it's 17 in the IRS's interest to get something in the most user 18 friendly form possible and that may be the case. 19 don't know. 20 I don't -- I I mean, if I order the summons enforced with certain of 21 the requests, the parties are free to work it out however they 22 want to work it out. 23 impossible then we can address that. 24 able to work it out. 25 And if something is impossible, then it's I assume you would be Sort of the bigger issues, though, I'm not -- I do think UNITED STATES DISTRICT COURT 55 1 it's a legitimate purpose and the abuse of process -- I 2 understand the argument. 3 myself on that one there, I should have taken a closer look at 4 it because I do think it was too broad, I agree. 5 I don't think -- again, I fault This one is still broad, but I think if we take it in 6 steps, it allows the IRS to do their legitimate investigation 7 with -- whatever that quote was I read -- just what's 8 necessary. 9 UNIDENTIFIED SPEAKER: And your Honor, just to clarify 10 on number one, are we limit -- I mean, obviously your Honor 11 hasn't issued a ruling, but are we still discussing things like 12 copies of driver's license and passports or -- 13 THE COURT: 14 maintained. 15 customer -- Well, so I don't know how that is Like I thought that would be in the know your 16 MR. FONDO: It is, your Honor. 17 THE COURT: It would come under the know your customer 18 realm. I don't think so. 19 If you have the taxpayer I.D. number, you have the 20 address, you have the name, you may want a copy of whatever 21 they gave Coinbase at some point if you have reason to 22 investigate further and you can ask for it at that point. 23 But I think having another agency in the government have 24 all these driver's license and passports when you may have 25 absolutely no need for them is not a good idea. UNITED STATES DISTRICT COURT 56 1 MS. MATCHISON: Okay. Again, you know, the government 2 would argue that this is relevant to the investigation, and 3 that we're not limited to things that are immediately known to 4 be necessary to complete an examination, and that kind of the 5 larger standard for relevance that you look at a summons 6 request for, that those items would be relevant to the IRS's 7 investigation, but I understand. 8 9 THE COURT: Not if you review the transaction records and there's no gain and you're done. 10 their driver's license. 11 MS. MATCHISON: 12 13 Why do you need to see Yes, your Honor, I agree, for those people we would not. THE COURT: Right. So that's all I'm saying. Let's 14 just wait and narrow it so that you won't have this whole 15 (indiscernible) of passports and driver's license and other 16 information that you have no reason for. 17 know why you want it. 18 about those. 19 it's still risks there. 20 MS. MATCHISON: I mean, I don't even It just creates risks. We all know Anyway, I mean, there's risks, if they have it, Yes, your Honor. Also on the risk 21 point just because it's come up, the IRS does receive millions 22 and millions and millions of transaction records every single 23 year from different financial institutions and we have yet to 24 have, in that system, any sort of a breach. 25 THE COURT: We know that. We all know that the IRS UNITED STATES DISTRICT COURT 57 1 keeps those returns very private. 2 MS. MATCHISON: 3 MR. FONDO: Yes. Yes. That's true we do. Your Honor, my government records were 4 leaked through a hack, so I think it is a real concern. 5 recognize that they've probably done better than other 6 agencies -- 7 MS. MATCHISON: Well, not the IRS records. I Other 8 parts of the government absolutely have been hacked, but the 9 IRS -- the IRS records -- same here. 10 THE COURT: No. No. No. But nonetheless, I do think 11 in 2017 one thing the Court should be sensitive to is that you 12 shouldn't just release lots of data that you may -- that the 13 agency may have no reason -- no need for. 14 unnecessary risk, and I don't think it's needed. That's just creating 15 You come back at that point for those taxpayers who you'll 16 then being able to identify in person, by the way, and who will 17 then actually get notice, right, in person, which is always 18 preferable to do it that way as opposed to as a John Doe basis, 19 which is now yet another reason I think to do it. 20 Probably the John Doe should be used only to the minimal 21 extent necessary. 22 you can go through -- maybe that's the real objection that is a 23 bigger administrative burden to the IRS, but it's completely 24 fair, I think, at that point. 25 If you can then identify those people, then MS. MATCHISON: I understand, your Honor. UNITED STATES DISTRICT COURT 58 1 THE COURT: All right. But -- I'll take the matter 2 under submission, but you sort of see what my thinking is, 3 anyway. 4 5 6 Anything further, Mr. Fondo? MR. FONDO: Yes, your Honor. So I think two things. One is, we would ask for if your Honor ends up ordering 7 this, the direction seems to be, we would ask for a 60-day stay 8 so Coinbase can evaluate its options about -- 9 THE COURT: Well, I don't -- the Supreme Court just 10 ruled one day this week that I can extend the time to appeal 11 and it's not jurisdictional, right? 12 But I don't know why you need to file -- to move for a 13 stay from the Ninth Circuit, right, is that what you're saying? 14 15 MR. FONDO: No. I'm asking for you to stay requirements to turn over the records for 60 days. 16 THE COURT: 17 MS. MATCHISON: 18 they're immediately enforceable. 19 move for a stay and your Honor grants that stay, your summons 20 is completely enforceable upon your order. 21 THE COURT: Oh. Oh. Oh. For 60 days. Your Honor, when summons are enforced, And so unless a party does Well, what if I were to do this though -- 22 sixty days is too long. 23 to meet and confer with the IRS -- I mean, I guess I don't 24 understand -- 25 MS. MATCHISON: What if I were to give you some time That was my question (indiscernible). UNITED STATES DISTRICT COURT 59 1 MR. FONDO: 2 Honor, they're out the door. 3 THE COURT: Yes. 4 MR. FONDO: So if we had to produce them tomorrow, for So once we produce the records, your 5 example, if we decide to appeal and then your Honor is 6 reversed -- 7 THE COURT: Yes. 8 MR. FONDO: -- it's sort of -- the records are already 10 THE COURT: Of course. 11 MR. FONDO: So that's our concern, your Honor. 12 THE COURT: Well, you have 30 days. 9 13 14 gone. see. Oh, I see. I I can certainly -MS. MATCHISON: Well -- so, your Honor, they would 15 need to move for a stay, and the United States would like the 16 opportunity to brief whether or not, you know, they are 17 entitled to a stay of your Honor's order. 18 So the government would prefer that if you do enforce the 19 summons, then Coinbase can move for a stay and the parties can 20 brief that. 21 THE COURT: Okay. But in the meantime while it's 22 being briefed, they shouldn't have to comply because that would 23 sort of moot the whole request for the stay. 24 25 MS. MATCHISON: It is difficult for us to force them to comply with the summons if they're not intending to comply UNITED STATES DISTRICT COURT 60 1 so they can -- 2 THE COURT: 3 MS. MATCHISON: It all makes sense. But my point is, a stay is not 4 automatic in the summons context. 5 becomes enforceable, it's automatically enforceable, it's 6 not -- again pending the parties move for a stay, it's not 7 stayed pending an appeal of the Ninth Circuit. Typically when a summons 8 THE COURT: Yes. 9 MR. FONDO: And that's why I requested a stay. 10 THE COURT: Oh, well, she's saying she wants to brief MR. FONDO: Well, we can brief it. THE COURT: Well, maybe you can work something out, 11 it. 12 13 that. 14 15 16 We're fine with too, right? I mean, the IRS has taken a long time with this, so it 17 would be hard to convince me that a 30-day or 60-day somehow 18 prejudices you in the event of time, right, that has been out 19 there. 20 21 22 So -MS. MATCHISON: I think ours is probably more a legal point than a practical one with the timing, your Honor. THE COURT: Okay. Well, I'll issue the order as soon 23 as I can, and then I think it is what it is, and I'm not going 24 to like -- what would happen? 25 want a stay -- hopefully, what you'll do is you'll talk to the You don't comply because you UNITED STATES DISTRICT COURT 61 1 IRS and see if maybe this is something that you can work out on 2 that point or you'll decide to appeal, in which case then you 3 can move for a stay at that point, and I don't think you would 4 be found in contempt for not complying if you've moved for a 5 stay. 6 MR. FONDO: Thank you, your Honor. 7 THE COURT: Okay. 8 UNIDENTIFIED SPEAKER: 9 THE COURT: 10 Great. Okay. Understood. Thank you. Your Honor, could we -- Yes. UNIDENTIFIED SPEAKER: -- just one last -- one issue 11 is with the wallet addresses. 12 to be producing it for 14,000 individuals, your Honor. 13 it's a -- 14 15 16 17 18 THE COURT: record? It's a pretty significant burden Why is that? And Like where is that in the Like why? I mean, I guess I don't understand why it's not just there with everything else. UNIDENTIFIED SPEAKER: Because one, it's also -- every 19 single transaction has a new wallet address, so you're not just 20 talking 14,000 people, you're talking 14,000 times however many 21 transactions they are, and we don't keep -- well, we don't 22 always use -- Coinbase doesn't always use wallet addresses for 23 these transactions. 24 THE COURT: 25 Okay. Well, what if I were to say, to the extent a wallet address is associated with the transaction in UNITED STATES DISTRICT COURT 62 1 the records that you produce -- in other words, don't extract 2 it. 3 You're going to be producing transactions -- you may be 4 producing transaction records, right? 5 address is there, then you should produce it. 6 And if the wallet If what you're saying is I have to go somewhere else to 7 find it and match it, well that's a different matter. 8 know. 9 be redacted. I don't have that here, but if it's there, it shouldn't 10 UNIDENTIFIED SPEAKER: 11 THE COURT: 12 UNIDENTIFIED SPEAKER: 13 Understood, your Honor. Yes. I mean, it's a significant burden, but I understand, your Honor. 14 THE COURT: 15 UNIDENTIFIED SPEAKER: 16 Okay. All right. Thank you. All right. Thank you, your Honor. 17 MR. FONDO: 18 MS. MATCHISON: 19 (Whereupon the matter concluded at 3:22 p.m.) 20 I don't Thank you, your Honor. Thank you, your Honor. --o0o-- 21 22 23 24 25 UNITED STATES DISTRICT COURT 63 1 CERTIFICATE OF TRANSCRIBER 2 3 I certify that the foregoing is a true and correct 4 transcript, to the best of my ability, of the above pages of 5 the official electronic sound recording provided to me by the 6 U.S. District Court, Northern District of California, of the 7 proceedings taken on the date and time previously stated in the 8 above matter. 9 10 I further certify that I am neither counsel for, related 11 to, nor employed by any of the parties to the action in which 12 this hearing was taken; and, further, that I am not financially 13 nor otherwise interested in the outcome of the action. 14 15 /s/ VICTORIA L. VALINE 16 _______________________________________ 17 Victoria L. Valine, CSR 3036, RMR, CRR NOVEMBER 14, 2017 18 19 20 21 22 23 24 25 UNITED STATES DISTRICT COURT