Judges Hear Argument in Cryptocurrency Financial Privacy Case: Harper v. Werfel

Do owners of a financial account have the right to challenge an IRS search of financial transactions? That is the question argued yesterday at the U.S. Court of Appeals for the First Circuit in Harper v. Werfel.

The case started when the IRS issued a “John Doe” summons against Coinbase, a cryptocurrency exchange, demanding its users’ financial information. As my colleague Tyler Martinez explained, a John Doe summons is a dangerous tool where the IRS can demand the financial information of thousands of individuals at a time. We filed an amicus curiae (“friend of the court”) brief in the case, detailing how important it is to protect cryptocurrency users’ financial privacy information.

At oral arguments, Sheng Li of New Civil Liberties Alliance represented James Harper. Li stressed the IRS’s summons to Coinbase was not narrow, encompassing millions of individuals. Harper sought to challenge the IRS summons but the lower courts declined to hear him. One judge yesterday questioned whether Harper’s financial records on Coinbase belonged to Harper or Coinbase. Li responded that Harper has a property right in his financial records on Coinbase. The lack of exclusive control did not necessarily mean Harper had no property rights in his financial records. This property right, in turn, deserves Fourth Amendment protection.

IRS Commissioner Daniel Werfel and the IRS were represented by Kathleen Lyon. Lyon argued Harper is not protected by the Fourth or Fifth Amendments because his financial records belong to Coinbase, not to himself. A judge inquired whether Harper had any other choice aside from a digital exchange platform to participate in blockchain transactions. Lyon stressed Harper could have engaged in peer-to-peer transactions and not used Coinbase. By using Coinbase, the government attorney said, Harper “voluntarily” exposed his information. A judge also raised the issue of financial privacy and was concerned the IRS’s John Doe summons destroys the anonymity provided by the blockchain. Lyon responded that the IRS only received transaction logs, not individuals’ private wallet addresses and key information, so it would have to tediously follow a transaction on the blockchain to reveal what financial transactions took place.

On rebuttal, Li once again pointed to the tremendous financial privacy issue at play in this case. Li compared the IRS’s John Doe summons here to a “drag-net fishing style expedition over . . .[a] huge number ” of people.

A decision is expected later this year. This case represents paramount importance for American’s privacy rights, and we will continue to monitor it.