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Regulatory ambiguity in the market for bitcoin

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The standard economic approach to considering the effects of a policy tends to neglect the prospect of regulatory ambiguity. I describe four sources of regulatory ambiguity and survey the literature considering the effects of ambiguity on entrepreneurial activity. I also explain how jurisdictional redundancy, where multiple agencies regulate the same action or industry, increases the likelihood of regulatory ambiguity. I offer a brief description of the regulatory environment of bitcoin in the United States in order to provide specific examples of the sources of regulatory ambiguity identified herein.

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  1. My claim—that the standard approach neglects regulatory ambiguity—should not be taken to mean that regulatory ambiguity has not been considered by others. That is certainly not the case. Marcus (1981) provides an early survey of the literature considering the effect of policy uncertainty on technological innovation. Hassett and Sullivan (2016) offer a more recent account. Other important works are discussed below.

  2. The term ambiguity is used to distinguish the sort of Knightian uncertainty I have in mind from mere parametric uncertainty (i.e., risk). See also: Easley and O’Hara (2009) and Hansen (2014).

  3. (Muchmore 2016) takes a similar approach in making a distinction between legal uncertainty, factual uncertainty, and uncertainty about the application of the law to fact.

  4. Wilson and Veuger (2017) suggest that information spillovers between firms might limit uncertainty about regulatory expectations. Consistent with this view, they find that banks located further from regulatory field offices incur significantly higher administrative costs to achieve the same level of compliance and that these costs are negatively related to the scale of the jurisdiction in which they operate.

  5. Along these lines, Marisam (2011) discusses “duplicative delegations” and Freeman and Rossi (2011) consider “shared regulatory space.”

  6. One should not confuse jurisdictional redundancy with polycentricity. Polycetricity gives agents the ability to opt in or out of various overlapping institutional regimes. In some contexts, the costs of dealing with the complexity of polycentricity are warranted by the benefits that come from being able to select the rules under which one will act. Jurisdictional redundancy, in contrast, leaves no scope for agents to opt out; they incur the costs of complexity without the benefits of polycentricity.

  7. Pindyck (1991) surveys the literature on uncertainty and investment when investments are irreversible.

  8. Hoffmann et al. (2009) consider factors that dissuade companies from postponing investment despite regulatory ambiguity.

  9. More generally, Engau and Hoffmann (2011) consider four potential response strategies for firms facing regulatory ambiguity: avoiding, reducing, adapting to, and disregarding. See also: Cukierman (1980) and Marcus (1987).

  10. Along these lines, Bailey and Thomas (2017) find that more-regulated industries experience fewer new firm births and slower employment growth.

  11. Regulatory ambiguity might encourage innovation in technologies that allow one to operate outside the regulatory framework. However, it will do so at the expense of other efforts and, insofar as it raises the cost of production, tend to discourage economic activity in general. Moreover, to the extent that regulatory ambiguity is concentrated around a specific technology, it will tend to discourage efforts to develop and promote that technology.

  12. See also: Lerner and Rafert (2015).

  13. In May 2006, a German District Court ruled that had infringed the broadcasters’ reproduction rights. The Dresden Court of Appeals ruled against in November 2006. In May 9, 2007, the German District Court ruled similarly against Then, in October 2007, the Dresden Court of Appeals ruled in favor of The Federal Court of Justice repealed both rulings in April 2009, remanding them back to the Dresden Appeals Court. The Dresden Appeals Court ruled in favor of in July 2011. A decision was not immediately reached for Finally, in April 2013, the Federal Court of Justice decided both had infringed the television broadcasters’ right to retransmit.

  14. Similarly, Bittlingmayer (2000) uses antitrust case filings as a measure of regulatory uncertainty and finds that at least some of the low investment of the late 1950s and early 1960s was due to “a resurgence of aggressive antitrust and related initiatives interpretable as ‘anti-business’.”

  15. It is difficult to disentangle the effects of an adverse ruling from those of the increased ambiguity that accompanied the ruling. However, the magnitude of the combined effects suggests it could be significant.

  16. Shoag and Veuger (2016) construct a similar index for U.S. states and show that the cross-sectional variation in uncertainty robustly matches the distribution of employment outcomes during the Great Recession.

  17. See also: Zetzsche et al. (2017) and Allen (2019).

  18. Bitcoin transactions are processed using the blockchain technology (Davidson et al. 2018). Luther (2019) considers bitcoin’s launch. See also: Luther and White (2014); Luther (2016a, b, 2018).

  19. The Silk Road was an online marketplace where users could buy and sell illegal substances and services with bitcoin. See: Christin (2013) and Barratt (2012).

  20. See also: Grinberg (2012) and Luther (2015).

  21. In July 2017, the SEC confirmed that some tokens are subject to securities regulation. Valkenburgh (2018) offers a useful framework.

  22. Few countries have taken steps to ban bitcoin. See: Hendrickson et al. 2016; Hendrickson and Luther (2017a, b). In contrast, Luther and Salter (2017) consider the extent to which government bailout policies encouraged adoption.

  23. Lee (2013a) describes how, in the months leading up to the hearing, “leaders of the Bitcoin community and sympathetic policy advocates have been engaging with federal regulators, lawmakers and other influential figures inside the beltway.”

  24. Mandel (2009) considers the challenges of regulating new technologies, the risks of which are not fully understood at the outset.

  25. The CFTC’s position has become clearer in recent years. In July 2017, for example, CFTC authorized LedgerX to clear derivatives and execute swaps under the Commodity Exchange Act.

  26. Mirjanich (2014) argues that bitcoin should be classified as currency by all regulatory agencies and, hence, subject to the same rules as foreign currencies. See also: Luther and Olson (2015) and Luther and Hazlett (2019).

  27. Specifically, the IRS 2014 offered an FAQ to “provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.”

  28. A John Doe summons does not identify a specific person suspected of misreporting income. Instead, it identifies a class of individuals (e.g., all Coinbase users), some of whom are suspected of misreporting income.


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Correspondence to William J. Luther.

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Luther, W.J. Regulatory ambiguity in the market for bitcoin. Rev Austrian Econ 35, 1–14 (2022).

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