FAU Research Explores Regulatory Ambiguity in Bitcoin Market
More than a decade after the launch of Bitcoin, regulatory ambiguity surrounding the peer-to-peer virtual currency continues to discourage entrepreneurial activity by increasing risk and the costs of compliance, according to a newly published paper by faculty at Florida Atlantic University’s College of Business.
Regulatory ambiguity refers to the uncertainty or inexactness of policies governing a particular action or industry, resulting from dormant, imprecise, conflicting and selectively enforced regulation.
In his paper, recently published in The Review of Austrian Economics , William Luther, assistant professor in the Department of Economics, writes that Bitcoin has suffered from all four sources of regulatory ambiguity. For roughly four years after its launch, regulations pertaining to Bitcoin lay dormant in the United States. When new policies were drafted, they were often imprecise and occasionally conflicted with one another. Finally, some regulations were selectively enforced, catching entrepreneurs and their customers off guard.
There were no explicit regulations pertaining to Bitcoin and little guidance as to how existing regulations would be applied. The U.S. Securities and Exchange Commission, Financial Industry Regulatory Authority and North American Security Administrators Association had also ordered guidance to potential investors. Prior to such guidance, and arguably long after, entrepreneurs were left guessing as to how Bitcoin and other cryptocurrencies would be regulated.
Not only was it unclear how Bitcoin would be regulated, it was also unclear which agency or agencies would do the regulating. Jurisdictional redundancy was pervasive. At the federal level, dozens of agencies had some scope to regulate.
“If you have two agencies regulating the same action or industry, it’s more likely that you’re going to get imprecise regulation or conflicting regulation,” Luther said. “So that's a real source of ambiguity for entrepreneurs. And there’s the ripple effect —meaning from the consumer standpoint, the investor standpoint, not just folks who are developing the base technology like Bitcoin.”
At the same time, many states, including the large states of California, Florida, New York and Texas, held inquiries, issued guidance, amended existing rules or drafted new policies.
Technological innovation always produces some degree of uncertainty, which entrepreneurs must navigate. However, in Bitcoin’s case, ambiguity resulted from the confusing regulatory response, making it difficult for entrepreneurs to forecast costs and benefits.
“So, my expectation based on standard economic theory is that if you raise the ambiguity involved in the entrepreneurial process, then you will discourage some of that entrepreneurship,” Luther said. “That means you’re going to get less investment in the technology and the ancillary services. For consumers, that means it’s going to be more cumbersome to use that technology. Some advances in that technology, as well as the gains from that technology, will go unrealized.”
In the process of reducing ambiguity surrounding virtual currencies like Bitcoin, some agencies have adopted policies that similarly discourage use and further development. The IRS, for example, now requires a capital gains tax to be paid if the value of Bitcoin increased between the time it was acquired and spent. Last month, a bill was introduced in Congress that has the potential to solve this major issue with payments made via Bitcoin and other major cryptocurrency networks. The Virtual Currency Tax Fairness Act of 2020 (VCTFA) would create an exception for the potential capital gains taxes that often occur when these digital assets are used in everyday commerce.
“By eliminating the onerous record-keeping requirements for those transacting with cryptocurrencies, VCTFA aims to level the playing field with the dollar,” Luther noted. “Unfortunately, it is not yet clear whether the bill will make it out of the House.”