The Curious Case of Blockchain and Competition law – Exploring the Unprecedented Pathway

Introduction

 

The purpose of the present article is to bring to the horizon two varied yet intersecting concepts that can be the new regulatory and business ecosystem. We are going to dive into the technology of ‘Blockchain’ and then inject the regulatory vires of competition law into it. Blockchain in Competition law  is new and  exciting and  is yet to realize its true potential. The attempt is to initiate a thought leadership process, highlighting and critically examining the benefits and  concerns that may arise.

 

In an attempt to simplify the intricacies of Blockchain and competition law the OECD published a paper and very recently, the first Policy of Blockchain governance has been rolled out by the Tamil Nadu State government in India, which aims to bring Blockchain in  government offices (an enterprise as per S. 2(h) of the Competition Act).

 

Blockchain technology and Usage

 

‘Blockchain’ is a database, storing lists of entries that are distributed rather than being centralized, which cannot be changed easily after they are created. In a Blockchain ecosystem there are blocks which have some records, entered through the mechanism of cryptography, and each block is connected and verified to other blocks through hash function.[1] In most cases, a blockchain is managed by a peer-to-peer network (P2P) on a mandatory consent mechanism to change blocks and every activity in the network is visible to everyone.[2]

 

Blockchain is based on distributed ledger technology (DLT). DLT is essentially used to maintain a decentralized database (ledger) so there is no intermediary involved to authenticate transactions. 

 

It is this ecosystem of decentralization, trust, transparency and efficient record management that has triggered blockchain usage. A Blockchain network, in a wide classification, can be open or closed. It can further be categorized as public, private, consortium or hybrid, depending upon usage and accessibility. These are further classified as permissioned or permissionless. Based on such categorisation of blockchain networks, simultaneously the rights of reading, writing, consent, and usage vary in the database. It essentially means that based on authorisation in either public or private or consortium blockchain networks, selective persons can either just read, or write or can have the right to commit and consent to blockchain transactions. For example, Bitcoin is traded in an open public permissionless network, an intra function of company is done in closed private permissioned network, banks operate with customers in closed consortium etc.

 

Addressing the arising Competition Law concerns

 

Blockchain as a concept has been decades old and its business models have evolved. The present part of the article will go on to determine the blockchain market in context of the Indian Competition Act, 2002 (Act). Before we begin, it is to be noted that a blockchain network  serves the purpose of three entities: blockchain developer, participant/user, and miner. Further, a distinction needs to be made between  blockchain itself as a business and blockchain as an enabler of other businesses in different market sectors. These distinctions will be relevant for  the further discourse.

 

Information Exchange

 

The risk of anticompetitive information exchange between competitors is likely to be the most significant competition law risk. The exchange of data that reduces strategic uncertainty in the market may lead to competition law infringements as it decreases the incentives to compete. Information related to prices, quantities and  future conduct is the most strategic, followed by information about costs and demand. These exchanges of information on the network may lead to competitors colluding easily and using it to their own advantage, therefore standing in violation of S. 3(3) of the Act.

 

Blockchain participants need to regulate the exchange of information and assess what information is available to competitors through a shared ledger and refrain from sharing information that could be used to facilitate price fixing. For example; ‘Hub and Spoke’ Cartel using  third-party blockchain networks to exchange sensitive information carries the highest risk of  hampering fair competition in the market. In this setup, a ‘hub’ (an enterprise) can facilitate co-ordination between two distinct blockchain networks (spoke) to exchange information and coordinate their market strategy. This can happen through a private-permissionless blockchain model. At the backend, this unfair exchange of information will act as a catalyst to agreements in violation of S. 3(3) of the Act.

 

Access to blockchain vis-à-vis relevant market and market power

 

The Competition Commission of India (CCI) has considered online markets different from offline markets, so it can be presumed that the blockchain market may be considered different from existing technologies.  But the argument isn’t simple to digest because of the divergent views expressed by CCI in Mohit Manglani and Ashish Ahuja where it didn’t recognise the distinction between online and offline markets, expressing that these are just two different distribution channels.

 

But divorced from the fact of merely being a different distribution channel, blockchain can form a relevant market in itself due to its technology. It is not substitutable on the demand side. The argument also finds its weight in CCI’s reasoning of holding ‘radio cab services’ to be  a relevant market by itself, on the ground that the characteristics of radio taxis cannot be found in any other means of transport. Being similarly placed, Blockchain is buttressed by the cutting-edge facilities that blockchain technology can provide and its unique characteristics, unlike others, which can attribute it to form a relevant market in itself.

 

The blockchain market is identified for its product-based service in different sectors and also for the unique technology on which the blockchain network is built. On the determination of relevant product market and its substitutability on demand side, as per S. 2(t) and 19(7) of the Act, blockchain is sought after primarily due to its technology. For instance, even if an offline enterprise (X) and a blockchain backed network (Y) are  offering the same services in the retail sector,  blockchain will form a different relevant market due to its unique technology and services provided to the end consumers in transactions and participation. It is not substitutable because that technology service is not available in the offline market.

 

Furthermore, the market categorization should depend on the type of blockchain application, i.e. based on the industry sector in which the blockchain model is applied. This would be an important factor  in determining the relevant market. For example, blockchain for bitcoin and blockchain engaged in providing healthcare services are completely different and need to be put in different categories of market.

 

Additionally, Blockchain technology by virtue of being complicated and expensive has  inherent issues of accessibility and affordability. This creates a loop leading to  ease in creation of monopoly by big enterprises and access to market power. Big enterprises gain early mover advantage, and the subsequent network effects compound their market power. As also noted in the 2020 Report of Competition and Markets Authority on ‘Online Platforms and Digital Advertising’, network effects and monopoly of big enterprises has also plagued the online advertising industry, wherein these enterprises later become dominant and abusive in their conduct, violating Sec. 4 of the Act.

 

Anti-Competitive Agreements

 

The Competition Act, under Section 3, prohibits all forms of agreements that cause an ‘Appreciable Adverse effect on Competition’ in the market. In a Blockchain network there is rapid and concealed exchange of information. With this technology, formation of cartels and their enforcement will be relatively easy for actors, violating Sec. 3(3) of the Act. ‘Hub and Spoke’ Cartel is one difficulty as pointed out above.

 

Now, one possibility is that all the competitors within a market will use a single blockchain. Another possibility is that each enterprise will have their own blockchains such  that each enterprise has its own server space. If enterprises collude to reap benefits from  market uncertainties in a consortium network, the ledger records can be an evidence and if a smart contract is embedded, it might specify automated pecuniary punishments. On a primary level, ‘Coding the law’ into smart contracts, proposed here, let’s say for an order of S. 27 of the Act, will help achieve streamlined regulation. Legal compliance will also be more nuanced. Both the horizontal and vertical agreements can be put under a check. However, the pseudo-anonymity of participants in a public blockchain might be an issue. 

 

In the vertical segment, tie-in arrangements can be effectuated by developers or by enterprises in private blockchain networks, in violation of S. 3(4) of the Act. Blockchain being the future need for businesses, pre-conditions can be imposed unrelated to the purpose, thus inviting tie-in arrangements. For example, a distributor of certain medicines is engaged in sale of drugs of certain pharmaceutical company, for which joining the blockchain of the company is essential. Herein, if the company decides to impose certain supplementary conditions unrelated to the core business, that may amount to tie-in and attract scrutiny under competition laws.

 

Moreover, there were  discussions in the EU about inserting  standardization agreements in blockchain. These agreements help in defining technical or quality requirements with which current or future products, production processes, services or methods may comply and help in achieving common technical standards and interoperability in  Blockchain networks.

 

However, such agreements may in certain cases reduce or limit competition on price, technical development and innovation and/or create entry barriers. For example; standards that set detailed technical specifications for a product or service may limit technical development and innovation. While a standard is being developed, alternative technologies can compete for inclusion in the standard. Once one technology has been chosen and the standard has been set, competing technologies and companies may face a barrier to entry and may potentially be excluded from the market. If this is the case, competition law will have to be applied to set rules to ensure a compliant functioning of the standardization process for different markets.

 

In the USA, a complaint in a blockchain antitrust case, the first of its kind, has been dismissed this year,  but the plaintiff United Corp has again filed an amended version of the complaint. United Corp, a diversified technology company, sued Bitmain, the largest Bitcoin mining pool, and a number of other high-profile stakeholders on collusion claims. It claimed that the colluding actors manipulated the cryptocurrency market for Bitcoin Cash by centralizing what is intended to be a decentralized transactional system, enabling the corruption of the democratic and neutral principles of the Bitcoin Cash network. As a consequence of the collusion, the prices fell, resulting in financial harm.

 

Abuse of Dominance 

 

Abuse of Dominance, under Section 4 of the Act, is an interesting concern here. If an enterprise is engaged in Blockchain technology development, maintenance and functional access, then its business is the technology itself. Now, it is first important to ascertain the existence of a dominant position to thereafter find its abuse. The liability flow is contingent on this.

 

Since decentralized networks like blockchain are not recognized as legal persons,[3] many issues arise, such as; Can a non-entity hold a dominant position? Can blockchain create a monopoly without a monopolist? Finally, if the blockchain is dominant, which users and/or entities hold that dominant position?

 

One way of determining this is by calculating the number of users within the network, or, alternatively, one can calculate the number of transactions on the network. This may still be a flawed approach since blockchains with similar transaction traction are not necessarily interchangeable if they do not provide the same services. Another possibility would be to calculate market power based on the type of applications.

 

Vertical integration (a criteria for determining dominance under Section 19(4)(e)) by dominant firms could be a potential issue here, distorting the market and creating barriers  to accessibility of the network. The common case of abuse in this scenario can also be of imposing unfair conditions for blockchain network use, denial of market access by denying an entry to the network or imposing supplementary conditions like non-usage of any other blockchain network. Predatory pricing by developers can be deployed to eliminate competition,  essentially causing miners to leave/migrate, allowing developers to  then enjoy the so-created monopoly and charge higher prices. For example, If there are multiple blockchains competing for users in a particular sector, a big blockchain company may choose to incur  losses in transaction fee initially from their own accounts. Subsequently, once the competition is eliminated, transaction fees can be charged again at usual or perhaps higher prices, inviting the practices of predatory pricing.

 

Availability of Evidence 

 

Most of the investigations conducted by competition authorities are plagued by non-availability of direct evidence, therefore, circumstantial proof is adequate in most cases. In a blockchain model network, where standardisation is applied, the availability of direct evidence will be greater . The exchange of information that would have had taken place  can’t be altered, given the immutability of blockchain. However, it will be a challenge to identify with exactitude the party involved as these networks are anonymous. For this an upstream governance model should be applied, i.e. to shift the locus from managing the risks of technological products to managing the innovation process itself: who, when, what and how. It aims to anticipate concerns early on, address them through open and inclusive processes, and steer the innovation trajectory in a desirable direction. One suggestion is to embed such technology with the authorized controller who can reveal identities of pseudonymous users on request, from the KYC records, on an investigation through Director General by CCI under S. 26 of the Act.

 

Merger Approvals

 

An M&A transaction that qualifies as a ‘Combination’ under S. 5 of the Act, is required to be notified to the CCI unless the transaction is exempted. As per S. 6(2A) of the Act, transactions which qualify as Combination cannot be legally consummated until the CCI grants its approval or the review period of 210 days as provided by the Act has expired, whichever is earlier. Before such final verdict, the CCI is required to form a prima facie opinion on the Combination within a period of 30 working days from the notification. In this whole process, voluminous documents have to be perused and cross-referenced by the CCI. Mergers can also get expedited approval, saving resources and maintaining confidentiality of sensitive information, by allowing authorities access to relevant parts of a private blockchain. If all the evidence regarding the company, that is relevant for the merger, can be traced in a blockchain, it will be easier for authorities to assess correct economic evidences.

 

Conclusion

 

Blockchain modelled regulation in the competition law regime is unprecedented. Yes, there are potential possibilities of anti-competitive agreements  operating through anonymous handlers. But at the same time, a streamlined approach can make enforcement mechanisms effective.  Market dominance can be stifled through innovation in the technology sector, and it can  be the key to preventing abuse. For instance, nobody thought MySpace would be dethroned as the largest social networking service before  the innovative Facebook emerged. Similarly, Yahoo seemed unsubstitutable, yet Google’s Gmail dominates now. YouTube, the online video sharing platform, acquired a  large userbase, and  the shifting of dominance and market power was possible due to innovation in technology.

 

Moreover, the first ever collusion case in a blockchain network, witnessed in USA, presents an ideal setting for  examining the pitfalls and pre-emptively checking them. This is important in order to protect the interests of  consumers and to maintain free and fair competition in the market. The need for re-conceptualization of law is pivotal for this decentralized network of Blockchain. Overregulation might also jeopardize the utility of this technology. At this juncture, it becomes imperative to ponder, as Dr. Thibault Schrepel poses the question in his paper on Blockchain, “After all, how can decentralized transactions be properly regulated by pyramidal rules and institutions?”

 

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[1] Arvind Narayanan, Joseph Bonneau, Edward Felten, Andrew Miller & Steven Goldfeder, Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction,  (Princeton University Press. 2016).

 

[2] Rodney D. Ryder, Nikhil Naren, Internet Law: Regulating Cyberspace and Emerging Technologies, (Bloomsbury Professional India 2020).

 

[3] Primavera De Filippi, Blockchain and the Law: The Rule of Code ( Harvard University Press, 2018).

 

 

Aman Shankar

Aman Shankar is a 4th year law student at Symbiosis Law School NOIDA. He has a profound interest in Technology Law, IPR and Competition Law. He regularly writes on topical issues concerning the intersection of Law and technology.

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