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Blockchain regulation

Antitrust pitfalls in blockchain technology: the key issues

Regulatory interest in blockchain, a type of distributed ledger technology, continues to gain momentum.

The technology at the heart of bitcoin and other virtual currencies is expected to transform interactions between companies by making them more efficient, traceable and secure without the need for duplicative (and potentially conflicting) transaction records and a trusted intermediary.

Blockchain’s potential uses span a range of industries such as finance, insurance, logistics, mining, healthcare, IP rights management and government services. For additional background, read our overviews What's in a blockchain? and Beyond bitcoin, or watch our video.

Legal commentators have raised questions about a myriad of issues ranging from security and privacy concerns to questions of liability and jurisdiction in the event of a dispute or fraud. A potential issue that has received comparatively little attention is whether the use of blockchain might present competition law risks.

Antitrust authorities are increasingly showing interest in this topic: the head of the Japan Fair Trade Commission announced on 25 January 2018 that the authority may look into competition policy issues involving blockchain-based cryptocurrencies depending on how they are used by businesses in the future. And on 1 February 2018, the European Commission launched the EU Blockchain Observatory and Forum to promote European blockchain actors, monitor developments and inform policy-making.

In order to unlock the full potential of blockchain technology, collaboration between multiple users who are often competitors is unavoidable.

Competition laws generally welcome collaboration between competitors if this allows them to achieve outcomes they would be unlikely to achieve on their own (or to achieve them more efficiently). But  companies need to be mindful of risks, particularly in relation to standardisation efforts, access rights to private blockchains, information sharing or collusion and merger control.

These risks are explored in more detail below.

Standardisation efforts

As the potential uses for blockchain technology expand, industry agreements on common technical standards will become increasingly important to ensure frictionless interactions between participants and lower transaction costs.

From a competition law perspective, standards that create compatibility between competing technology platforms are generally considered to be procompetitive. Nevertheless, when competitors get together in a blockchain consortium to discuss a new standard, they should take certain precautions to avoid falling foul of competition laws.

For example, they should ensure that participation in the consortium is not unduly restricted, the procedure for setting the relevant standard is transparent and access to the adopted standard should be on fair, reasonable and non-discriminatory (FRAND) terms.

On the other hand, consortia that exclude certain participants from the standard-setting discussions or impose restrictions on their members’ ability to work with other consortia may attract scrutiny from regulators. This is unless the consortium members can show that these restrictions are reasonably necessary to allow the consortium to achieve its objectives (and that any resulting efficiencies are passed on to consumers).

Access rights to private blockchains

Private (also known as ‘permissioned’) ledgers require an invitation to join and generally have a set of rules governing who is allowed to participate.

If access to the network is a requirement for activity on the market, participants attempting to exclude certain competitors from accessing the distributed ledger should consider whether such a refusal may violate competition laws.

Restrictive membership policies may be justified if the rules help the consortium operate more efficiently (eg if the third party does not comply with data protection or cyber security protocols). But members should ensure that any rules they impose on new joiners are reasonable and based on objectively justifiable criteria.

Information exchange and collusion risk

The exchange of public, historical and/or aggregated information is typically regarded as benign under competition laws, particularly if the exchange is necessary to achieve the procompetitive outcomes of the collaboration.

On the other hand, current or future prices or other competitively sensitive information should not be shared as this may reduce competition or even facilitate price fixing.

Each competitor on the same blockchain network keeps an identical record of all transactions cleared within the distributed ledger.

The level of detail about individual transactions that is stored on the distributed ledger will depend on the rules of the particular blockchain. As a result, companies should be aware of the nature of the information they share on distributed ledgers and carefully consider their participation in blockchain consortia.

A layer of cryptographic privacy may need to be added to obfuscate competitively sensitive transaction data. Alternatively, members may wish to store competitively sensitive information such as transaction amounts off-chain, and use the blockchain simply to record information about the transacting parties and the ownership status of certain assets.

Competition authorities are alive to new forms of information exchange and collusion. (Take the Libor and FX cases in the financial services sector, or the authorities’ recent interest in algorithms as an example.) So the authorities can be expected to take a close look at the information disseminated on, and the structural characteristics of, distributed ledger networks.

In addition to collusion through information exchange, competition law scrutiny may also extend to the way transactions are approved by consortium members.

The validation of transactions on a blockchain is performed by all members (or ‘nodes’) in accordance with certain pre-set rules (the so-called ‘consensus mechanism’). A transaction will only be added to the blockchain if a sufficient number of nodes agree that the transaction is valid.

Competition authorities may well take a close look at consensus mechanisms in future to ensure that they do not have any anticompetitive effects.

Companies should ensure that the mechanism does not prioritise the clearance of transactions of certain consortium members or boycott transactions by particular parties.

Merger control

The creation of a blockchain consortium may result in a notifiable transaction in certain jurisdictions, even if the project does not have any operations in that jurisdiction.

In many cases, approval from the relevant competition authorities may be required before the consortium can be implemented.

Companies should seek legal advice early on in the process before setting up blockchain consortia.

Conclusion

Violations of competition law can result in lengthy investigations and large fines.

In some jurisdictions, they can also expose companies to private litigation and, in the most serious cases, potential criminal liability.

It is not yet clear how competition authorities will approach the regulatory issues raised by blockchain technology. But it is important for companies to be aware of the potential competition law risks as they begin to harness its benefits.