Blockchain Technology and Competition Law Concerns

Author: Umang Motiyani

The author is a student at the ILS Law College, Pune


I. Introduction

Blockchain was first introduced in Satoshi Nakamoto’s white paper titled ‘Bitcoin: A Peer to Peer Electronic Cash System’ in 2008. It is a ledger technology with a decentralized database that registers transactions across a network. Any information entered in the database is shared and stored via blocks of data across multiple nodes. It is, thus, a process of connecting a block of cryptographically signed data with immediately preceding and subsequent blocks to form a permanent and unalterable chain.

Blockchain became essential for trading in bitcoin and other digital currencies, as it made dealings between businesses reliable, secure, faster, and verifiable. Its invention was especially valuable to combat uncertainty in financial transactions where the parties are unaware with whom they are dealing. While all personal data is private, the technology is transparent. This helps to monitor and validate the entire chain of transactions which are dependent and the outcome of the previous record, making it difficult to change or disrupt a single transaction without disturbing the whole block. Thus, the blockchain model will effectively lead to the removal of intermediate steps in transmission and replace them with a single technological platform.

However, despite being such an exceptional improvement for various sectors (financial and non-financial); there are a number of legal concerns yet to be answered. The most complex being whether the competition regulators are equipped to incorporate this technical advancement into their competitive analysis and adopt the change in the manner market will function.

II. Exchange of Data

The purpose of blockchain is the sharing of information. Any information shared is either accessible to all in public blockchain or restricted to a limited group of participants in a private blockchain. However, once information is entered into the block, any node operating in the system can access it. In a public or shared blockchain, this could lead to the sharing of sensitive competitive information. If it does, then that sharing could result in co-ordination between competing firms on pricing, discounts, customers list, production cost, turnover, sales and other market-sensitive information. That could result in anti-competitive agreements which are prohibited under section 3 of Competition Act, 2002 (“the Act”).

III. Blockchain Consortium

Apart from public and private blockchains, there is a third type of blockchain emerging which is a hybrid of public and private versions. This is known as a consortium blockchain, a combination of the ‘low-trust’ offered by public blockchains and the ‘single highly-trusted entity’ model of private blockchains. A consortium blockchain is one with a controlled user group. Its purpose is essentially to promote collaboration among companies, including competitors, to increase efficiency. The access to these blockchains are not open or exposed as public blockchains, but rather limited to consortium members.

Since the participation is limited, it becomes easier and faster to validate any transaction entered in or removed from the blockchain. This would lead to manipulation of consensus mechanism in order to prioritize favourable transactions.

IV. Cartels

A cartel exists when two or more enterprises enter into an agreement to fix prices, to limit production and supply, to allocate market share or sales quotas, or to engage in collusive bidding or bid-rigging in one or more markets. A blockchain, like any other form of communication, could serve as a means of operating a cartel, by sharing information related to price-coordination or price-fixing and deliberate future course of action, with great speed and accuracy.

V. Standard Setting

As the global market adopts blockchain technology and widens its usage, there arises a need to set access standards for the use of such nascent technology. The European Commission’s Guidelines on Horizontal Cooperation Agreements provided guidance for competitor collaborations. The guidelines define the conditions under which enterprises can combine complementary activities, skills or assets to achieve substantial economic benefits, share risks, lower costs, increase investments, pool know-how, enhance product quality and variety, and launch innovation faster, but without risking antitrust violations.

The same concepts apply to the use of blockchains as a means of commercial communication. Companies that use blockchains must still comply with basic competition law, to the extent that there should be clear regulatory guidance on access and entry issues. If it appears that the blockchain is an essential competitive resource (and this is not clear at this point), then no undue restriction should be imposed on participation, and the use of blockchain should not put any market player in a dominant position.

VI. Accessibility of Blockchain

The blockchain technology is still developing and accommodating diversified needs depending on specific functionalities. Since the market for blockchain services is unclear and yet to be defined, there is a possibility of some network growing to a dominant position as this niche market becomes more mature.

Assuming this to be the case, then access may need to be granted to any new market participant to enter in the blockchain. Control over entry to an essential facility can be used to foreclose new entrants in the market. Such denial of market access (considering blockchain as a defined market) by any entity, especially the one in the dominant position, is restricted under Section 4(2)(c) of the Act as anti-competitive behaviour.

VII. Analysis

For blockchain to function in a systematic manner without breaching competition law provisions, a certain regulatory framework is required. It is necessary to decide a distinction between commercially sensitive data that needs to be protected from data relevant to contracting parties in the chain. Additionally, any standard set to access this technology should be reasonable and non-discriminatory in nature restrictions that do not hinder fair use of such technology.

Apart from the mentioned changes required in the regulatory framework, competition authorities can use the advancement of the market in their favour. This would result in the collection of evidence, without it being tempered, helping in the effective enforcement of laws. It will also simplify the sharing of information in merger cases by participants using the relevant details from the blockchain without compromising their confidential information and in turn reducing their transaction costs. Hence global co-ordination can be achieved when framing rules to avoid any appreciable adverse effect on every state’s market.

VIII. Conclusion

Blockchain is a wave of technological advancement, creating numerous opportunities for existing as well as new participants. It is a user friendly and cost-effective technology which has made a significant impact on the market and continues to gain greater use. However, the opportunities are accompanied by challenges for the competition regulator to investigate and restrict violation of legal provisions or rules by this new innovation.

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