Blockchain technology has burst onto the scene and into the public consciousness over the last few years. While the securities and privacy law questions surrounding blockchain technology have received much attention, perhaps less obvious are the potential antitrust issues raised by the technology.
Although these issues are nascent, they are not wholly theoretical. For example, on March 16 the FTC announced that it is creating a Blockchain Working Group to look at, inter alia, competition policy. “Cryptocurrency and blockchain technologies could disrupt existing industries. In disruptive scenarios, incumbent companies may sometimes seek to hobble potential competitors through regulatory burdens. The FTC’s competition advocacy work could help ensure that competition, not regulation, determines what products will be available in the marketplace” (FTC Blog Post). And in January of this year, the Japan Fair Trade Commission also indicated that it may look into the competition policy issues involving blockchain-based cryptocurrencies.
This blog post briefly discusses some of the potential antitrust issues associated with blockchain technology.
What Is Blockchain Technology?
Entire papers and books have been written about what blockchain is and how it works, and obviously we can’t cover all the issues here. In a nutshell, blockchain technology consists of three parts: (i) a peer-to-peer network, (ii) a consensus mechanism and (iii) a blockchain. The peer-to-peer network allows network participants to communicate with each other directly, without the need for a centralized, trusted intermediary. The consensus mechanism allows the network to agree upon the validity of transactions that take place over the network. And the blockchain itself consists of a shared ledger of transactions that is typically open for inspection by all network participants.
For more background information, see Orrick’s Blockchain and Cryptocurrency webpage.
Potential Antitrust Issues Raised by Blockchain Information Sharing
Some blockchains simply record the transfers of tokens between and among network participants. However, blockchain technology is highly malleable, and blockchains can record other information. If that other information includes price or cost information of goods or services, and the information is available to network participants who are also competitors or potential competitors, the technology may facilitate information sharing that would be prudent to avoid. It may be possible through cryptographic mechanisms, information firewalls or the like to limit one competitor’s access to, e.g., another’s current or future pricing information. In addition, in highly concentrated markets, even the sharing of non-price information might be argued to cause certain issues. For example, if firms fear that any moves to try to capture more of the market may become transparent through the blockchain and prompt retaliation by competitors, they might be dissuaded from trying in the first place.
Potential Antitrust Issues Raised by Setting Blockchain Standards and Rules
Industry standards often enable multiple companies to produce and share interchangeable or interoperable products, and are therefore generally pro-competitive. However, the formation and promulgation of industry standards can create antitrust risk. For example, if a standard favors one competitor’s technology over another’s, and is adopted in a non-transparent manner that obscures the ownership interest, the standard could be argued to create or enhance market power through industry “lock-in.” For this reason, network membership criteria should be objective and reasonable, and blockchain technology standards should be adopted pursuant to transparent and fair processes.
Blockchain consensus mechanisms – which can be thought of as resulting from adopted standards – may also be subject to antitrust review. For example, most blockchain networks require a certain number of network participants (or “nodes”) to agree that a given transaction is valid. The validation mechanism could raise antitrust issues if it, for example, favors certain network members over others (e.g. in connection with processing time or bandwidth), boycotts the transactions of certain members, etc.
Potential Antitrust Issues Involving Access to Private Blockchains
Some blockchains are open to any and all interested parties. (Bitcoin is the most obvious example.) Other blockchains involve closed networks open to participants only by invitation. As with other competitive collaborations, blockchain participants should ensure that they are not excluding competitors or others for anti-competitive reasons with an anti-competitive effect, and that the rules for expulsion of members (if any) are clear, objective and not anti-competitive.
Given the inherently decentralized nature of blockchain technology, most implementations are likely to cross numerous borders. This may make determining the applicable law particularly complex. Finally, another potential issue arises from the supposedly irreversible or immutable nature of blockchain transactions. If a court orders a change in the practice of a particular blockchain, can such an injunction be implemented given the nature of the technology? If not, what are the parties to do?
It is far from clear how regulatory agencies or the courts will apply antitrust law to blockchain technology. However, it is abundantly clear that competitors should not simply ignore the possible application of traditional antitrust concepts to this emerging technology.