Are Blockchain and Competition Law Compatible?
An identification of the clashes between blockchain technology and competition law today.
Blockchain technology, somewhat an analogous landscape to that of search engines and e-commerce platforms in the 1990s, is giving rise to substantial Competition Law issues. The question is: are they mutually exclusive?
Monopolies form naturally in industries requiring specific materials or technology to operate. Barriers to entry give the largest – and often the first – supplier in an industry, a substantial advantage over potential competitors. The blockchain industry is not an exception.
Bitcoin acquired a monopoly position partly due to the overwhelming volume of mining equipment supporting the network, expressed primarily in power consumption. Therefore, the formation of a similar sized network is economically inefficient.
For another large network to co-exist, it needs to have new properties and uses, possibly becoming a natural monopoly on its own merit. Enter Ethereum – allowing users to develop smart contracts and create their own crypto-assets. It also proposes a transition to a consensus mechanism which cuts down on 99% of its current energy consumption.
Any imitator of these natural monopolies will always lag behind in terms of market capitalization, capacity and expenses for infrastructure maintenance.
Determining the dominant position
An issue arises when trying to ascertain whether an open source public blockchain, such as a DAO, is in a dominant position. With no legal personality, can it hold a dominant position? Can you have a monopoly without a monopolist? Is it in a dominant position if it is left purposely open for anyone to replicate it? The concept of “dominant position” may very well be inapplicable in this case.
Depending on how the dominant position is ascertained, assignment of liability follows. One way of determining this is by calculating the number of users within the network. This would mean that the dominant position is held collectively by the users. 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. One should also consider whether the blockchain competes with other technological or non-technological means to achieve the same end-result. Here, the blockchain would be integrated into a wider market – similar to the integration of online sales into the general sales market. The geographical dimension also needs to be addressed.
Blockchain can be a vehicle for anti-competitive practices and there can also be anti-competitive practices within the network itself such as collusion by validators.
Exclusionary practices may be combined with abusive practices especially on private blockchains where there is an element of central governance such as:
- Limiting access to the blockchain;
- Predatory pricing in transaction fees;
- Creating a dual blockchain environment, one for those who pay the most and one for those who pay less and whose transactions lag behind as a result.
How can competition law survive this technology?
Even if a dominant position is determined and anti-competitive practices are detected, an issue remains if the persons responsible are anonymous. A potential solution (albeit difficult to implement) would be the possibility of revealing the user’s identity when a violation is detected. A further challenge is the difficulty to implement intervention measures on the blockchain when anti-competitive practices are identified.
An upstream approach is therefore necessary. Law has to become code and basic rules of conduct and safe harbours should be encoded in the blockchain’s governance at development stage. This remains an issue with existing blockchains especially if created anonymously. Therefore, at this stage, the regulator has to focus on observing practices and treat the technology as the disruptive technology that it is.
Dr. Jade Fenech
Jade joined E&S Group as a legal associate in 2018. Before joining E&S Group she practised with a litigation firm for two years. She holds a Bachelor of Laws Degree and a Masters of Advocacy from the University of Malta and was admitted to the bar in 2019. She is now reading for a Masters in Blockchain and Distributed Ledger Technologies at the University of Malta. Her primary areas of practice are corporate and commercial law, financial services and fintech.
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