Posted on July 19, 2021
Authored by Vallari Dronamraju*
Image Source: Built In
The internet and the digital economy have raised questions on the viability of blockchain technology and the ability of sectoral regulators to address issues in digital markets. Further, the World Economic Forum has stated that 10% of the global GDP will be stored in blockchains by 2027. This indicates that blockchains will be an intricate part of financial transactions in the years to come and will require significantly higher regulatory attention.
Recently, the Competition Commission of India (“CCI”) released a discussion paper stating the competition concerns arising from the development of blockchains in India that come with the evolution of cyberspace. It described the growing nature of technology and digital markets in India along with the objective of sustaining and promoting the economic concerns of several stakeholders in the market.
Blockchains are a virtual chain of information in blocks of data, grouped in a sequence, that can be openly shared among its users to form an entrenched record of transactions. It maintains a decentralised, distributed, and secure record of the transactions occurring. Blockchains can help store a range of records that includes payment transactions, sales records, purchase history and are permanent.
Considering the implications for competition law, it is essential to distinguish between actions by users of the blockchain, for instance, firms competing in the downstream markets, and actions by those that control the protocol of the blockchain, and actions by those that sell inputs to the blockchain i.e., developers of validation hardware/software. This article will explore the positive and negative effects of blockchains on competition in the market and will further elucidate the regulatory concerns that surround the cross-section of blockchains and anti-trust policies.
Pro-Competitive Effects of Blockchains
Due to the decentralised nature of blockchain, the automated processes, and simplified claims management, blockchain technology may have pro-competitive effects such as lower transaction costs, regulation of entities, easier transactions for consumers, lowering barriers to entries, etc.
Blockchain technology lowers the cost of verification and can make markets more secure and efficient, thus able to expand the type of transactions that they are willing to engage in. For this, the data recorded on a blockchain must be accurate. In addition to this, smart contracts, which are agreements allowing execution of credible transactions between mutually distrusting agents, with no third parties, might provide a commitment device that will allow firms to soften price competition by self-executing under specific conditions. These may also enable small and medium enterprises to transact efficiently, reducing costs and increasing profits.
Additionally, permissionless blockchains are blockchains where authorisation is not required to participate and are easier to implement along with acting as economic incentives. For a higher degree of competition, these may be used to create digital marketplaces without assigning control over both prices and access to data for a single operator.
Furthermore, without the existence of a central intermediary, the digital platforms with blockchains, can turn these markets into more competitive ones. With the low entry barriers, enterprises are encouraged to develop new products and services. In markets where verification of the identity of an individual or the origin of the products is critical, blockchains may be used to create a database in a short period and at a lower cost.
Anti-Competitive Effects
Cryptographic protection may combat the risk of anti-competitive information exchange (for instance, price-fixing and collusion) between competitors. While blockchains may be a boon, some anti-trust concerns should be borne in mind to avoid abuse of power and exclusion of new firms and entrants. Blockchains may facilitate collusion as transactional information in the blockchain ledger may be seen by the other blockchain participants while excluding outside of this chain due to restricted access or encrypted data with pseudonyms. This information is authentic and may be shared on a real-time basis, increasing the risk of collusion. There must be adequate safeguards to ensure that the enterprises do not monitor activity and enter into collusive agreements. Given the automated nature of smart contracts, there could be a possibility of firms colluding in the market using the same blockchain, turning it into an oligopolistic enterprise’s paradise. It is also, however, possible to identify any deviation of cartel participants and smart contracts might also specify automated punishments.
In terms of the Indian Competition Act, 2002 (“Act”), Section 3(4), elucidates vertical agreements between enterprises, that may include smart contracts that self-enforce tie-in, exclusive supply, and distribution agreements, refusal to deal, and minimum resale price maintenance between entities at different levels of the value chain. An agreement between a blockchain and its nodes/wallet/exchange that requires the latter to use only the blockchain application in question will prohibit the latter from participating in any other competing blockchain application. The CCI explains that this is evident in permissioned blockchains where authorisation is required to participate and the role of each member is defined. Vertical agreements in a permissioned blockchain dealing exclusively may be appealing to a blockchain application if it wishes to be the only source of data for the transaction.
Furthermore, in the case of United America Corp. v. Bitmain, Inc., a federal anti-trust complaint was filed alleging a tight-knit network of individuals and organisations that manipulated the cryptocurrency market for bitcoin cash, effectively hijacked the network, centralised the market, causing a global capitalisation meltdown of more than $4 billion. However, in March 2021, the court dismissed the complaint with prejudice, holding that the plaintiff was unable to bring a valid claim against the defendants.
For abuse of dominance concerns, it is first essential to determine the relevant market. One of the key factors in this regard is market power, which may be assessed based on the number of users, number of recorded transactions, number of blocks, revenue, or a combination of these can be utilised to determine the dominance of the firm. Dominance may also exist within a blockchain when a participant achieves a position of power, exerting it in the functioning of a blockchain application.
The CCI’s discussion paper notes that in a market with lower barriers to entry, incumbent blockchain applications with a higher market share may be unable to unilaterally increase their price. The resulting competition among the incumbent and the new entrants would drive down the price charged. In a contrasting situation, a blockchain application with high barriers to entry could indicate higher market power.
Refusal to access data can be anti-competitive if the data is an “essential facility” to the activity of the undertaking asking for access. It is also possible for dominant blockchain applications to engage in anti-competitive conduct by bundling their blockchain application with digital wallet services to induce a user to use the blockchain application when they may only intend to use the digital wallet. The need for a technical standard for interoperability may be defined by a standard-setting organisation where blockchains used by different firms can interact with one another.
A dominant firm may significantly reduce its transaction fee to eliminate a competing blockchain from the market and subsequently increase its prices after the competitor exits. This predation strategy may be adopted by enterprises to gain maximum profit even in the digital marketplace. A blockchain application may be viewed as a dominant enterprise and all the participants may be viewed as collectively dominant. However, India does not recognise this yet.
Way forward for regulatory bodies
The lack of a consistent regulatory framework that enables businesses to innovate and develop the technology for a competitive and complex environment, in a mixed economy like India, might pose several challenges on the blockchain front.
Depending on the nature of the commitments, smart contracts may remove monitoring costs for authorities that are looking into behavioural remedy packages. However, these must not be designed to enable enforcement of any collusive or anti-competitive conduct of any form. It is also imperative that they consider changes in compliance relating to any request or orders that are issued by the CCI.
The CCI highlights in their discussion paper, that regulatory authorities are met with lesser than necessary evidence while investigating allegations of anti-competitive behaviour. Data procured from third parties to investigate is not verifiable from a third-party source. Therefore, it may be beneficial to collect data from blockchain applications that may facilitate an assessment of how a proposed combination of firms is likely to influence the competition.
Further, the pseudonymous nature of the nodes in a public blockchain may make it difficult to determine the real-world identity of the specific nodes that have resulted in collusion. Without being able to identify the enterprises that are involved, the authorities may find it difficult to undertake necessary measures to address the competition-related issues.
There also exists a lack of a medium of exchange for transactions in the blockchain mechanism, cryptocurrencies being a major player in virtual transactions. In India, the recent RBI circular on cryptocurrencies has stated that the banks and other regulated entities cautioning customers against using virtual currencies does not align with the Supreme Court order in 2020 that set aside the previously issued a ban on dealing in currencies.
Regulations like these will reinforce the need for a well-rounded path of implementation for a complex connection such as anti-trust laws and blockchain technology. Blockchains are evolving technology and there is little knowledge of the impact they will have on the competitive nature of the Indian market. With the increase in updates in the digital market sphere and the blockchain mechanism, it is imperative that the implications on competition law are explored by regulatory bodies and policymakers comprehensively.
*Vallari Dronamraju is an Editor at IntellecTech Law and a penultimate year law student at the National University of Advanced Legal Studies, Kochi with a keen interest in competition law, technology law and corporate law.
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