This article is written by Shishank Shaw, pursuing a Certificate Course in Competition Law, Practice and Enforcement from LawSikho. 

Introduction

Blockchain is an exciting technology with great but yet to uncover potential. From a competition law point of view, it is a new avenue with numerous questions and answers yet to be explored. This article explores the nature of blockchain technology, the pricing mechanism in blockchain and how it fits in the supply chain. This article would also discuss how competition law applies to Blockchain Technology and challenges and issues from competition law point of view.

What is blockchain technology

Before understanding blockchain technology, it is important to define certain terms for better understanding of the topic.

1. Blocks – They contain data or records of any transactions (currency, smart contracts etc.) each block has a unique fingerprint. Identifying information in one block requires referring to the fingerprint of the earlier block. Each block has a ‘single parent’ and is arranged in chronological manner so there is a traceable ‘chain’ back to the original block. In case of any mishap say a mismatch of signatures the entire blockchain breaks. This allows users to locate where the misconduct occurred so tampering with it is very difficult.
2. Nodes – To validate any transaction requires computers, nodes computers that are connected to the blockchain network to validate and relay transactions, they are the hardware behind blockchain technology. Nodes are responsible for creating individual blocks born out of transactions, putting them in chronological order and storing the blockchain itself.
3. Bitcoin – Created in 2009 this is the original cryptocurrency and the reason behind Blockchain’s popularity. It demonstrated the potential of blockchain to the world.
4. Smart Contracts – Smart Contracts are self-executing contracts i.e. they are self-enforcing and do not rely on any third party to execute it. They are designed by using computer codes with appropriate legal statutes to automatically execute the contract when certain conditions are met. For example, a purchase contract designed to execute itself when certain conditions like determined price, quantity, location are met.
5. Private Key – They are equivalent to passwords we use to login in our phones and our various websites. Private key in essence is a set of unique numbers that is used by users to verify any transaction that takes place.
6. Permission-less Blockchain – Also called public blockchain, it is a blockchain that anyone with the right equipment becomes a validator (users who validate transactions). In this sphere anyone can see the transactions that take place in the blockchain.
7. Permissioned Blockchain – Also called Private Blockchain, in this sphere conditions are imposed on who could become a validator and only allowed players can look at the transactions that take place. Usually, a consortium or a group of companies/firms would run such blockchain and participate in verifying the transactions. A good example of this would-be Libra blockchain developed by Facebook. This is permissioned but public blockchain, where users will be pseudonymized but the transactions that take place are transparent. The consortia that are operating Libra are Visa, Uber, PayPal, eBay, Vodafone Spotify, Lyft and more.

Blockchain as the name suggests is simply a chain of blocks that contains data. Each block has a cryptographic hash of the previous block, a timestamp and transaction data. 

As put by Nick Szabo (one of the founders of blockchain technology), this is like the process of a fly being suspended in amber – over time the fly is still visible, but more and more layers of amber are added.

It is an open distributed ledger which records transactions between two or more parties and these transactions are verified by validators. This creates a peer-to-peer network that will authenticate any transactions taking in blockchain without relying on any third party.

Once a data is stored in a block it cannot be updated retroactively without making changes in other blocks. To make any changes in the block, it is to be ratified by the majority in the network, making it secure and insusceptible to hacking.

How does Blockchain work

To display it in a practical scenario, take for example trading of bitcoins.

A and B want to trade bitcoins, to initiate the process, A will use its Private key to ‘sign’ a message containing:

i) A’s Bitcoin Address ii) The transactional amount iii) B’s Bitcoin Address.

These inputs are then run through a one-way encryption algorithm that produces a unique fingerprint for the block which contains the above information. This message is then sent from A to a node to be added to a block which is verified by each node in the blockchain network.

In the verification process, the nodes in the network re-run the encryption of the transaction message based on the inputs by A. If 50% or more of the node on the network arrive at the same unique output after running the encryption, then the transaction is deemed verified and transferred into a block and finally added to the blockchain.  After this, the blockchain will then show B as the owner of the bitcoins sent by A.

How does competition law apply to blockchain technology

Blockchain as marketplace

Competition law which primarily deals with sustainable competition between the players in a market. Since the primary field is the study of market, product and its player, blockchain should be seen as platform products that compete to attract both users and validators. The success of blockchain will depend on its ability to attract users on both ends. As a result, it will set attractive terms for both groups to get them on board. 

From the competition law’s perspective, it will set up a framework to ensure no anti-competitive activities take place in the market that can cause harm to its players and end-users. Unfair or arbitrary terms for entry into the market is an example of anti-competitive activity that can take place in Permissioned Blockchain.

Blockchain in supply chain

Blockchain in terms of supply chain refers to companies that create inputs that are required to run blockchain. An example could be a software company selling validating software for blockchain to operate along with the respective hardware. Validators may then use the blockchain platform to sell verification services to users of blockchain. These end users may be individuals or firms.

From competition law’s perspective, competition authorities may examine the upstream market, where the inputs to run blockchain are produced to downstream markets i.e., end users. Actions of users of blockchain, actions of those who control the protocol of blockchain and those who sell the inputs are in the radar of the authorities. 

What are the challenges and issues faced by blockchain technology due to competition law

Blockchain technology is successful because of its decentralized nature of authentication and transparency. It resembles the internet in the 90’s before google and other tech giants revolutionized our lives. 

Although blockchain is decentralized by design, the risk of centralization is effective. Today, a few selected participants de facto control leading blockchain networks and the potential for collusion and forms of monopolization is high.

Antitrust represents a fundamental gatekeeper of the economic democracy in present and future markets18 based on blockchain technology and DLT in general.[1]

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.[2]

Though Competition laws welcomes collaboration between competitors if such collaboration increases any of the economic efficiencies, they must be careful of the risks given below:

• Access to private blockchains- Private blockchains require permission of the members of the consortium before entering the network. They will draft a framework to regulate the membership and working of its members. A potential anti-competitive conduct is Restrictive Membership rules or policies that may create barriers to entry for a new entrant.
• Collusion Risks– Exchange of data in collaborations is normally seen in a positive light if it promotes pro-competitive outcomes. However, exchange of sensitive data for example costs, prices, future plans is seen in a negative light. This can lead to anti-competitive activities like price-fixing, output restriction, transactions approval etc. These activities are possible in Private Blockchains where the members of consortia dictate the rules for every activity. For example, members of consortia may unanimously decide to approve transactions above a certain sum and nothing below it. This is similar to price-fixing where competitors charge similar prices based on an agreement.
• Minimum Resale Pricing– Using smart contracts, players can set resale price maintenance as a condition to execute the contract.

Conclusion

In conclusion, blockchain is a technology that has the potential to disrupt several markets. From a competition policy view, it is offering endless possibilities. From Antitrust point of view, the concerns largely remain the same like foreclosure of competition, acquisition by dominant entities, and denial of entry to the network. These are however subject to change as we learn more about it and since markets are dynamic laws around it are always evolving. Competition Agencies should also focus on studying and exploring this technology and understanding the risks and opportunities it poses, especially private blockchains and development of consortia of members.   

References

1. Is Blockchain the Real Antitrust Game Changer? (competitionpolicyinternational.com)
2. https://www.freshfields.com/en-gb/our-thinking/campaigns/digital/fintech/blockcha

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