This article is written by Apurv Umredkar, pursuing a Certificate Course in Competition Law, Practice And Enforcement from LawSikho.
Introduction to Blockchain
Blockchain is a technological advancement based on Distributed Ledger Technology (DLT) consisting of a decentralized computer network system for the purpose of P2P (Peer to peer) information or data exchange by its authorized users. With the innovation of this technology, users are able to anonymously and securely make transactions in a very fast manner. The system is based on several blocks attached with each other in an encrypted manner and every time a new transaction happens, it is added to the chain of blocks, hence the term Blockchain. This technology has brought with it some of the really amazing features like absence of centralized or governmental authority, trustworthy system, helps in safeguarding our identity by providing anonymity and systematic record management which ultimately enhances the dependency on the blockchain. As can be seen from recent developments, this technology is mostly being used in the virtual form of currencies (cryptocurrencies) which are now becoming a trendsetter in the financial and banking world.
According to the NASSCOM Avasant India Blockchain Report 2019, blockchain technology is used mostly in Financial Services, Infrastructure, Banking and Media. Given the growth rate, this technology is going to disrupt the major financial systems of the world. But as every coin has two aspects, blockchain technology is not totally flawless. It carries with it some potential risks which are necessary to acknowledge so as to avoid possible future intricacies. The author by way of this article delves into the blockchain system from a competition law perspective. A synopsis of the interlink between the two entirely different yet interlinking concepts is provided. Since the topic ‘blockchain’ is naïve in nature, the information relied upon while writing this manuscript is limited. The author has tried to provide a perspective by critically investigating the rising concerns. So without further ado, let’s begin.
Enigmatic link between blockchain and antitrust
The possibility of any connection between blockchain & antitrust laws is very hard to comprehend. The reason being, both these subjects are at their nascent stage of development and are yet to be considered as grown-up matured subjects. As far as blockchain is concerned, the majority of the people across the globe don’t even possess a basic understanding of blockchain, let alone investing in it. Because people are so much acclimatized into the traditional financial system of physical notes and government issued coins, that it is hard for them to accept a system which isn’t even being governed by anybody. Also, the person should have more than basic technology knowledge to use blockchain. Apropos the antitrust laws, they are showing signs of future potential with the ever-growing acceptance and new legislation in various jurisdictions especially in the last 2-3 years. Nevertheless, they cannot be construed as flawless or fully developed aspects of the law. As a matter of fact, everyone finds it hard to understand the underlying meaning and hidden connection between the blockchain and antitrust laws. Regardless of the above-mentioned fact, one can find the cardinal links between these two aspects. The author has prepared a list of some problematic antitrust issues which may arise in blockchain in the next paragraph.
Antitrust intricacies in blockchain systems
Most of the time, the blockchain mechanism is considered to be neutral (neither pro or anti-competitive) or sometimes even pro-competitive. By virtue of its transparent and efficient business model, various tech enthusiasts have claimed that it is going to have a more of a positive effect than any alleged negative consequences. But this transparency and openness to the users might pose a great risk of various future legal intricacies. Although the data of a transaction is encrypted, it provides an insight into the sensitive commercial information like purchase history, transaction receipt, corporate accounts etc. These are some of the confidential reports which if placed into the wrong hands, might lead to a huge loss or unbearable consequences for the users. Keeping in mind these points there are some specific questions raised on blockchain systems if we observe it though the competition law lens –
- Data Exchange and Collusion – The public visibility of the data present in the blockchain system is what is feared by the competition lawyers the most in this aspect. The data can be easily accessed by any user and this adduces the possibility of collusion between the parties. Although this feature may lead to greater public accountability, on the contrary it may also cause reduction in competitiveness among the players. The tactical data including price, discounts, risks, investments, quality, quantity and turnover can be misused so as to gain illicit advantage by the potential competitors. Of all these, the determination of future pricing is among the riskiest things to be misused. To counter this negative effect, companies must be regularly aware of their confidential details which are shared on a huge public platform. A cryptographic layer of protection might be added for the specialized commercial sensitive data. The smart contract feature of the blockchain system is also an important factor that might lead to the collusion in the market by setting price algorithms such that they will adjust on their own in case a smart contract is satisfied. Entities may also form a cartel where they exchange data on price, output, production and other sensitive information. Entities may also enter into a consortium by creating a Joint Venture agreement.
- Standardization Intricacies – To successfully operate the blockchain ecosystem in a plethora of sectors, it will require a standard protocol and pre-defined set of regulations which will help in maintaining the minimum basic requirements that need to be fulfilled. Such agreements lay down the procedures which each of the members has to follow. Basically, they will make the parties meet the technical requirements pertaining to production, distribution and other such business aspects which will facilitate smooth interplay between the authorized members of the blockchain system. While this might be for legitimate purposes, it can also lead to certain anti-competitive effects if the parties explicitly decide to reduce price, eliminate competition, or create entry barriers. They pose a great threat of restricting innovation and development and may also possibly lead to denial of market access by creating barriers to entry for new upcoming players. Therefore, competition law may apply to such standardized agreements which pose a risk of appreciable adverse effect on competition. This will come under the ambit of Section 19(3)(a) of the Competition Act 2002.
- Access to blockchain and Abuse of Dominant Position – Oftentimes a situation arises when private blockchains are created in such a manner that it leads to access only to certain authorized users. This might seem normal but in such cases, some parties are not given access to the blockchain system without any due cause or justification. The dominant entities impose undue limits & restrictions as to who will be a member of the group based upon the prior requirements. The concept of ‘refusal to deal’ stipulated in the Competition Act 2002, will play a role here. This unnecessary burden on competitors will also be held as ‘Abuse of Dominant Position’.
- Mergers and Joint Venture/Risk of forming an Anti-Competititve Agreement – There is a possibility of different firms in the same blockchain system engaging themselves in a manner that is proscribed by the competition regimes. In the Indian Competition parlance, Section 3 of Competition Act, 2002 proscribes entities from entering into an agreement having an Appreciable Adverse Effect on Competition. In the blockchain network, plenty of transactions take place and that too without any governing body or centralized authority. This feature aggravates the possibility of rapid formation of cartels and other anti-competitive concords. The entities may make this happen either by creating a pact which mandates all competitors will use a uniform blockchain system or by each of them having their own separate blockchain system. They may collude with each other to reap unauthorized benefits and manipulate that particular market as per their own whims and wishes. For example, if there is a merger between two entities of the same level in the blockchain system. There is also a chance of merger or collaboration between horizontal cryptocurrencies. If a dominant crypto company buys two or more crypto entities, then this act would reduce the already dominant position and will increase the stronghold of the buying crypto company. One way of tackling this problem is by taking help from the digital ledger system of the blockchain system through which ledger details can be accessed for providing evidence in curbing cartels. But in a practical sense this is easier said than done due to the anonymity provided by blockchain. It will become a cumbersome task for law enforcement authorities to trace down the person or entity responsible for formation of such illicit agreements. The unique feature of anonymity weighs equally on both positive and negative aspects.
- Using Blockchain to be construed as an agreement? – There’s an ambiguity as to whether the fact of users or persons participating in the blockchain will be taken as an indication of proper agreements or not? The Indian Competition Regime by way of section 2(b) provides a comprehensive definition of an agreement. In a plethora of cases, the conundrum regarding the scope and ambit of agreement is objected to. The Competition Commission of India has up till now tried to define an agreement in the widest possible manner. This is done to ensure that any transaction carrying any anti-competitive risks must not escape the scrutiny of the act. Even a nod or a wink is considered as sufficient to prove the existence of an agreement. Given such broad interpretation to the meaning of agreement, the parties engaged in blockchain transactions come under the ambit of it. The blockchain users act by way of forming a concord to enable successful execution of transactions in the blockchain system.
- Quandary over Jurisdictional issues – Due to the anonymity and global virtual access, it is a tough task to set a defined jurisdictional boundary and regulation for blockchain. And apart from this, the fact that each and every jurisdiction has its own unique set of laws. This further enhances the ambiguity regarding jurisdictional issues.
- Absence of transparency in Blockchain – Since blockchain is properly understood by very few people across the globe, there’s a lack of proper approach and guidance for anyone who is new to the blockchain world. The information contained in the form of data in the digital ledger system can only be accessed by the authorized members. If the entities or members of a blockchain unethically use this feature to create a cartel or anti-competitive pact, it will be very difficult to track down such malicious companies. Because the data which can be used as evidence to make culprits liable is not accessible to unauthorized users, this will reduce the burden on law enforcement authorities to curb such illicit practices. Added to it is the anonymity part which aggravates the easiness with which these enterprises perform illicit tasks.
- Blockchain as a dominant entity – Due to the fact that the whole blockchain system operates in a decentralized manner, it does not have any headquarter or head offices, rather it functions on the basis of different users that are connected to each other through blockchain server. And if for the sake of rectifying dominance, then we will have to construe it as a collective dominance, a concept which as of now is not yet recognized by Indian or any other competition jurisdiction across the globe. Therefore, considering blockchain as a dominant entity can’t be backed by a solid proof. As a result, given the current facts and legal ambit, blockchain cannot be considered as a dominant entity. However, if a certain member of blockchain or a certain entity gains a considerable market power in their operation of blockchain, then that particular entity can be termed as a dominant enterprise.
After the perusal of this article, one will be able to grasp the competition issues in blockchain mechanism. From a legal perspective, blockchain is not tightly regulated by law enforcement authorities. But in future there’s a possibility that laws revolving around will strengthen up to provide an effective management and regulatory enforcement system, specifically laws pertaining to financial matters. the blockchain and antitrust laws, both have limited scope and exposure as compared to the other similar aspects. Due to the absence of concrete information and detailed theory, any of the points made above depicting a nexus between blockchain and antitrust laws must be taken as a possibility. There’s yet to find out more about blockchain as it is considered the most innovative and revolutionary thing after the internet. With a proper assessment, thorough analysis and in-depth research, we can find out more about the blockchain system and the ill effects it has or will have on the socio-legal context across the globe.
Until then, we will have to deal with the problems as per the current regimes and solutions. With the speed with which it is growing and developing, soon we would be aware of the new development of the blockchain ecosystem. Although analyzing through the competition law perspective, there isn’t much to discuss or talk about since both the Competition Law and Blockchain are naïve in nature. Maybe in future the advancements in technology and competition regimes might make another aspect on which the intricacies could be dealt with.
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