Blockchain and Competition: Anti-Trust Practices and (In)Sufficiency of Legal Regime

[By Abhinav Gupta]

The author is currently a student at National Law University, Jodhpur.

Introduction

The ever-increasing integration of technology with daily functions has led to better innovations and has revolutionized commercial transactions. One such prominent innovation is Blockchain Technology. It has varied applications and has the potential to impact the functioning of a wide array of commercial activities, from a small

It is expected that the Blockchain Technology will significantly. Most of the financial institutions have shown great interest in blockchain technology because of its and significantly reduce processing time. Despite this, the businesses using the blockchain technology for their operations need to be very careful of anti-trust issues, especially in cases where they have to interact with their competitors. However, blockchain does not pose any inherent competition threat to the firms. It has to be analyzed on the basis of each situation, judging by the information that was exchanged.

In this article, the author seeks to explore the anti-trust challenges posed by the use of blockchain and whether the current provisions of the Competition Act, 2002 (hereinafter “the Act”) are sufficient to tackle these challenges.

Blockchain Technology

Blockchain is a ledger of transactions. It is a distributed ledger that resides on each participant’s device. In order to complete a transaction on a blockchain network majority of the participants need to consent. This is known as a consensus mechanism. Each copy is updated whenever a transaction or set of transactions is completed. By using the blockchain, the stakeholders are placing their trust in a technological platform and this rules out the need for intermediaries such as banks, governments, brokers. In order to better understand the underlying anti-trust challenges, it is important to understand the types of blockchain networks.

Public/Open Blockchain: Public Blockchain is based on an open network. The information on the network can be accessed and joined by anyone, as it is available in the public domain. For e.g. Bitcoin Blockchain is a public blockchain, where anyone can read the data on available on it.

Private/Permissioned Blockchain: As the name suggests, a private blockchain or permissioned network requires a permission/invitation for access, hence restricting the participant pool. The essential feature of private blockchains is that it cannot be accessed and identified by outsiders and only parties to a particular transaction can access the information available over such a network.

Anti-Trust Practices

Collusive Behavior:

A major issue posed by the advent of blockchain technology is that it might lead to collusion among the competitors in a market. The major players in the market might come together and form a blockchain consortium. Concern has been raised that blockchain is merely a means of colluding and getting away with it. A discussion paper on ‘Blockchain Technology and Competition Policy’, issued by the Organization for Economic Co-operation and Development states that the most essential enabling factor behind the blockchain technology is ‘authentication’.  This paper also analyses whether there is a possibility of collusion via the use of Blockchain.

There is a possibility of collusion when all the competitors start using the same blockchain network. In this scenario, it will become easier for the cartel participants to identify deviations due to the increased transparency. An additional benefit is that as most of the contracts entered into between the competitors will be smart contracts backed by blockchain. Hence, in case a cartel participant deviates from the agreement there will be automatic punishments. Blockchain’s transparency can facilitate the exchange of information between the participants of the blockchain. Due to this, price coordination may emerge between the members as they will get to know about price changes as soon as it happens and can adapt to such change accordingly. Moreover, due to increased transparency provided by a market-wide blockchain, the firms in an oligopolistic market may coordinate without any explicit agreement or direct contact.

A blockchain application works in different ways and hence, there cannot be a straitjacket formula of finding out if there is collusion or not. Ordinarily, where there is no exchange of personalized consumer information or disclosure of price information, it cannot be considered anti-competitive.  This means that an investigation for an alleged anti-competitive agreement over blockchain would largely be fact-based, investigating the information that was shared between the blockchain participants.

Abuse of Dominance:

The blockchain consortium formed by the firms in the market by coming together might acquire a dominant position in the market. If this is the case, the consortium may refuse to provide access to a new entrant. Such refusal can be considered as ‘abuse of dominance’. There can be instances where the owner of the private blockchain network does not directly refuse access to the new entrant but imposes a certain set of requirements that needs to be fulfilled in order to be part of the consortium indirectly deterring new entry into the market. The risk of exclusionary conduct is higher in private blockchains as it requires invitation or permission to access, unlike public blockchain which is open to all. This will not only hamper the competition in the market but would also deter new players from entering the market, slow down innovation and prevent the emergence of new products in the market.

The (In)sufficiency of Current Legal Regime

The biggest problem regulatory authorities may face while dealing with blockchain is in conducting investigations. The issue arises here due to difficulty in the detection of anti-competitive practices and the identification of the organizations involved in such practices. Considering the fact, that blockchain is based on the concept of pseudonymity it will be a daunting task for the regulators to identify the perpetrators and impose penalties on them.

Furthermore, it will be difficult for the authorities to obtain the data shared over the blockchain network to conduct an investigation. The blockchain participants might share data over permissioned networks. Considering only people who have received authorization can access the network, authorities have to find a way to compel the organization to share the data to conduct the investigation. Moreover, as provided by the statute that certain factors (see Section 3 of the Act) have to be taken into consideration before analyzing the adverse effect, it becomes even more important to access the data.

It is to be noted that Section 29 of the Act, which provides for a procedure for the investigation of combinations, mandates the parties under investigation to disclose information about the combination to the public and persons affected or likely to be affected by such combination. Moreover, by virtue of Section 43A, the Competition Commission of India (hereinafter “CCI”) has the power to impose a penalty on the party which fails to disclose the information about the combination upon order of the investigating authority.

In light of these provisions, it be can be seen that even if the investigating authority does not have access to a permissioned network, it can compel the alleged parties to anti-competitive behavior to disclose the details shared on the blockchain network. This would facilitate the investigation process to some extent. However, due to the lack of any other means to ascertain the information that was shared over the network it becomes difficult for the investigating authority to identify if all the information has been disclosed or not.

All these issues still need to be addressed by the regulatory authorities and the Courts in India, meanwhile, the CCI has to identify competition hazards associated with blockchain technology and accordingly modify its policy to safeguard market players. It has to fulfill its duty as provided under Section 18 i.e. to ‘eliminate practices having an adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade.’

CCI does have a procedure in place by which it can review the economic policies and legislations. Under Section 49(1) of the Act, upon the reference of State or the Central government, the CCI has to give its opinion, on the impact of competition caused by particular government policy or legislation.  It is noteworthy that CCI issued the Competition Assessment of Economic Legislations and Policies Guidelines, 2016 to assess upcoming /existing economic legislations and policies made by the Government. There is a need to ensure the appropriate application of these guidelines to make an environment conducive to fair competition while being receptive to this new technology with the ability to revolutionize the market.

Conclusion

With the increase in usage of the blockchain technology by the financial institutions, the regulator’s scrutiny will also tighten. This is important in order to protect the interest of the consumers. At the same time, it must be recognized that unreasonably strict regulations might deter market players from using and developing this revolutionary technology. Challenges such as unfair competitive edge, risk of collusion, and abuse of dominance arising from this technology need to be pre-emptively tackled. The blockchain technology is in itself neither anti nor pro-competitive and its regulation is better than prohibition. It is agreed that we have to stay vigilant in order to prevent unfair practices but at the same time, we need to be receptive to new technology and innovations in order to progress further.

No doubt that blockchain poses risks of facilitating anti-competitive practices such as collusion or abuse of dominance having appreciable adverse effects on competition in India, especially in the case of permissioned networks. However, it has to be understood that the technology is not the determining factor of anticompetitive conduct but the way it is used is. In such a scenario, barring the use of a revolutionary technology like blockchain is not the right way to go. Hence, the success and development of this technology would largely depend on how the regulators perceive this technology and how much trust do people place in its usage.

Leave a Reply

Your email address will not be published. Required fields are marked *

*
*