Exploring the Enigmatic Realm of Blockchain Technology through the Competition Act, 2002

[By Shivangi Paliwal]

The author is a student of National Law University, Jodhpur.

 

I.          Introduction

Blockchain technology has gained significant attention in recent years due to its potential to revolutionize various industries. India, currently, does not have any cryptocurrency legislation in place, although the parliament has proposed various bills to address the regulatory concerns associated with them. In January 2021, it was reported that the Indian Parliament was considering the “Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.”

The Competition Act, 2002 prohibits any practice which leads to adverse appreciable effect on competition. Cryptocurrency and blockchain technology can be used in an anti-competitive manner, thus it is pertinent to address concerns surrounding blockchain technology within the framework of the Competition Act, 2002,

This article delves into key questions regarding blockchain technology, such as its classification as an enterprise, the treatment of agreements within the blockchain ecosystem, the jurisdiction of the Competition Commission of India (CCI) over blockchain enterprises, competitive concerns raised by blockchain, and the impact of algorithmically determined prices. Additionally, relevant case laws from USA too, are analyzed to provide a comprehensive understanding of the legal landscape surrounding blockchain technology.

II.          Classification of Blockchain Applications as an Enterprise

Section 2(h) of the Competition Act defines an enterprise as “a person or a department of the government engaged in any activity.” In the case of Re: Dilip Modwil and Insurance Regulatory and Development Authority, the CCI adopted an expansive interpretation of the term “enterprise,” encompassing entities engaged in economic and commercial activities. Accordingly, based on the joint discussion paper released by the CCI, blockchain applications providing distributed ledger technology (DLT) services can be regarded as enterprises governed by the Competition Act.

III.          Agreements within the Blockchain Ecosystem

The Competition Act’s Section 2(b) defines an agreement as any arrangement, understanding, or action in concert, regardless of its form or enforceability. Section 3 encompasses the prohibition of anti-competitive agreements among enterprises, individuals, or groups of enterprises or individuals, pertaining to various aspects such as production, supply, distribution, storage, sale, pricing, and trade of goods, as well as the provision of services. More specifically, the Act imposes restrictions on firms, or associations of firms, from engaging in collusion with other firms or associations of firms, regardless of whether they operate within the same or different levels of the production chain. In the context of competitors engaged in the same economic activity, these anti-competitive agreements commonly manifest as collusion, encompassing practices such as cartelization or bid rigging.

The CCI’s joint guidance paper acknowledges that when two firms or individuals participate in a blockchain application with pre-defined rules, they have effectively entered into an “agreement.” Consequently, any anti-competitive conduct arising from participation in a blockchain application may be deemed a contravention of the Competition Act.

IV.          Jurisdiction of the CCI over Blo. ckchain Enterprises

Blockchain technology transcends geographical boundaries, and participants often remain anonymous. While this poses challenges, the CCI retains jurisdiction over global blockchains if it can demonstrate that significant adverse effects on competition in the relevant Indian market have occurred, as stipulated in Section 32 of the Competition Act.

V.          Competitive Concerns Raised by Blockchains

  1. Opacity Effect of Permissionless Blockchains

Permissionless blockchains, characterized by data encryption and pseudonymous nodes, pose challenges for competition authorities in analyzing blockchain application data. This opacity effect makes it difficult to identify economic evidence of anti-competitive conduct. However, the CCI has acknowledged this challenge in Re: XYZ Corporation, emphasizing the need for innovative approaches to address anti-competitive concerns within permissionless blockchains.

  1. Enforceability of Permissioned Blockchains

In contrast to permissionless blockchains, permissioned blockchains are governed by centralized entities that scrutinize and list participants. As a result, concerns regarding enforcement and anti-competitive behavior are minimized within permissioned blockchains.

  1. Exchange of Sensitive Information

Blockchains often contain sensitive information, including pricing, discounts, production, sales, costs, and strategies. The CCI has established, in various orders, that the exchange of commercially sensitive information can lead to an appreciable adverse effect on competition, contravening Section 3 of the Competition Act. For instance, in Re: Cartelization in Industrial and Automotive Bearings, the CCI held that the exchange of commercially sensitive information is an anti-competitive practice. Therefore, if a blockchain application involves the exchange of such information, the CCI has the jurisdiction to investigate the matter.

  1. Smart Contracts and Anti-competitive Behavior

Smart contracts, integral to the functioning of blockchains, are self-executed digital contracts that automatically execute based on predetermined conditions without human intervention. In the case of Hyundai Motor Company and Kia Motors Corporation, the CCI ruled that the mere use of algorithms in smart contracts is not inherently discriminatory. However, it emphasized that such algorithmic means should not be utilized to promote anti-competitive behavior in the relevant market. Given that algorithms are an essential component of blockchain technology, the CCI will closely scrutinize any instances where algorithms are employed to facilitate anti-competitive conduct, raising concerns for blockchain applications.

  1. Impact of Algorithmically Determined Prices on Collusion

The Competition Act stipulates that human involvement is necessary to provide relief in cases of collusion. The CCI’s decision in Samir Agarwal v. ANI Technologies affirmed that algorithmically determined prices do not automatically lead to collusion or cartelization within the scope of competition law. However, it is worth noting that every process involved in the functioning of a blockchain is algorithm-based, presenting a quandary for the CCI in assessing the potential for collusion or anti-competitive behavior within blockchain ecosystems.

VI.          Position in USA

Under the U.S. antitrust regime, the following are the major cases which shed light on competition concerns associated with Bitcoin technology.

In the case of Gallagher v. Bitcointalk.org, a Bitcoin enthusiast filed a claim against the Bitcoin Foundation and the forum owners, alleging that they conspired to exclude him from the website, thereby stifling competition in the Bitcoin space. The plaintiff argued that this conduct violated Section 1 of the Sherman Act, which prohibits anti-competitive agreements and conspiracies. The court considered whether denying access to a blockchain facility, in this case, Bitcointalk.org, could constitute an infringement of antitrust law.

Ultimately, the court determined that the plaintiff failed to present cogent and viable legal claims. Granting leave to amend the claims would be futile and cause unnecessary delay. The case is currently pending appeal. In United American Corporation v. Bitmain, the plaintiff, a protocol developer of blockchain transactions and mining cryptocurrencies, alleged collusion among certain mining pools, protocol developers, and crypto-exchange defendants. The plaintiff claimed that these entities conspired to manipulate a network upgrade by creating a new hard fork, thereby gaining control over the Bitcoin Cash cryptocurrency. The court examined whether the plaintiff demonstrated a plausible conspiracy, defined a relevant product market to establish an unreasonable restriction of trade, and showed evidence of antitrust injury. Ultimately, the court concluded that the plaintiff failed to satisfy these requirements. It determined that the plaintiff did not sufficiently demonstrate a conspiracy, failed to define a relevant product market, and did not establish any antitrust injury.

VII.          Conclusion

Blockchain technology presents both opportunities and challenges within the legal framework of the Competition Act, 2002. The classification of blockchain applications as enterprises, the treatment of agreements within the blockchain ecosystem, the jurisdiction of the CCI over blockchain enterprises, competitive concerns raised by blockchains, and the impact of algorithmically determined prices are crucial aspects that demand careful analysis. Case laws provide valuable insights into how the CCI interprets and applies competition law principles in the context of blockchain technology. As the technology continues to evolve, it is essential for legal and regulatory frameworks to adapt and address the unique characteristics and potential anti-competitive implications of blockchain technology to ensure fair and competitive markets in the digital era.

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