Author- Darshit Khare , Anshuman Verma
As blockchains is a developing technology, and most applications based on it are still in the proof-of-concept or pilot stage, there is little empirical data on how blockchain applications operate, particularly from the perspective of competition law. However, the technology is generating attention, and blockchains may become as widespread as the Internet was a few decades ago.
The internet and the digital economy had also generated issues about competition law’s ability to address new competition concerns that arose as digital platforms became more accessible. Consequently, it was concluded that the same set of principles of competition law are to be applied and enforced to the digital markets after understanding the key concepts like multi-sided markets and network effects. Similarly, understanding about the blockchain technology can assist competition authorities in addressing competition issues involving blockchain applications. Discussions among blockchain stakeholders and competition authorities on new market dynamics and paradigms could aid in gaining a quantitative grasp.
- Participation in a blockchain and agreements
Whether or whether participation in a blockchain may be defined as an agreement is one of the factors influencing the applicability of competition law to blockchain applications. For example, in a hypothetical case of alleged collusion in which competitors are accused of exchanging competition-sensitive information via a blockchain application, the first question would be whether participation in the blockchain application can be construed as a “agreement” under the Competition Act, 2002 (‘Act’). The Act defines an agreement as “any arrangement, understanding, or concerted action,” regardless of whether it is written or not, and whether or not it is legally binding. As a result, one may contend that two organisations or individuals have entered into a “agreement” when they participate in a blockchain application with pre-defined rules. This means that any anti-competitive behaviour arising from use of a blockchain application could be considered a violation of the Act.
- Blockchain as an “enterprise”
Blockchain applications, unlike traditional businesses, are decentralised, meaning that no single organisation makes choices. Rather, a number of entities are involved in the decision-making process. This brings up the question of whether or not a blockchain application can be considered a dominant business. One option is to consider all of the participants as collectively dominant. In India, however, collective domination is not yet recognised. Even in nations where the concept of collective domination is recognised, such as the United Kingdom, the European Union, and Singapore, minimal enforcement has taken.
A blockchain could be considered an enterprise under the Act. The Act defines an enterprise as “a person or a department of the Government…”, and a “person” as “an organisation of persons or a body of individuals, whether incorporated or not, in India or beyond India,” among other things. As a result, a blockchain application may be considered an enterprise (engaged in the provision of distributed ledger technology (DLT) services under the Act’s system).
Certain elements of a blockchain may influence a competition authority’s capacity to apply competition law to blockchain applications. For example, access to the blockchain’s data is restricted in a permissioned blockchain, whereas data encryption and the pseudonymous nature of nodes may affect the authority’s capacity to examine data from a blockchain application in a public permission-less blockchain. As a result of the opacity effect of a blockchain, it may be difficult for the competition authority to determine whether there is any economic proof of anti-competitive behaviour.
Furthermore, the pseudonymous nature of the nodes in a public blockchain application may mean that even if authorities are able to analyse the data on the blockchain to detect possible evidence of collusion, they may still be unable to determine the real-world identity of the specific nodes alleged to have colluded. This topic is also relevant in other areas of competition law. Authorities may be hampered in taking required actions to remedy the competition concern and penalise the concerned parties if they are unable to identify the enterprises involved in anti-competitive behaviour.
Blockchain applications can occur in any part of the world at the same time. When nodes/market participants of a blockchain application are located in multiple countries, it could create a jurisdictional issue for competition authorities around the world. Collaboration between competition authorities in different parts of the world can help address this difficulty. As a result, efficient competition enforcement would be dependent on rapid and accurate information exchange, communication, and coordination among competition agencies worldwide. Section 32 of the Act gives India the authority to investigate anti-competitive agreements, abuses of dominance, and mergers and acquisitions that take place outside of India but are likely to have a significant negative impact on competition in India. Therefore, international cooperation among competition authorities will be critical in addressing the jurisdictional issues raised by global blockchain applications.
- Exchange of information
One of the advantages of blockchain is its capacity to build trust by storing verified, unchangeable information. Blockchain applications make it easier to share a vast amount of data, boosting openness. Information transparency is supposed to increase competition in general. However, it is possible that information belonging to competitors who are members of the blockchain will be visible in some situations. Unless sufficient protections are taken in a blockchain application, the transactional information in the ledger can be easily accessed by blockchain participants. Due to restricted access (in the case of a permissioned consortium blockchain) or encrypted data with pseudonyms, the same information may not be accessible to organisations outside the blockchain (opacity effect) (in case of a permission-less public blockchain). Adequate precautions should be implemented to ensure that this feature does not allow competitors to reach an agreement and monitor each other’s behaviour.
However, it is crucial to analyse whether blockchain applications produce any differences in terms of information transmission compared to other existing systems (such as physical or digital exchange of information). One difference could be that information on a blockchain can be shared in near real-time. Due to the safe and unchangeable nature of blockchains, there may be higher trust in the veracity of data kept in them than in other systems.
- Self-enforcing smart contracts
Undoubtedly, smart contracts will play an essential role in the world of technology and commerce by enabling the creation of new products and services with the arrival of 5G, IoT, and AI. Smart contracts, on the other hand, could be utilised in a select circumstance to enforce and maintain collusive agreements without the need for considerable data sharing. Competitors could employ smart contracts to self-enforce collusion by deploying code and pricing algorithms that are consistent with the collusive agreement.
Smart contracts could also be used to self-execute punishment on a co-conspirator who breaks the collusive agreement’s provisions. A smart contract may, for example, be used to create a fund with contributions from each company. A smart contract may result in the immediate forfeiture of the sum and its distribution among the other firms if one of the firms deviates from the agreed price or output levels by reducing their price or raising their output. The smart contract could operate as a deterrent to deviation and so encourage collaboration if the loss to the deviator from forfeiture of cash exceeds the benefit from deviation.
- Way Forward
Awareness of potential competition difficulties in the context of blockchains may aid in the creation and deployment of blockchain applications in accordance with competition law standards. This can be accomplished by proactively engaging blockchain stakeholders (miners, developers, users, and so on) at an early stage in the technology’s development, informing them of potential competition law concerns and how competition authorities would address them. This research article is an attempt in that direction.
This advocacy effort is expected to persuade blockchain stakeholders to take the required precautions to avoid anti-competitive behaviour. For example, if the creators of blockchain applications are informed of the worry over the flow of competitively sensitive data among competitors, they may take adequate measures to remain compliant with competition legislation. Avoiding keeping such data on a blockchain could be part of the solution.
It may be able to code and integrate competition law requirements into blockchain applications with strong advocacy and, if possible, regulatory sandboxes, which would benefit both blockchain stakeholders and encourage competition in India.
The Competition Act, 2002 (12 of 2003) Section 2(b). (2012). ↑
Competition Commission of India. (2019). ↑
Collective dominance refers to a position of market power possessed jointly by a group of competing firms ↑
Section 2(h), Competition Act of 2002. ↑
Corporate capture of blockchain governance: The next big antitrust issue? (2019) ↑
Section 32, Competition Act of 2002 ↑
Directorate For Financial and Enterprise Affairs Competition Committee, OECD. (2018). Blockchain Technology and Competition Policy-Issues paper by the Secretariat ↑
Sadiku, M. N. O., Eze, K. G., &Musa, S. M. (2018). Smart Contracts: A Primer. Journal of Scientific and Engineering Research, 5(5): 538-541. ↑
Lianos, I. (2018, September). Blockchain Competition – Gaining Competitive Advantage in the Digital Economy: Competition Law Implications. Research Paper Series: 8/2018. Centre for Law, Economics and Society, UCL. ↑
For this threat of punishment to be credible, the loss due to the punishment should outweigh the benefit that a firm would make by deviating from the collusive agreement. ↑