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Companies that use blockchains must be cautious about sharing information through them and ensure that they are compliant with competition laws
Most competition lawyers’ radars go off when they hear the term “blockchain”. They have spent years advising clients not to share competitively sensitive information with others, most particularly their competitors. Not because the sharing itself is a violation of competition law, but because of what the sharing might ultimately facilitate — price fixing, market allocation, bid-rigging.
Blockchain is a shared, immutable ledger that facilitates the recording of transactions and tracking of assets across a digital network. An asset can be tangible — land, house, car, cash — or intangible — intellectual property, patents, copyrights, branding.
Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. However, in a blockchain world, some competitively strategic information may well find its way onto a shared ledger.
Competitively strategic information can be related to, for example, prices; discounts; increases; reductions or rebates; customer lists; production costs; quantities; turnover; sales; capacities; qualities; marketing plans; risks and investments. Generally speaking, information that fundamentally triggers most cartel arrangements (relating to prices and output) is the most strategic, followed by information about costs and demand.
To be truly efficient and reach their full commercial potential, blockchains will often be set up in peer-to-peer networks that can include actual or potential competitors. This unfettered access to potentially commercially sensitive information by competing companies puts blockchains firmly into the crosshairs of competition law enforcement.
There will, of course, be many blockchain-specific nuances — for example, is the blockchain public or private? — but the operative question remains constant: will the blockchain give rivals access to competitively sensitive information about their competitors that they would not have but for the blockchain?
Perhaps the biggest concern is that blockchain platforms could be used to mask, stabilise or prolong cartel behaviour. By their very nature, cartels are unstable. Cartelists must rely on imperfect information, without a complete picture of how each cartelist is behaving.
Competition law regulators have preyed on this instability, devising immunity programmes that encourage cartel members to inform on one another. Yet, the very purpose of blockchain is to provide verifiable data to its participants in a transparent way. The use of a blockchain platform to facilitate cartel behaviour could consequently diminish the efficacy of immunity programmes. This is because it can allow cartel members to enforce, and more effectively monitor, the cartel rules and practices to verify and ensure that they are being followed.
Taking it one step further, when a deviation from a cartel is identified, blockchains present an opportunity to punish the deviator using, for example, smart contracts. Smart contracts entail embedding an instruction on the blockchain that will trigger upon a particular event, for example, if a cartel member was required to maintain a particular market share and did not, the smart contract would penalise it appropriately.
The case of UnitedCorp vs Bitmain in the US gives a window into another possible blockchain-related collusive practice, one akin to more familiar litigation involving market manipulation.
In December 2018, UnitedCorp, a diversified technology company, sued Bitmain, the largest Bitcoin mining pool, over an alleged anti-competitive scheme. UnitedCorp alleged that several investors and mining pools had colluded to support a specific fork of bitcoin over an alternative fork and, consequently, caused the price of the forks to fall, causing damage to UnitedCorp’s investments.
This draws obvious parallels with previous litigation concerning uneconomic bids from energy traders and the false-quote scandal involving London inter-bank offered rate traders (a benchmark interest rate that is used for the pricing of loans and derivative products throughout the world) that caused those markets to artificially deviate from their economic fundamentals. While the case did not progress (given UnitedCorp’s inability to illustrate competitive harm), it raised interesting questions around competition and competition law in a complex blockchain eco-system.
The above notwithstanding, competition law regulators worldwide are honing their skills and getting to grips with blockchain technology and the various competition law challenges it can pose. For example, the European Commission and other global regulators are investigating the use of blockchain technology for anti-competitive practices in the cryptocurrency space, particularly with respect to the role of cryptocurrency exchanges and mining pools.
More and more blockchains will therefore become subject to intense competition-law scrutiny and potential prosecutions that could result in significant administrative penalties, third-party claims or even criminal liability.
Companies involved in blockchains need to be acutely aware of which types of information could be made available through them, and how, as an information-exchange platform such as a blockchain network could easily result in the formation of large-scale price fixing, market allocation or bid-rigging cartels, be it directly or tacitly.
Companies are thus encouraged to remain compliant with competition laws and carefully monitor the information they share or which they can access through their involvement in blockchains. They should also strongly consider putting safeguards in place to protect themselves against competition-law risks, such as implementing layers of cryptographic protection to protect particularly commercially sensitive data, for example, disaggregated pricing and customer data.
HB Senekal is a competition partner at the law firm Bowmans.
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