Over the last months blockchain and bitcoin have been the subject of lively public discussions on whether blockchain is the technology of the future and cryptocurrencies are going to be just a speculative phenomenon or something more. However, little has been said so far on blockchain from an antitrust perspective, probably because new technologies require some time to be digested and elaborated by competition authorities.
This gap is going to be filled, as the Organisation for Economic Co-operation and Development (OECD), always at the forefront of the discussions involving new trends, has prepared a paper which is going to be presented on June 8 in Paris during the 129th Meeting of the Competition Committee. Below I will briefly illustrate what blockchain exactly is, and what are the most relevant competition concerns raised by the OECD.
What is Blockchain?
Blockchain is a tool that allows to validate online transactions involving digital goods. While transactions involving tangible assets happen through the use of credit cards, paper money, notaries and other traditional validating tools, blockchain technology helps to overcome those instruments in the digital environment, removing the need for a third party.
More in detail, blockchain may be compared to a digital accounting book (“ledger”) simultaneously run and updated by multiple parties, all of which have access to the entire set of data reading on the book. Each block on the chain represents a transaction and contains all the relevant information on that transaction plus a reference (“hash”) to the previous block in the chain, which, in turn, contains a reference to its predecessor block and so forth until the entry block. This linking mechanism is what prevents the chain from being manipulated. Indeed, the system cross-checks all the blocks when a new transaction occurs (every few minutes) and if a single block is modified, the system will scan the inconsistency with the values stored on the subsequent blocks and with the copies held by the other network participants.
In the case of bitcoin, blockchain technology updates on the shared ledger all the transactions made by any participant using bitcoin, and the updates are simultaneously shared with all the other bitcoin participants each time a payment is done, so preventing double spending.
Blockchain has the potential to dramatically simplify logistical operations in a number of industries, particularly in relation to transfer of money, goods and property, and is already the basis for many current applications, like cryptocurrencies, authentication systems, land registration, digital asset management and many more in the fintech and IoT sector. Furthermore, it offers the possibility to put agreements, rather than transfers of ownership, onto a blockchain. The so-called smart contracts have the advantage of ensuring the execution of an agreement, in the same way that a blockchain creates trust that a transaction of Bitcoins will be executed.
Companies should always be very careful in the early days of a technology as hidden antitrust risks might unexpectedly come out. The same is true for blockchain.
- Standardisation: ISO is working on the development of a technical standard so that there will be interoperability among the various products implementing blockchain. This means that companies holding standard-essential patents (SEPs) will have to commit to license under fair, reasonable and non-discriminatory terms and that those which implement the technology shall engage in good faith negotiations in compliance with the established case law issued by IP courts worldwide.
- Collusion: a problem might arise if all the competitors will use a blockchain running on a common server, as it might enhance transparency on prices, costs, contract terms and customer names and, in oligopolistic markets, transparency permits tacit coordination of commercial conducts.
- Abuse of dominance:
- Dominant incumbents might lobby for regulatory barriers exaggerating the safety risks posed by blockchain or prevent their customers from charging consumers lower fees on blockchain transactions;
- If a blockchain developed by a consortium is approved by a regulatory authority, the existing members might refuse access to third parties, excluding them from the market;
- Dominant players might impose, by means of smart contracts created using blockchain technology, certain anticompetitive clauses with the aim to reduce price competition (i.e.: most-favoured-nation clauses);
- Dominant cryptocurrencies enjoying network effects might exploit their market power by raising transaction fees;
- Dominant positions might arise in markets dependent on blockchain (i.e.: market for the production and sale of the hardware required to “mine tokens”, which is the procedure through which new bitcoins are created). Dominant firms in these markets might charge excessive prices or leverage their position to enter downstream markets.
The OECD sees a procompetitive aspect in blockchain from an economic perspective, as blockchain technology might disrupt the current digital order, mainly based on intermediary platforms which match two sides of a market and gather reviews on suppliers to build trust (or distrust). Eliminating platforms would reduce transaction costs and enhance efficiency. However, although it is evident that blockchain may provide trust on the origin of a product and ensure that a payment will be made, it is not clear yet whether it will be able to replace the matching role played by platforms.
Moreover, the OECD assumes that blockchain might reduce the transaction costs related to contract enforcement, thereby allowing companies to change their very nature and to outsource more core functions to specialized firms, eventually raising the level of competition on the market.
It remains to be seen if this will happen and what will be the outcome of the OECD´s roundtable on blockchain.