Is there a “blockchain fortress” and if so, how to enter it?
Within the past years, cryptocurrencies have shown to be highly volatile markets, fluctuating at a quick pace between hype and hope1. Blockchain technology, upon which they are built, is however expected to play a leading role in the global economy on the short term2 and the consistent work of the developing community has compelled institutions and regulators to address the situation.
In France, the Loi Pacte3 which is currently getting through the legislative process, is a modest attempt to outline a « pragmatic and attractive » financial framework for cryptocurrencies according to the French Minister of Finances, Bruno Le Maire4 . Far from a crippling regulation, institutions look to provide a higher degree of safety for businesses, we will see how it will unfold. Nevertheless, a wide adoption of the technology would certainly raise paradoxical questions of antitrust and competition policy.
Why competition authorities have to adress the technology
In his research paper « The Blockchain Antitrust Paradox » Thibault Schrepel discusses the fundamental competition issues, most notably on the question of unilateral practices in the form dominant positions and the risk of subsequent abuses.
Blockchain technology allows anonymous users to transfer value based on cryptographic proofs rather than trust, allowing computers to reach a consensus without a central authority. The system is « an open and distributed ledger that can record […] all sorts of transactions between users. […] (these transactions) are permanent and can be seen by all users […]. The set of rules governing the system is meant to be immutable. While governance choices may allow « private » blockchains to work on a reduced « permissioned » framework, raising rather traditional antitrust issues, Thibault Schrepel’s research focuses on public « permissionless » networks where the identification of anti-competitive practices and perpetrators will face new challenges due to the very nature of the technology. After all, one can wonder what is left for antitrust regulation on a trustless technology ?
As to widespread adoption, the research suggests a token network effect : the bootstrapping problem causing low utility during early development stages of a service will be solved by a high token incentive mechanism for early users, closing the inefficiency gap before utility arise from the massive use of the service (actual cryptocurrencies like Bitcoin or Ethereum provide good examples). Consequently, serial blockchain based monopolies could rise and fall quickly, taking over the actual internet giants acting as middlemen. While drastically reducing vertical competition issues, this would most likely shift the horizontal competition pressure towards end users Thibault Schrepel says.
Potential unilateral practices on blockchains
Anti-competitive practices may very well appear from within the governance protocol of a given blockchain system. Furthermore, these practices will most likely emerge from applications running on them. Indeed, while the very first use case of the technology is by nature, cryptocurrencies, the current work seeks to develop the transfer of value through more complex transactions including smart contracts, allowing for the creation of autonomous applications5. After that, sky is the limit for creative minds.
Such decentralized autonomous applications (called Dapps) being unregulated at the moment, Thibault Schrepel asks the following question : « can a non-entity hold a dominant position ? ». While pseudonymity is a structural principle of the technology, regulators do have the means to work their way towards real identities. The issue then lies rather on the identification of practices and the scope of the liability. Regarding the latter, the research praises for the establishment of a methodology to outline liability, suggesting that market power could be evaluated « based on the type of applications running of the blockchain ». However the key factors of the analysis are yet to be identified.
Another important point that needs to be highlighted is the way to determine a geographical relevant market on blockchain based networks. The technology exceeds well beyond legal physical borders and a global harmonization of the regulation seems to be crucial.
As for which unilateral practices could be implemented, Thibault Schrepel argues that traditional abuses such as exclusive dealing, refusal to deal, predatory pricing, discriminatory abuses or loyalty rebates are very likely to appear on private blockchains managed by central entities. While on the other hand, public « permissioned » networks are very unlikely to suffer from such abuses because of their preserved fundamental characteristics. Thibault Schrepel put the emphasis on the « visible effect » inherent in public blockchains : everything is public and everybody can verify it, making it quite difficult to operate in the dark. The research estimates various degrees of probability for each situation, discussing use cases while remaining very humble about the high risks of new anti-competitive behaviors and practices that have yet to be created and identified.
Regulatory infiltration as a strategy, but before anything : humility
Moving on to a regulation strategy, Thibault Schrepel provides a twofold conceptual approach, subjected to the technical core principles of blockchains.
Firstly, due to the « fortress nature » by design of these network, which are immutable once they are created, there is a need for upstream regulation. The research describes it as a shift from Lawrence Lessig « code is law »6 to a new « law is code » paradigm implying the creation of legal digital tools, checks and balances rather than a sui generi body of concepts for antitrust and competition law. Indeed, systems could be designed in compliance with a regulatory framework, the legislator using both the carrot and the stick to incentivize users to the adoption of healthy rules at the creation of the governance protocol.
Secondly, he recommends the creation of regulatory backdoors to achieve a « regulatory infiltration strategy » in order to allow the identification of practices and perpetrators by authorities as well as providing them with the means to coerce on the network after the immutable protocol makes it a theoretically inviolable fortress.
Beyond the paradox : decentralized competition authorities ?
Thibault Schrepel’s Blockchain Antitrust Paradox discusses many of the fundamental issues raised by blockchain technology regarding matters of antitrust law, however the rather cynical question « is blockchain the death of antitrust ? » hides a much more complex study of upcoming regulatory challenges. In a very thoughtful and detailed research the framework for future debates is set up with a fair and unbiased eye. While the key idea of the paper is regulatory humility (as simple as it is important), rather than opting for a frightened perspective, the course is set to a very exciting journey and, why not, to the concept of decentralized competition authorities ?
- See MIT Tech Review May/June 2018 issue
- Up to 10 percent of global GDP by 2027 according to the World Economic Forum
- https://www.latribune.fr/entreprises-finance/banques-finance/le-plaidoyer-pour-la-blockchain-et-les-crypto-actifs-de-bruno-le- 4 maire-797300.html
- Ethereum most notably
Source : Thibault Schrepel, Is Blockchain the Death of Antitrust Law? The Blockchain Antitrust Paradox