Competition Law in the Blockchain Era – Falk Schöning and Myrto Tagara of Hogan Lovells Brussels

Europe In Depth Interviews Worldwide

How does competition law apply to blockchain technology? We ask Falk Schöning and Myrto Tagara, competition lawyers at Hogan Lovells.

Falk Schöning and Myrto Tagara, competition lawyers at the Brussels office of international law firm Hogan Lovells, work with a particular focus on clients in the technology area. Hogan Lovells deals with mergers, antitrust procedures and compliance questions – not only at EU or its Member States level, but very often globally. Recently, they have focused their expertise in competition law to questions raised by blockchain technology.

Key Outtakes

  • The focus should be on the opportunities that blockchain technology provides, and not on the potential risks. Therefore, pre-emptive regulation does not seem fit for purpose in a situation where it is unclear if there is any problem with blockchain in the first place, and if so, which one.
  • Competition law is regularly enforced ex-post. This has the advantage of observing conduct, studying it, assessing the market around for a while and only if the conduct is found harmful, it offers tools for intervention on a case by case assessment. Thus, it can be a lot less intrusive, particularly in tech markets, than ex-ante regulation.
  • There is an increasing focus from the European Commission on competition law issues caused by algorithms and other big data applications. Blockchain has not yet been mentioned in this context, but at the working staff level, the Commission closely follows the developments with regard to blockchain in the context of financial services.
  • Some elements of the net neutrality debate, such as the paid prioritization concept, could be applicable to the blockchain. Paid prioritization, i.e. providing more or faster bandwidth to those who can afford to pay for it, has been at the heart of the net neutrality debate. By way of blockchain analogy, stronger players in the blockchain could get their transactions cleared faster, while other transactions are lagging behind.

What and when piqued your interest in the blockchain technology?

We generally have an interest in new technologies, both from a technological and a legal perspective. It allows us to deal with new questions where we may be amongst the first lawyers to find solutions for new issues coming up with technological development. At Hogan Lovells, we have strong sector expertise in media and technology, and we have a dedicated blockchain group of lawyers. However, until about two years ago they focused more on ICOs, on commercial and corporate law, or on data privacy questions with blockchain. We realized that no one had really started thinking about the competition law aspects – so we wanted to find a path for exploring these questions.

You consider blockchain from the perspective of competition law. In “Blockchain: Mind the gap! Lessons learned from the net neutrality debate and competition law related aspects”, a paper you co-authored, you wrote that from a competition law perspective, the blockchain landscape of today is analogous to that of search engines, e-commerce platforms, and algorithms in the 1990s. What are some of the similarities?  

The landscape is analogous in the sense that, for now, there is big hype around the technology. So the focus is, understandably, more on exploring use cases rather than the legal issues around them. However, when the internet started to become a technology used by the masses 20 years ago, no one could have imagined that one day, many large competition law investigations would focus on the internet. Fairness of search engines, restrictions of e-commerce, collusion enabled by the use of algorithms – to name only a few. However, all of these started to receive attention only about a decade after they first appeared.

Similarly, blockchain technology today is only capturing the attention of a few academics and practitioners, with little or no enforcement action by the authorities – at least for now. However, given that authorities are now much more familiar with the cyberspace and its functionality, we expect that we might see enforcement initiatives in the blockchain spectrum earlier than it was in the case of search engines, e-commerce platforms, and algorithms.

Will competition law authorities play a role in enforcement actions concerning blockchain? Why?

We are regularly talking to authorities about blockchain, on an informal basis, and from those discussions, we strongly believe that they will. This is because the technology has the potential to become a massive sector, affecting our economies, and competition law enforcement cannot afford not staying up-to-date with such developments.

Competition law is regularly enforced ex-post only. This has the advantage of observing conduct, studying it, assessing the market around for a while and, only if the conduct is found harmful, it offers tools for intervention on a case by case assessment. Thus, it can be a lot less intrusive, particularly in tech markets, than ex-ante regulation.

Another reason why antitrust authorities will likely play an active role in the blockchain field lies at the political level. For instance, the European Commission under Commissioner Vestager focused much more on the digital sector, as compared to the past. Other authorities, such as the German or French competition agencies, followed this example, and as blockchain technology evolves and penetrates into different industries, it is likely to increasingly attract the attention of authorities.

What aspects of competition law are particularly relevant to blockchain technology’s applications?

There are many aspects of competition law that may be relevant to blockchain, and the more we learn about this fascinating technology, the more we will be able to have a better view about what the actual competition issues are. For us, it is important to stress the opportunities that blockchain technology brings and not focus only on the risks. At the same time, blockchain won’t be immune to competition law problems, and we have identified a couple of topics to consider:

  • As a general proposition, in blockchain technology, information is shared between its users in a decentralized way. If such information is competitively sensitive, and if the members of a blockchain network are competitors, sharing such information could be problematic. This could be built as a classic information exchange or even a cartel case.
  • Another relevant area is access to the blockchain. In a scenario where access to the blockchain is controlled by its existing members or a specific gatekeeper, there might be claims that this constitutes illegal refusal to access, provided that access to that blockchain is essential to compete in a given market. We view this as the main issue competition law authorities will focus on, as there are many parallels with other digital, or even offline, world cases.
  • Finally, competition law issues could arise with regards to miners, their organization in mining pools and the fees charged by them for clearing transactions. For instance, the blockchain environment allows quick transaction clearance, if the user is willing to pay more. This might have the effect of creating a dual-speed blockchain, whereby those that are able and willing to pay more, will have their transactions cleared faster. Ultimately, this means that weaker players (e.g. start-ups) might stand on unequal footing. Of course, this is not necessarily problematic in and of itself, but it is still worth keeping an eye on, as in other internet related segments such paid prioritization has been explicitly prohibited by regulation.

Why is information exchange through blockchain an attractive aspect for competition law enforcers? How could sharing information on a blockchain network trigger competition law enforcement actions?

Information exchange generally attracts the attention of competition law authorities because it can be the first step to the formation of a cartel. Equally, information exchange can lead to concerted practices or tacit coordination, because once the commercially sensitive information is exchanged between competitors, they could use this information to form their market strategy in a way that they could both maximize their profits to the harm of consumers.

Putting this in a blockchain environment, competitors who are part of the same blockchain network could exchange commercially sensitive information, given that each of them would get an identical record of all actions registered on the distributed ledger. However, we believe that in practice and for the moment, this is rather an abstract risk as there are still easier ways for companies to exchange information or engage in cartel behavior than by using blockchain.

Can existing concepts of competition law be applied to the blockchain, given that blockchain technology is novel and fairly unshaped?

Competition law does have the tools to deal with this new technology, as was the case for previous technologies when they were still new. Competition law tools have been proven flexible enough to deal with all sorts of technologies and complex electronic products, so it shouldn’t be different for blockchain. In any event, one should not forget that competition law will effectively apply to a company’s behavior within a blockchain, but not to blockchain technology as such. Blockchain would only be a new means of implementing potentially anticompetitive practices.

Are those competition law issues already a point of interest for EU officials?

There seems to be increasing interest in the European Commission to ensure competition law compliance in the digital era in general. As Competition Commissioner Vestager highlights regularly in her speeches, there is an increasing focus from the Commission on competition law issues caused by algorithms and other big data applications. Blockchain has not yet been mentioned in this context, but we are aware that the Commission, at the working staff level, closely follows the developments with regard to blockchain in the context of financial services. Companies active in the blockchain field should consider a statement by Johannes Laitenberger, the EU Director-General for competition, who advised companies that “to stay on the safe side of the law, it should have programmed the software to prevent collusion in the first place”.

How does the global scope of blockchain technology affect competition law enforcement?

Technology is global, and so is competition law enforcement. However, not all competition agencies have the same tools and powers, and competition law enforcement will not always be harmonized. The global reach of blockchain technology and its technological complexity makes it more likely that, at first, only the more experienced authorities such as the EU Commission or the UK, French or German agencies would open investigations in this field. However, we are aware that other authorities such as the ACCC in Australia or the Swedish Competition Authority do some work in the blockchain field.

What would be the role and responsibilities, if any, of the vendor or manager of a distributed ledger network when it comes to competition law?

This would have to be assessed on a case by case basis because the facts could make a significant difference. As a general rule, not only the members or users of a blockchain network but also the vendor or manager can be found to be liable for a competition law infringement. The so-called AC-Treuhand case-law of the European Commission demonstrates that any third party involved in anti-competitive behavior may be fined. Very often, such third parties are not aware of this risk and view themselves only as service providers.

Could vertical relationships between parties participating in a blockchain raise competition law concerns?

Yes, that would be possible. A simple example would be one where blockchain participants are market players in a vertical relationship, and the blockchain network is being used as a means of monitoring the dealers’ prices by the supplier. In turn, and although the latter is not unlawful per se, this could be found to amount to illegal resale price maintenance. As explained above, there is no specific “blockchain competition law” and all anti-competitive conduct that we see in the offline world could apply to blockchain.

Blockchain technology was initially developed to be decentralized and open – similar to the internet. However, the ongoing net neutrality debate points to these aspects being threatened by the increasing commercialization of the internet. Are elements of the net neutrality debate in any way applicable to the blockchain, in the context of completion law?

Yes, although these elements would be applicable to blockchain only by analogy. This is mainly because of an important distinction, namely that the debate around net neutrality was developed on the premise of the internet’s unique nature and its importance for freedom of speech in the digital world. Put differently, there is only one internet within which people exchange views, for instance in the context of elections. In contrast, there could be a myriad of blockchain networks.

Nevertheless, some elements of the net neutrality debate, such as the paid prioritization concept mentioned before, could be applicable to the blockchain. Paid prioritization, i.e. providing more or faster bandwidth to those who can afford to pay for it, has been at the heart of the net neutrality debate, both in the EU and the US. By way of blockchain analogy, stronger players in the blockchain could get their transactions cleared faster, while other transactions are lagging behind.

The analogy with blockchain is clear; more bandwidth and thus faster content delivery come at a higher price, and thus “fast lanes” would effectively be reserved for the prevailing service providers, who can afford to pay more. This prompted regulation of internet service providers and we follow the discussion of whether certain blockchain networks require regulation (or competition law enforcement) of mining pools – and if so, how this could be enforced in the decentralized, anonymous world of blockchain.

You point out, that despite a clear need for a predictable framework, pre-emptive regulation does not appear to be an appropriate instrument for a dynamic and nascent technology like blockchain. What approach do you think is appropriate?

Blockchain is still in a premature stage in various market segments. As we said earlier, we suggest focusing on the opportunities this technology provides and not on the potential risks. Therefore, pre-emptive regulation does not seem fit for purpose in a situation where it is unclear if there is any problem with blockchain in the first place, and if so, which one.

Therefore, competition law is probably a more suitable tool for dealing with blockchain issues, given its less intrusive nature compared to ex-ante regulation. Competition law has been proven remarkably flexible in applying its concepts to new technologies, and this would probably also be the case with blockchain. We believe that although there is no strict predefined compliance framework, businesses should be listening to the authorities’ statements regarding “digital antitrust” (eg. make sure that the algorithms they use are not really a disguised price fixing tool) and ensure internal compliance by involving their IT departments and blockchain experts in the compliance system design.

Do you see blockchain, cryptoassets, smart contracts, etc. as a threat or an opportunity for legal professionals?

It is rather a challenge, both professionally and personally. It is fascinating for a lawyer to get to dive into complex technologies, understand them and make sure to speak the “same language” with their client. Professionally it’s also challenging, given that you may get to be involved in the first case, one that would shape the competition law approach to blockchain. Thus, lawyers who are able to adapt and learn to deal with new technologies are, in our view, not a risk of being replaced by computers, but have the chance to influence how our profession can be involved in these exciting questions.

About the author

Maciek Klimowicz

Maciek Klimowicz

A seasoned writer and editor with 10 years of experience in a variety of print and online media. Recognizing the transformative potential of the blockchain technology, Maciek has now put his pen to work to explore the key issues of this fast-evolving sector. Contact him on [email protected].

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