Blockchain Technology: a Future Antitrust Target?

• Jurisdiction: United States,Federal
• Author: By Ryan C. Thomas and Peter Julian
• Publication year: 2020
• Citation: Vol. 30 No. 2

BLOCKCHAIN TECHNOLOGY: A FUTURE ANTITRUST TARGET?

By Ryan C. Thomas and Peter Julian¹

I. INTRODUCTION

Technology companies face increasing antitrust scrutiny globally. In the United States, lawmakers are ramping up pressure to increase enforcement at federal and state levels. Several high-profile politicians, including U.S. presidential candidates, have called for new antitrust legislation that would make it easier to pursue allegedly "dominant" companies, especially leading technology firms.² As more companies rebrand themselves to embrace e-commerce, future antitrust enforcement and private suits will extend beyond the large online platforms.

As blockchain applications increasingly expand beyond cryptocurrency into other areas, including supply chain and government bidding, companies and competition enforcers are developing experience with how antitrust issues play out with this much-hyped technology. Meanwhile, initial concerns around prematurely regulating and potentially stifling this emerging technology have given way to legislative efforts to limit illicit cryptocurrency uses, while promoting lawful uses of blockchain technology. While the promise of a sweeping blockchain revolution across the economy may seem overstated, real-world implementations have been progressing. This article explores the antitrust issues presented by blockchain implementations and implications for companies considering adopting blockchain technology.

Blockchain technology (or distributed ledger technology—the two are used interchangeably throughout this article) was first conceptualized in 2008 for use in Bitcoin.³ Since then, the technology and "use cases" (applications) continue to evolve. Although by no means ubiquitous, every year more companies, including established, sophisticated players, are entering the blockchain "market."⁴ Investors are still paying attention to and pouring significant sums of money into blockchain startups, and businesses are actively implementing the technology.⁵ "Platform" blockchains and blockchain as a service (BaaS) are becoming more common, making it easier for businesses to use the technology. Instead of having to code a proprietary blockchain solution from the ground-up, which can be a complicated and expensive endeavor, businesses can use open source solutions, such as Hyperledger,⁶ Enterprise Ethereum,⁷ or R3's Corda,⁸ adapted to their particular application. In addition, leading enterprise software companies like IBM,⁹ SAP,¹⁰ and Oracle¹¹ have begun offering BaaS that make it even easier for businesses to explore and deploy the technology.¹² These developments have given rise to increasing emphasis on standardization and interoperability between blockchain networks to prevent data silos.¹³

[Page 18]

Blockchain also continues to attract significant regulatory and legislative attention based on its disruptive potential. The acting United States Comptroller of the Currency (a former general counsel of a major cryptocurrency exchange)¹⁴ recently issued rulemaking notices aimed at proliferating the use of both cryptocurrency and blockchain technology within the banking sector.¹⁵ The rulemaking notice specifically seeks input on how blockchain technology is used or potentially could be used in the banking industry.¹⁶

Apart from potential agency rulemaking, legislators at both the federal and state levels are introducing bills aimed at providing a regulatory framework for the use of blockchain and cryptocurrencies.¹⁷ At the federal level, the 116th Congress recently issued more than thirty-two such bills. The bills address a number of topics, such as limiting the use of cryptocurrencies for potential terrorism, sex trafficking, and money laundering, while promoting a working group to study the use of blockchain technology.¹⁸ States are also jumping into the fray. In 2019, twenty-eight states introduced bills aimed at regulating the blockchain and cryptocurrency space, with a majority of them signed and enacted.¹⁹ As these developments illustrate, legislative and regulatory bodies are concerned with blockchain and cryptocurrency's implications for the future, and are taking measures to promote their lawful use. Early concerns around burdening a new technology with regulations that may stunt its potential are giving way to a wave of new regulations aimed at both regulating and fostering its growth.²⁰

[Page 19]

Antitrust authorities are paying attention, too. As recently as August 27, 2020, the head of the Department of Justice Antitrust Division, Assistant Attorney General Makan Delrahim, confirmed that the Division was studying the competitive effects of blockchain technology.²¹ The Division has implemented a program where government attorneys and economists are taking an online course to "build [their] expertise . . . in cutting edge business applications: specifically, blockchain" and other technologies with the goal of "develop[ing] a basic but critical understanding of how businesses implement these technologies and what effect they might have on competition."²² Delrahim acknowledged that while the technology does have the potential to increase efficiencies, for example, in the financial technology sector, it also has the potential to lead to cartel-like behavior, and stated "the Division will play a critical role in ensuring market conditions are conducive to unleashing blockchain's revolutionary potential."²³ DOJ is not alone.

[Page 20]

Other competition authorities are paying close attention to the technology as it gets deployed more widely. In February 2018, the European Commission announced the "EU Blockchain Observatory and Forum."²⁴ In March 2018, the Federal Trade Commission announced the creation of an internal "FTC Blockchain Working Group."²⁵ Soon after, in April 2018, the Organization for Economic Cooperation and Development published an issues paper titled, "Blockchain Technology and Competition Policy."²⁶ The movement by government agencies to better understand blockchain increases the likelihood of scrutiny and potential enforcement actions, and businesses are well advised to evaluate the antitrust risks associated with deploying the technology.

While the rollout of blockchain is by no means ubiquitous, the technology is finding its audience and use cases. We will explore a few examples in this article, analyzing potential antitrust implications for other applications. First, we begin with a short overview of distributed ledger technology. Then, we discuss potential antitrust issues, with an emphasis on U.S. competition law. Finally, we discuss a few prominent contemporary examples of blockchain technology implementation and lessons learned for future adaptations.

II. BLOCKCHAIN BASICS

A full discussion about the mechanics of blockchain technology is outside the scope of this article. We address below a few crucial characteristics that will be helpful in discussing the antitrust implications. At its core, a blockchain is a shared ledger in which transactions are recorded and stored in a verifiable way.²⁷ Records of transactions are stored along with other transactions into "blocks" of data that are linked to one another in a "chain."²⁸ The ledger or database is hosted by a number of different users or "nodes."²⁹ Unlike a traditional database, the ledger does not allow users to delete data or modify existing data—users can only add new transactions to the end of it, much like a ledger recording financial transactions.³⁰ Also, unlike traditional databases in which one central authority controls what information can be accessed or added to the database, a blockchain is distributed across multiple computers in a network ("nodes" in blockchain parlance), each of which can read from or append to the ledger—all while ensuring that every node has an identical copy of the ledger.³¹

[Page 21]

Because blockchain nodes are distributed and have no centralized validation system, there must be a "consensus mechanism" for deciding which block to add at the end of the blockchain if there is a conflict between two or more nodes.³² For example, on the Bitcoin blockchain, the party that is the first to correctly solve a computational puzzle gets to propose the next block to the network and is rewarded with bitcoins.³³ This is called "mining."³⁴ The nodes on the network signal their acceptance of the proposed block by adding it to their copies of the Bitcoin blockchain after validating that the computational puzzle was solved correctly, that the transactions in the block are valid, and that the Bitcoin in each transaction was not previously spent in another transaction.³⁵ If there is a conflict between different versions of the blockchain, the node that has done the largest amount of computational work to validate transactions is considered to have the accurate record. This is known as a "proof of work" consensus mechanism.³⁶ Apart from access to computing power, and thus being able to mine more, there is no practical likelihood that one participant can be strategically prioritized or given an unfair advantage over another.³⁷

Generally, there are two types of blockchains based on levels of openness and distribution: "permissionless" and "permissioned."³⁸ A permissionless (or public) blockchain is open to anyone who wants to join—there is no central authority acting as a gatekeeper preventing new entrants from being a part of the blockchain network.³⁹ Without a central authority or clearing house, each node keeps a copy of the entire blockchain and is able to contribute data back to the network.⁴⁰ Participants can remain pseudonymous behind unique user identifiers, but can access the transaction data stored in the blockchain by downloading the software.⁴¹ For example, in a supply chain blockchain, the transaction history can be used to assess if the participant has sufficient funds, capacity, and inventory to complete the requested transaction based on the prior recorded transactions that either have credited or...