Blockchain brings antitrust concerns alongside competitive opportunities

The rise of blockchain technology has heralded significant advances across a range of industries, from financial services to consumer goods. But there are two sides to every Bitcoin. While providing an important vehicle for entry and disruption, blockchain creates antitrust risks arising from new opportunities for firms to collude, signal competitively sensitive information, act forward, or engage in exclusionary tactics to block actual or potential rivals. This update analyzes both the potential antitrust pitfalls and competitive opportunities associated with blockchain.

Linked together

Blockchain has the potential to reduce the barriers to forming and maintaining anticompetitive cartels in violation of Section 1 of the Sherman Act. To understand why, it is important to consider that cartels must solve three operational challenges.

First, they must form a consensus around the terms of the agreement. This could be demanding a fixed price, rigging which companies win which bidding opportunities, or assigning customers or markets.

Second, they must monitor compliance. A cartel will not be effective unless its members follow consensus. Because a cartel is made up of competitors, members are naturally suspicious of each other. For this reason, members must monitor each other to ensure that everyone is following the terms of their agreement. In practice, this is difficult because it requires the exchange of competitively sensitive information on an ongoing and covert basis.

Third, there must be a mechanism to punish companies that “cheat”. For example, if a company seeks to increase sales by undercutting its co-conspirators, the other contracting parties must have a way to discipline the company that deviates from consensus. Unless these challenges can be overcome, the cartel is unlikely to last.

In terms of compliance monitoring, distributed ledger technology enables companies to observe sales, purchases and transaction metadata recorded on the blockchain. This makes it easier to determine whether a company is breaking the cartel agreement by selling below the fixed price or by producing above its allocated quota. In addition, companies do not need to meet or even communicate directly to demonstrate compliance with the agreement. They only need to monitor transactions on the blockchain. This means that smoke-filled rooms are no longer necessary for co-conspirators to keep the deal afloat.

Punishing cheaters can also be facilitated through blockchain technology and “smart contracts”, which are protocols that automatically execute the terms of a contract if certain conditions are met. Of course, smart contracts also serve several pro-competitive purposes, such as reducing transaction costs and reducing the lag time between satisfaction and execution of the contract. For example, a smart contract can ensure that ownership of a property is automatically and immediately transferred to the buyer when funds are deposited into the seller’s account.

In a cartel context, however, smart contracts can be a weapon to ensure that if one company sells below the fixed price or exceeds the production quota according to the cartel agreement, then all co-conspirators automatically punish that company. Discretion is removed from the cartel members and delegated to the smart contract, ensuring that the cheater is immediately punished for each violation of the cartel agreement. In turn, the risk of incurring the wrath of co-conspirators by cheating is higher in the blockchain context, which promotes adherence to the cartel’s consensus and durability.

Telephone chain

Blockchain platforms can enable companies to signal price and production information to competitors, which in turn can enable them to enter into agreements to raise prices or reduce production. This concern is amplified where private (permission) blockchains are involved, or where a blockchain consortium includes competitors in concentrated industries.

Chain link fence

In addition to cartel concerns, blockchain technology can be used to exclude rivals. As Professor Thibault Schrepel writes in Blockchain + Antitrust, “the ability to deny access is an important feature of private blockchains.” Professor Samuel Weinstein warns in the same way Blockchain neutrality that “anticompetitive denial of access to permitted ledgers” represents an “antitrust harm that may arise from the use of blockchain.” Such claims can be brought under a class boycott or refusal-to-deal theory of injury, depending on how critical access to the ledger is to a company’s competitive viability.

Technology platforms can also act as gatekeepers. As Professor Schrepel explained in a panel of the American Bar Association (ABA) Federal Civil Enforcement Committee on January 11, 2023, “Blockchain does not exist in a vacuum, and neither does Web3. Blockchain operates on top of the Internet, and gatekeepers can affect the blockchain and Web3 based on infrastructure.”

Competitive opportunities

On the other hand, technological innovation often enables and strengthens the start-up and growth of small businesses by breaking down barriers to entry. Distributed ledger technology has the potential to drive this disruption.

Regarding the unsecured credit market, Professor Carla Reyes pointed out that “blockchain can provide actual notice and can reduce entry barriers to maintain priority.” However, this outcome is not automatic. “People can design architecture that challenges gatekeepers, but alternatively they can create exactly the same structures in traditional finance and Web3. And despite the opportunity and potential to lower barriers to entry, the law encourages the re-creation of new crypto gatekeepers.” To drive the point home, Processor Reyes stated that “the social context and what you build with it matters.”

Avoid Ball and Blockchain

Companies leveraging blockchain technology can reduce their antitrust exposure by taking appropriate precautions.

1. Employees who interact with distributed ledger technology should be trained to never use blockchain as a means to discuss, signal or exchange information with competitors about the company’s bids, sales opportunities, customers, costs, prices, employee compensation, employment or other competitively sensitive information.
2. In the context of blockchain consortia involving concentrated industries, companies should consider more proactive anti-threat mechanisms.
3. Persons controlling access to permissioned blockchains must also recognize that agreements between competitors to “boycott” or exclude rivals from the ledger may be illegal in themselves. Illegal group boycotts include collective “blacklisting” of a firm from the ledger or agreement with others to refuse to do business with a particular company.

By consulting with experienced antitrust counsel, businesses can capture the benefits of blockchain innovation while avoiding costly antitrust violations.

An earlier version of this update appeared in Law360.

© 2023 Perkins Coie LLP