Friday, 03 April 2020
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Innovating for the greater good: how to design a competition law compliant blockchain

It is clear that competition authorities around the world are under significant pressure to make 2020 the ‘year of action’ when it comes to the digital economy. The debate around data, privacy and innovation in the digital economy is one of the hottest topics in antitrust and one that is driving regulators to become more cautious in their review of digital transactions, leading to increased interventionism. This interventionism is being informed by learnings from retrospective reviews, such as the US FTC’s recently launched market study into non-reportable past acquisitions by tech companies.

A few weeks ago, a senior European Commission official cautioned that blockchain-enabled digitisation initiatives, such as the Tradelens platform in the shipping sector, should take care not to fall foul of rules on anticompetitive foreclosure and information sharing. Likewise, the chief executive of the French competition authority, speaking at the UK CMA’s conference on “Understanding Digital Markets”, called out blockchain as an area that the French authority is proactively looking into to understand potential risk areas and to provide clearer messaging to the market.

When it comes to blockchain technology, there is currently a great deal of academic and regulatory debate, but little practical guidance for business on the boundaries imposed by competition law.

What is blockchain?

Blockchain technology offers a solution for people or entities who may not know each other to establish a trusted record that is based on the approval of all parties involved without the need for an intermediary. This technology was first used to establish Bitcoin as a means to facilitate peer-to-peer payments without a central third party intermediary such as a central bank.

From a legal perspective, blockchain is a transformational development for intangible goods and services across all sectors. Blockchain technologies have the power to enhance competition in existing markets and innovative solutions can provide better outcomes for consumers – for example, by materially reducing frictional costs in the document-heavy shipping sector. From a technological perspective, the protocols and source code underpinning blockchain are relatively straightforward and often freely available as open source software. For more details, see here.

There are broadly two types of blockchain: (i) public blockchains, also known as permissionless or open ledgers – with the most well-known example being the Bitcoin blockchain – and (ii) private blockchains, or permissioned ledgers. Permissionless ledgers are open, decentralised networks that anybody can access and send their transactions to be verified by the network. In contrast, the participants in a private blockchain all know each other and, unlike a public blockchain, there may be some scope for the access rules of a private blockchain to be changed retrospectively. For this type of blockchain, access is governed by a central “gatekeeper” who determines, based on pre-agreed rules, who is and is not allowed to participate. This “gatekeeper” role in a private blockchain is key to understanding and mitigating against potential competition law concerns.

Is blockchain an “essential facility”?

The interest shown by competition authorities and financial regulators around the world in blockchain suggests that regulators are keen to proactively consider the competition law risks arising from the changing landscape. One of the specific risk areas identified by the European Commission relates to the potential for anticompetitive foreclosure.

The “essential facilities” doctrine is central to competition law concerns around anticompetitive foreclosure, as a refusal to provide access to “essential facilities” or “critical inputs” may enable a dominant player to insulate itself further from future competition.

The premise of the essential facilities doctrine is therefore that the owner of an “essential” or “critical” facility must provide third parties, including its competitors, with access to that facility at a reasonable price. This “forced” supply is a notable exception to the general rule that all companies, whether dominant or not, should be free to choose their trading partners. The doctrine is not without controversy and the threshold for establishing whether an input is in fact “essential” varies from jurisdiction to jurisdiction.

In Europe, this doctrine was – perhaps unsurprisingly – first developed in the context of access to key infrastructure, such as ports, airports, rail and telecoms networks. Since then, the case law has evolved to include modern day inputs such as data sets, operating systems, and premium TV content. Notwithstanding this evolution, the European Courts’ starting point remains that a refusal to supply can only amount to an abuse of dominance in the most exceptional circumstances.

The following circumstances, in particular, must be present in order for the exceptional circumstances threshold to be met:

-- the refusal relates to a product or service that is indispensable to players active on a downstream or neighbouring market;

-- the refusal is such that it leads to the elimination of effective competition on the downstream or neighbouring market; and

-- there is no objective justification for the refusal of access.

This set of three factors giving rise to “exceptional circumstances” is, however, neither exhaustive nor settled. The European Commission has made clear its view that it is entitled to take account of exceptional circumstances other than those identified in the case law to date. In the Microsoft judgment, the Court acknowledges this to be the Commission’s view without expressly disagreeing with it.

The central tenet of the essential facilities doctrine is this requirement of indispensability. It is not enough for it to be merely convenient or useful for a competitor to have access to the dominant company’s product or service – access must be essential. The Commission and the Court’s starting point is to look at whether competitors could effectively duplicate the input or service in the foreseeable future. This question is not one of absolute impossibly – the economic viability of duplication is key.

Looking at recent private blockchain innovations, it seems that – at a technological level – duplication by a competitor would indeed be neither impossible, nor unreasonably difficult. The fact that much of the source code that forms the basis for developing a blockchain is publicly available, relatively easy to replicate, and broadly the same irrespective of industry or application, would indicate that there is nothing ‘irreplicable’ about a given blockchain application. This will provide some comfort if the blockchain is being deployed for internal use only within a company (e.g. where blockchain is merely digitising existing processes).

If a blockchain moves from internal use to being more widely adopted across an industry or supply chain, economic viability concerns may start to trump arguments around technological ease of duplication by a competitor. Competition authorities or courts may find that setting up a second, similar blockchain infrastructure is simply no longer “economically viable” once a critical mass of end customers, suppliers and other industry players have gravitated towards the incumbent blockchain. Such a finding is more likely to emerge in sectors where there are strong network effects or, in the context of data, in industries where the blockchain records contain important single source information (i.e. the information stored within the particular blockchain is unique and therefore not accessible to those outside the network).

However, as a starting point, there are several features of blockchain that clearly distinguish it from other inputs and services to which the essential facilities doctrine has previously been applied – most notably the fact that the source code underpinning the design of a blockchain is largely publicly available and is readily accessible to competing developers. That said, concerns that incumbent players may seek to use blockchain access restrictions to maintain “gatekeeper” positions and raise barriers to entry, mean that the risk of regulatory investigations under the essential facilities doctrine cannot be ruled out.

So what practical steps can companies and developers take to mitigate against these emerging risks?

Top tips for businesses developing blockchain initiatives in 2020

1. Where a new blockchain or standard for blockchains is developed, ensure, where possible, interoperability with other blockchains or standards. Systems which are “closed” are at risk of being deemed anticompetitive for stifling competition and innovation.

2. Design robust governance protections around the blockchain’s gatekeeper function – for example, by enshrining the independent gatekeeper function, including the objective access criteria, into a company’s constitution or articles of association. This ensures that any retrospective changes to the blockchain’s access criteria would be more burdensome and visible. These protections are more credible and persuasive if they are established voluntarily and prior to regulatory concerns being raised, and allow the blockchain owner to build up a strong track record of transparency and compliance over time.

3. Access to the blockchain should be made available to non-members on fair, reasonable and non-discriminatory – or “FRAND” – terms.

4. Any membership fees and joining fees should not be excessive, and the scope and duration of early adopter fees should be reasonable.

5. Keep a record of any refusals of access, and remember that refusals must be limited to, and based on, objective justifications (e.g. the third party requesting access has inadequate cybersecurity systems and controls).

Competition law risks and enforcement attitudes towards innovative industries continue to evolve rapidly. For more on this, see our 10 Key Themes chapter on the Digitised Economy.


source: freshfields.com

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