The Competition Commission of India has come out with a discussion paper with clear no to Blockchain Tech for Anti Competition Enterprising.The discussion paper focuses on an interplay between “blockchain” and “competition law in India”.
The relevant and most significant part of the discussion paper has been tried to be discussed in this write up.
Definition of Blockchain and Smart Contract
The bedrock of this discussion paper is the definition of blockchain” and smart contract and defined herein below;
Block Chain
It has dealt on blockchain and its transactional nodes, as under,
A blockchain is a virtual chain consisting of information on various blocks (transactions) grouped together in a sequential manner. This chain maintains a decentralised, distributed, immutable and secure record (or ledger) of the transactions taking place between different nodes7 of the blockchain.
Decentralised – The process of adding a new block to the database/ledger is governed by a consensus mechanism8where the different nodes on the network participate in the process of deciding whether to add a new block of transactions to the database or not. This decentralised nature of the blockchain (resulting from it being controlled by a group of nodes rather than a single central authority) makes it more secure for the participants since the characteristics of the network cannot be changed by a single entity for its benefit.
Distributed – Each node keeps a copy of the database/ledger containing details of all the past entries. While this creates redundancy in the network, it also provides security to avoid manipulation of records. Specifically, any attempt to corrupt the network (by a hacker) may happen only if the data stored on the majority of the nodes in the network gets altered.
Immutable – Once an entry has been added to a blockchain, it is nearly impossible to edit, correct or delete the entry. This makes the data record of past transactions on a blockchain almost permanent and unalterable. An entry can only be updated by adding a new block instead of changing/deleting the past record.
Secure – The process of adding a block to the database involves cryptography (a mathematical algorithm to encode information for security purposes) and economic incentive mechanisms which do not require trusting the other nodes involved in the network. This is the emergent property of maintaining a distributed and decentralised database by involving a consensus mechanism. The absence of the need to trust the other nodes involved creates an opportunity to transact and interact with greater confidence
Smart Contract
The paper has defined the smart contract as below,
A smart contract is a programmable code that is executed on a blockchain, after meeting certain pre-defined terms and conditions, thereby self-enforcing an agreement between two or more parties14. They are based on the “if and then” logic, i.e., if the parties to a transaction comply with the pre-agreed conditions, then the transaction is validated by a smart contract, else it is rejected.
It is a computer protocol intended to digitally facilitate, verify and enforce performance of an agreement. Platforms like Ethereum provide setting up of a programming logic for executing transactions between the nodes. With the advent of 5G, the Internet of Things (IoT) and Artificial Intelligence (AI), smart contracts play an important role in the world of technology and commerce. Today, most of the trading on stock exchanges is algorithmic in nature where AI plays a key role in deciding whether to buy or sell securities.
Issue Identification
It takes a note of the fact that the advent of digital technologies, internet and now, blockchain as well as smart contracts and ICOs have resulted into running of firms in a decentralised way.
This results into a major challenge as there are many entities participating on this platform.
Conclusion cum Evaluation
On the basis of the aforesaid and ancillary aspects related to functioning of blockchain technology and IOT , they concluded as to what shall be the matrix of evaluation as under:
a.Who can participate in a blockchain application and who can get access to the information, i.e., whether the blockchain application is permissioned/permission-less and private/consortium/public?
b.What is the consensus mechanism that is being adopted?
c. What are the governance rules, i.e., how can the source code/algorithms be changed?
e.What is the application, i.e., what records are being maintained?
f.What is the medium of exchange, i.e., fiat money, cryptocurrency, crypto-tokens, etc.?
Pro-competitive effect of blockchains
The discussion paper also discussed on the following to be an attempt leading to pro-competitive effects, as under;
a.They may enable individuals and entities to bypass intermediaries, provide consumers with greater information, and enable more efficient transactions . Better functioning markets may thus be promoted as a result of the decentralised and transparent nature of blockchains .
b.They can reduce transaction cost between unrelated entities, as a result of which it may be possible for firms to disaggregate their different departments and outsource the related functions to external individuals/entities. As a result, competition for these functions may increase .
c.They can provide small and medium enterprises (SMEs) with an efficient and trusted way of transacting with consumers, thereby removing any barriers that may result from the existing economies of scale . The most prominently discussed pro-competitive effect of blockchains relate to their possibility to increase competition by lowering barriers to entry and creation of new products and services.
An example is a digital marketplace created on a blockchain that does not assign control (over both price and access to data) to a single entity. Such a marketplace by enabling individuals and firms to transact without an intermediary may be able to increase competition in the market .
Sectors on Smart Contracts
The commission identified that the smart contracts have applications in various sectors such as insurance, healthcare, automobiles, real estate, insurance, lotteries, supply chain management, cryptocurrency exchanges, financial exchanges, covenants, law (including creating a will) and government (e-voting system).
Smart contracts do not require manual intervention, such as raising a claim request or processing it, thereby saving time and cost for both parties. For instance, in the clearance and settlement of accounts, blockchains allow near real-time transactions between two parties directly, thereby reducing cost and the time involved.
Issues related to Smart Contracts
The discussion paper also deals on the legality and challenges pertaining to smart contracts:
i. One of the challenges may be a smart contract’s inability to address contingencies. For instance, provisions with respect to the frustration of contracts due to change of law, impossibility, Force Majeure, and Act of God, etc., can be built into traditional contracts but may not be possible in smart contracts.
Immutability and irreversibility of such contracts could be a challenge. Under contract law, a contract is not just a set of instructions to be automatically executed; rather they are interpreted in the context of ever-changing real scenarios. Spirit of law supersedes the letter.
ii.There may be further challenges related to validity of smart contracts. Under the existing provisions, contracts need signatures. Similarly, digital signatures are required for contracts that are executed digitally.
The Indian IT Act, 2000 puts a limitation on obtaining these digital signatures, and says that only a government-designated certifying authority can provide these signatures. This conflicts with blockchain technology as it uses a hash-key for authorisation.
This disparity is also vis-à-vis the Indian Evidence Act (1872), Section 85B, which states that an electronic agreement would be considered valid only if it has been authenticated with a digital signature. These two provisions raise issues around validity and admissibility in case of a dispute.
Blockchain In India
The discussion paper also deals on blockchain in India and its application in various sectors.It also discusses about Supreme Court decision quashing the RBI circular which had banned the Crypto currency and also the domain of RBI to regulate policies in its domain.
The discussion paper also takes cognisance of the fact that though the dimension and horizon of Blockchain is exhaustive as there being multiple points which are yet to be analysed and understood however, the technology is attracting interest and there is a possibility for blockchains to become more pervasive, on the same scale that the Internet was a few decades ago.
It further discussed that acquiring an understanding on the blockchain technology may help competition authorities address competition issues related to blockchain applications. Discussions among blockchain stakeholders and the competition authorities on new market nuances and paradigms may help in getting an analytical understanding.
Thus, they focussed on the following two major aspects as to how Competition law is to be understood under the context of blockchain:
a. How competition issues could be evaluated under competition laws.
b. The possible benefits from blockchain in terms of competition law enforcement.
Challenges in Blockchain & Agreement
1.Execution of an agreement or otherwise
The discussion paper majorly focuses on the enforceability of an agreement under the guise that “whether the participation in the blockchain application can be construed as an “agreement” as defined in the Competition Act, 2002 (‘Act’). “
2. Decentralised Participation as Enterprise
It proceeded with a fact that “blockchain applications are decentralised, i.e., there is no single entity that takes decisions. Rather multiple entities are involved in decision-making.”
Whether participation of multiple entities results into a dominant enterprise in a collective manner or otherwise. At the same, it also acknowledges that collective dominance is not yet recognised in India.
However, it concludes that Blockchain is an enterprise alone. The basis being the Act defines an enterprise as “a person or a department of the Government…” and a “person” to include, among others, “an association of persons or a body of individuals, whether incorporated or not, in India or outside India” . Thus, a blockchain application may be taken as an enterprise (involved in the provision of the service of distributed ledger technology (DLT) under the scheme of the Act).
3. Enforcement
The paper also have grave concern over enforcement of competition law by the authority law in as much as while assessing the allegation of collusion, the pseudonymous nature of the nodes in a public blockchain application may imply that even if the authorities are able to analyze the data on the blockchain to detect possible evidence of collusion, it may still be unable to determine the real-world identity of the specific nodes that are alleged to have colluded.
This issue is relevant to other areas of competition law as well. Without being able to identify the firms engaged in the anti-competitive conduct, the authorities may be hindered from undertaking necessary measures to address the competition concern and penalise the concerned parties.
4.Jurisdiction
It is pertinent to note that blockchain applications can exist across geographies. This could raise the jurisdictional issue for competition authorities around the world when nodes/market participants of a blockchain application are located across different countries.
This challenge can be overcome by co-operation between competition authorities in different parts of the world. Therefore, effective competition enforcement would hinge upon timely and accurate information sharing, communication and co-ordination between competition authorities around the globe.
Concerning India, Section 32 of the Act enables India to inquire into anti-competitive agreements, abuse of dominance, and mergers and acquisitions that occur outside India but are likely to have an appreciable adverse effect on competition in India. As mentioned above, international co-operation between competition authorities will play a key role in addressing the jurisdictional challenges arising from global blockchain applications.
Legality
The Competition Commission of India is majorly concerned with the ambit of the following provisions;
a. Section 3(3)- Horizontal Agreement
It observed that In the case of competitors (firms engaged in the same economic activity), anti-competitive agreements often take the form of collusion (cartelisation or bid rigging).
It further concluded that for a collusive agreement between competitors to be successful, the firms that are a part of such an agreement should be able to:
i. Interact with each other and arrive at a mutually agreeable coordination strategy.
ii. Monitor each other’s conduct to ensure adherence to the agreement.
iii. Punish a firm in case of deviation from the agreement in such a way that the penalty supersede the benefit from cheating on the collusive agreement.
b. Section 3(4)- Vertical Agreement
As regards to vertical agreement, it held that anti-competitive agreements between firms engaged in different stages of the value chain could take the form of tying-in agreements, exclusive supply/distribution agreements, refusal to deal agreements, and agreements aimed at resale price maintenance as per the Section 3(4) of the Act.
The possible vertical agreements which can be there in participation in blockchain can arise from the following ;
i.A blockchain’s governance prohibiting access for an entity using a competing blockchain application/wallet/exchange
ii. An agreement between a blockchain platform and developer of blockchain applications running on the platform prohibiting/restricting the developer from dealing with any other competing platform.
iii.An agreement by a mining hardware provider tying the sale of its product to a miner by using a specific wallet.
iv. An agreement between a blockchain and its nodes/wallet/exchange that requires the latter to use only the blockchain application in question (thereby prohibiting the latter from participating in any other competing blockchain application).
v.Smart contracts that self-enforce tie-in, exclusive supply/distribution, refusal to deal, or minimum resale price maintenance between entities at different levels of the value chain.
In some cases, the above vertical agreements could adversely affect the competition. Whether a vertical agreement is anti-competitive or not, is assessed on a case-by-case basis by balancing the anti-competitive impact against justifications for the vertical arrangement.
c. Section 4 – Dominance of Power
This had been the major concern in blockchain and hence the paper discusses on dominance of power in more exhaustive manner.
It also noted that the Act prohibits an enterprise from abusing its dominant position in a relevant market. Competition assessment related to abuse of dominance involves analysis of:
a. Market power (or dominance) of the entity under investigation
b. The impact a dominant entity’s actions may have on the competition.
The concept of “Relevant Market” is very significant and hence it has been defined as under:
a. Each blockchain application as a market (since its ledger would be distinct): Such a market definition may be appropriate only when there are no close substitutes to the blockchain application, either in terms of other blockchain applications, non-blockchain technologies or offline substitutes. This is likely to happen in case blockchain applications are leveraged to create new markets that do not currently exist.
b.Blockchains with similar applications as a single market: Blockchains providing similar applications may be defined as a relevant product market when there are no substitute non-blockchain applications. This is likely to be the case with blockchain applications that create relatively new but similar types of products or services.
c.Relevant market consisting of similar blockchain applications and non-blockchain applications: The relevant product market can be defined to include similar blockchain applications as well as other similar digital/non-digital substitutes (if any) when they are all close substitutes. This is comparable with online sales and offline sales from brick and mortar stores being considered as part of the same relevant market.
Dominance can also emerge within a blockchain when a participant achieves a position of power. This may be observed when entities having an existing dominant position exert their market power in the functioning of a blockchain application. For instance, a large existing entity may sponsor/develop a blockchain application such that its design, governance and terms of participation draw support from the entity.
Suggestions to check compliance of Competition Laws in a Blockchain Ecosystem
The broader suggestions to ensure that there is a compliance at the end of stakeholders in a blockchain ecosystem (who, inter alia, include technology developers, blockchain platforms, wallets, miners, exchanges, mining hardware manufacturers and users) are enumerated as under;
a. Blockchain stakeholders should be mindful of the provisions of the Act while participating in a blockchain.
b. Blockchain applications should not be used to exchange competition-sensitive information among competitors. This includes recent data on prices, cost or output information of competitors.
c.Blockchain or smart contracts should not be designed to enable enforcement of any collusive (including imposing punishment in case of deviation from collusive agreement) or anti-competitive conduct of any form.
d.Stakeholders need to be mindful of the provisions related to Section 3(4) of the Act while creating any smart contract or blockchain application between parties that are part of a production chain, such that these do not result in or are likely to result in appreciable adverse effect on competition.
e.Any enterprise operating or participating in a blockchain, which is in a position of dominance (as defined in Section 4 of the Act), should avoid potentially anti-competitive behaviour such as fixing unfair or discriminatory prices or conditions or provision of services, limiting or restricting production/development of goods or services or denial of market access of goods or services.
f. While designing the governance mechanisms of a blockchain, consideration should be made for the possible changes in compliance relating to any requests or orders issued by CCI.
AMLEGALS Remarks
The entire discussion paper revolves around the terminology of “interplay” between competition law and blockchain. Even the possible grey areas have been tried to be tested with the water of different jurisdictions as well.
The challenges are many and even in most developed Blockchain nations, there is no clear identification of many aspects which this paper has tried to touch and at times shown its inability.
The crux of the paper has been that blockchain creates “enterprise” as there is “decentralisation“. Further, multiple entities play a role or participate in the chain and hence the testing parameters of dominance or anti-competitive or collusive dynamics is a concern with the authority.
They have identified the working of “smart contracts” in across sectors and also cautioned that the stakeholders should realise and act sensibly in terms of the Act and also ensure that there is no contravention of Section 3(3), 3(4) and 4 of the Act per se in any direct or indirect manner and at any given point of time.
Only the time will reveal as to how the dominance power in Blockchain tech arena will evolve and the line of demarcation being very thin to be identified and revealed under a given situation.
For any feedback or query, feel free to connect with anand@amlegals.com
Leave a Reply