This presentation by Peder Østbye, Special Adviser, Norges Bank, was made during the discussion “Blockchain and Competition” held at the 129th meeting of the OECD Competition Committee on 8 June 2018. More papers and presentations on the topic can be found out at oe.cd/2gx.

1. COLLUSION AND
EXCLUSION IN
CRYPTOCURRENCY
MARKETS
OECD COMPETITION COMMITTEE HEARING, 8 JUNE 2018
PEDER ØSTBYE, SPECIAL ADVISER
NORGES BANK

2. The essence of cryptocurrencies
2
 Cryptography-based asset disposal
– Users dispose over assets linked to register-addresses with a private key
– Ownership verified with a public key
– Pseudo-anonymity
– Various degrees of programming features for “smart-contracts”
(conditional disposal)
 Decentralized operation and governance
– The users validate transactions and maintain a distributed ledger (DLT)
– Detection and punishment of misbehavior facilitate integrity (e.g.
processing only valid transactions, preventing double spending,
consented coin growth)
– Bitcoin: Proof-of-Work blockchain

3. Cryptocurrencies can improve competition
3
 Cryptocurrencies created with the intention to compete with
traditional finance?
– “[w]hat is needed is an electronic payment system based on cryptographic
proof instead of trust, allowing any two willing parties to transact directly
with each other without the need for a trusted third party.” Nakamoto
(2008)
 Regulation is needed: crime prevention, consumer protection,
systemic risk mitigation
– But regulations should not unnecessary restrict or distort competition
 We must also consider how competition can be restricted in
cryptocurrency markets

4. What are the relevant markets associated
cryptocurrencies?
4
 Cryptocurrencies provide some money functions
– Medium of exchange
– Store of value
– Unit of account
 Cryptocurrencies are separate payment systems
– Compete with each other and traditional payment systems/services
providers
 Cryptocurrencies can be platforms for the intermediation of suitable
services
– Smart contracts
– AI services
– Data storage

5. Market power in cryptocurrency markets
5
 Market power within a cryptocurrency
– Certain stakeholders can have market power vis-a-vis other stakeholders
in a cryptocurrency
– Anti-competitive alliances are possible
 Market power in broader relevant markets where a cryptocurrency
participate
– Certain cryptocurrencies may gain a strong position in a relevant market
– The stakeholders can engage in exclusionary or exploitative practices

6. Market power within a cryptocurrency
6
Some stakeholders in a cryptocurrency
 Operators
– Users who perform validation and maintain the cryptocurrency’s integrity
 Code-developers
 Input providers
– Software, hardware, electricity, communication providers, financial service
providers
 Normal users
– Those who use the cryptocurrency as intended

7. Market power within a cryptocurrency
7
Some examples of possible anti-competitive actions
 Agreements and collusion
– Collusion both for exclusion and exploitation
– Mining pools
– Vertical restraints between operators and input providers
 Unilateral conduct
– Excessive transaction fees
– Exclusion transactions by certain users or of blocks validated by certain
validators
 Mergers
– Purchase of coins/tokens
– Purchase of mining equipment
– Vertical integration of stakeholders, e.g. operators and input providers

8. Market power in broader relevant markets
8
Some stakeholders
 Stakeholders within the various cryptocurrencies
 Wallets and exchanges
 Payment services providers
 Financial infrastructures
 Banks
 Internet/communication providers

9. Market power in broader relevant markets
9
Some possible anti-competitive actions
 Agreements and collusion
– Collusions between stakeholders in different cryptocurrencies
– Exclusive agreements between stakeholders in a cryptocurrency and third-
party providers
– Exclusive agreements between internet/communication providers and
cryptocurrency stakeholders
 Unilateral conduct
– Exchanges, wallets or payment services providers may obtain a dominant
positions and discriminate against certain cryptocurrencies
 Mergers
– Cross ownership in cryptocurrencies
– Banks, traditional payment services providers, or internet providers might
acquire control over cryptocurrencies and associated platforms

10. Challenge 1: methodology
10
 The governance structure of a cryptocurrency is very different from a
usual firm
– How to specify profit functions?
 How to analyze competition and assess market power?
– How can cryptocurrency operators possess market power?
– How to measure market power?
 Is the traditional industrial organization workhorse sufficient?
– Textbook IO models may not be useful representations
– New forms of co-opetition
– How do network effects play out?
– Must competition authorities learn more «cryptoeconomics»?

11. Challenge 2: competition law application
11
 Substantive issues
– Who can be liable according to comeptition law?
– Distinguishing coordination and unilateral behavior (e.g. are validators
acting unilaterally or coordinated when complying with protocols)?
– How to determine dominant position/monopoly power?
– What is a merger?
 Enforcement issues
– How to deal with pseudo-anonymous operators?
– How to deal with cross-jurisdictional operations?
– What are the right remedies?