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Blockchain and Competition – OSTBYE – June 2018 OECD discussion

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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.

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Blockchain and Competition – OSTBYE – June 2018 OECD discussion

  1. 1. COLLUSION AND EXCLUSION IN CRYPTOCURRENCY MARKETS OECD COMPETITION COMMITTEE HEARING, 8 JUNE 2018 PEDER ØSTBYE, SPECIAL ADVISER NORGES BANK
  2. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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?

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