Antitrust and crypto: Another bump in the regulatory road?

What is antitrust?

Antitrust’s inception dates back to 1890 in the United States- it was created as a tool to address economic disparities on the market. Antitrust law refers to legal norms that encourage competition on the market and limit the power of any particular participant that becomes too big in contrast to others.  

Antitrust laws are all about making sure that mergers and acquisitions are done in a manner that doesn’t take on too much market power or form monopolies. It also focuses on preventing market participants from colluding, forming cartels to harm competition or fix prices on the market. 

In simple terms, antitrust laws want to ensure that everyone on the market is competing fairly; the term ‘trust’ in antitrust means a group of companies that team up or even form a monopoly to set out pricing in the relevant market and try to push their competitors out. 

Whether we call it antitrust or competition law, which is a term used mainly in Europe, it also presents a legal tool for consumer protection. An open marketplace with fair competition amounts to consumers enjoying stable prices and products or services of higher quality.

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Antitrust in the crypto era

The primary objective of antitrust laws has always been to preserve open and free marketplaces, which aligns with the primary perception of blockchain technology as decentralised, transparent, and permissionless networks. The same idea was once associated with the creation of the Internet. 

However, in the past couple of years, big technological companies have found ways to centralise the Web and act as intermediaries between the users and the Web.  

As Tim Berners-Lee, the inventor of the World Wide Web, once stated- bringing together blockchain technology and the Web could reduce the new role of big technology companies and connect users in many interesting ways. 

Blockchain and the crypto era can help antitrust in reducing the market power of centralised platforms owned by giant tech companies as well as comply with data privacy laws just by using its main traits. 

However, even if blockchain technology becomes widely accepted, the role of antitrust laws as the gatekeeper of economic democracy should remain. For all platforms to function properly in the relevant market, many industry experts think that self-regulation is insufficient and that antitrust agencies should remain neutral bodies that watch out for potential illegal practices. 

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Blockchain and possible antitrust problems

Due to its main perks, blockchain technology could help antitrust law, but if used by perpetrators, it could also become a tool for anti-competitive cartels. It is important to understand the three main elements of cartel conduct on the market. 

When forming a cartel, participants first need to be on the same page regarding the terms of their agreement; whether it is, for example, about big rigs or price fixing, they need to have a mutual understanding. 

Secondly, a cartel cannot pursue its goal if all participants don’t follow the consensus. Keep in mind that each cartel is made up of market participants which are competitors so they can be suspicious of each other’s conduct. Therefore, it is often required to monitor whether all members follow the terms of their mutual understanding. 

And finally, for a cartel to be efficient, there must be a sort of punishment for participants that didn’t follow the mutually established rules.  

There is a concern among antitrust regulators that blockchain could be used as a tool for harming competition. For example, if cartel members decided to utilise blockchain technology, it would be easier for them to monitor other members and whether they are following the terms of their unlawful agreement. Instead of smoke-filled rooms where conspirators used to meet a long time ago, now they just need to monitor data on the blockchain. 

Additionally, punishing members who move away from the terms of the cartel agreement could be implemented through smart contracts. While smart contracts are mostly associated with pro-competitive purposes and goals, they are a double-edged sword if used by malicious actors. For example, if one member sells below the fixed price, the smart contract could punish that member immediately because the predetermined conditions have been met.

Competition between crypto exchanges

Cryptocurrency exchanges function in a new and dynamic space in which competition is still developing. The crypto market is still considered a young one, but some main elements of competition between exchanges are showing up.  

Due to the current market dynamics and economic data, it is believed that the crypto exchange sector could become more concentrated in the years to follow, and that it will attract more attention from competition watchdogs. 

Some industry experts firmly believe that this is the time to lay down a solid antitrust policy that supports the growth of the crypto space, but sets some rules at the same time for companies to follow.  

Crypto companies made headlines frequently, and some of these events caused the general public to lose trust. Crypto exchanges play a vital role in the growth of the crypto space since they present mainly the first point of entry for many users and investors. Their adherence to consumer welfare norms as well as competition rules could help the whole crypto sector. 

It is important to understand that, even though crypto exchanges operate in a world ruled by the principles of decentralisation and transparency, they are still companies that could go through mergers and acquisitions or even obtain a dominant position on the market and abuse it afterward.  

While blockchain technology has the power to self-regulate eventually, education on pro-competitive and anti-competitive practices in the crypto market could help it gain trust and ensure user welfare.

How do crypto exchanges compete?

While the market of crypto exchanges is still evolving, it can be spotted that they compete on several parameters already such as liquidity, reputation, range of coins, and trading costs. Let’s explain them briefly. 

Liquidity is a term often mentioned within the crypto community. It is an important parameter for crypto exchanges, yet it is also significant in the context of market competition. When choosing a platform, users usually look for those where there are many buyers and sellers- the more people trade on a particular platform, it is believed that it provides more opportunities and beneficial trades. 

Secondly, crypto exchanges are typically judged on their level of security or the potential to avoid affairs and malicious activities. This presents the reputation parameter. Users are more oriented towards exchanges that provide a substantial level of security, and many crypto exchanges have taken proactive steps in that direction to ensure a better position on the market - some of them implement high levels of cybersecurity while others provide detailed insurance policies to safeguard investors and traders. 

Furthermore, the range of coins and tokens an exchange offers affects its popularity among consumers. Basically, exchanges that offer a wide array of crypto assets attract more users due to providing many options. However, exchanges need to take proactive measures regarding other parameters to truly prosper on the market; for example, offering a wide range of coins without substantial security measures set in place could affect the exchange’s reputation. 

All crypto exchanges include certain fees such as trading or deposit fees. These costs of trading are a significant parameter users take into account when choosing a crypto exchange to trade on. Therefore, the reduction of fees is one of the activities of competition between crypto exchanges to expand its user base. 

Network effects and barriers to entry

If you are a frequent reader, you probably remember that we have examined the influence of economic theories that stem from traditional finance on the crypto space in our 'How do popular theories in economics shape crypto?'.

The doctrine of network effects is significant in the antitrust context. Network effects happen when the value of a particular service to one user directly depends on how many other users are using it as well. This theory is prevalent within the economics of social media apps, but it can be also applied to the crypto space.  

Even though direct network effects boost the value of a product and attract new users, they can also assume the role of a barrier for new companies to access the relevant markets and produce anti-competitive effects. 

The network effects theory is linked to the liquidity of crypto trading platforms or traditional marketplaces- users feel more comfortable trading financial instruments such as stocks and shares or crypto assets in places with many other traders. 

When it comes to competition, this basically means that users who want to buy or sell an asset will use a small number of platforms, providing them with a powerful position on the market. This makes it hard for newcomers- even though they can access the market, they need to convince many people to use their services instead.

The winner takes it all

The problem with network effects in the context of competition law is that they have the potential to concentrate power and make antitrust regulators uneasy. 

However, several economic experts don’t think cryptocurrencies are a ‘winner takes it all’ marketplace, and that it won’t lead to a monopolistic infrastructure. Another concern is that the market may become oligopolistic which amounts eventually to higher prices, entry barriers, and lower variety, and overall affects the welfare of its customers. 

On the other hand, there is a wide variety of products and services that can be spotted within the crypto space as well as a high degree of technological innovations. It is believed that such features could diminish the network effects and maintain a healthy marketplace for the years to come.

Antitrust cases in the crypto space

As the antitrust division is slowly moving into the crypto space, many companies have caught the attention of regulators due to their anti-competitive behaviour. Let's take a look at a few examples of how regulators are dealing with antitrust crypto problems.

The Bitmain case and alleged collusion

Among all blockchain-related legal issues that made headlines, competition law has ranked low. As we have already explained, the antitrust aspect of crypto markets is still evolving. Therefore, legal issues have mainly been revolving around the financial status of crypto assets and less around harming the competition.  

However, prosperous markets equal power which is closely linked to abuses of power. Back in 2018, United Corp sued Bitmain, one of the largest Bitcoin mining pools as well as several high-profile stakeholders. It is considered the first U.S.-based antitrust case that involved crypto companies. 

In 2020, the court dismissed this lawsuit without prejudice, which in a legal sense meant that the plaintiff can file again an amended version of the lawsuit. 

The original complaint alleged that BItcoin cash developers such as Kraken and Ver colluded with Bitmain to redirect hashing power at the exact time the fork was scheduled to take place. This activity allegedly forced the network to implement the Bitcoin ABC design as well as allegedly caused harm to the network and other market participants. 

The plaintiff claimed that the collusion in question breached U.S. antitrust laws and harmed other market participants by restricting their right to compete. However, this case shall be remembered as the first one that tackled antitrust issues within the U.S. crypto economy.

Binance and alleged monopoly on the crypto market

In 2023, Binance Holdings Limited was sued by Nir Lahav, a cryptocurrency investor, for allegedly violating the U.S. Securities Exchange Act and California’s Unfair Competition Law by hampering competitor trading platforms operated by entities of the infamous FTX.

The class action intended to cover all investors who invested their money with FTX before 6 November 2022 and after 8 November 2023. 

In other words, Binance was accused of breaching securities and competition rules by attempting to monopolise the market of crypto platforms. FTX filed for bankruptcy when Binance decided not to acquire it; Binance was accused of triggering the collapse of FTX entities’ stock in the market for anti-competitive purposes. 

Binance got into more trouble as the U.S. Securities and Exchange Commission decided to sue with allegations of breaking securities laws and mishandling funds of customers. 

The Chilean abuse of the dominant position

Back in 2018, the Chilean Free Competition Defence Tribunal received three separate claims following the decision of several local banks to close crypto exchange companies’ accounts; the proceedings were initiated by SurBTC, CryptoMKT and OrionX. 

These three antitrust proceedings are believed to challenge traditional concepts of competition law. Let’s start with the dominant position claim - these crypto companies claimed that they competed with banks in the same relevant market as well as encompassing a payment management system using crypto assets.  

All these claims alleged that the closing of the bank accounts amounted to an abuse of the dominant position aimed at favouring a certain bank whose share capital is more than 70% held by the defendants. The third, OrionX’s lawsuit even laid down the concept of banks enjoying a collective dominant position. 

Secondly, the plaintiffs pointed out that the refusal to deal amounted to an abuse of the dominant position carried out by the defendants. The banks provided several different reasons for their doings such as not wanting to cooperate anymore with crypto firms due to internal policies and the notion that the crypto industry is not regulated. 

The third plaintiff, OrionX, inserted another interesting argument by pointing out the essential facilities doctrine which assumes that a good or service is considered essential when there is no existing substitute for the product. In other words, if those companies disappeared from the market, the Chilean crypto community would be left without the possibility to trade or invest in cryptocurrencies since the size of the country’s crypto economy is marginal. 

Tether and Bitfinex alleged price manipulations

2019 was a rough year for Bitfinex and its sister company, the stablecoin issuer Tether as they have been accused of manipulating the Bitcoin markets twice.  

The first legal proceedings started by New York’s Attorney General obtaining a court order against Bitfinex’s operators iFinex and Tether in April 2019, and a few months later, two Bitcoin traders, Eric Young and Adam Kurtz filed a class action suit in Washington that heavily relied on the first case. 

Long story short, these crypto companies have been accused of monopolising and conspiring to monopolise the Bitcoin market as well as manipulating the marketplace and making false claims. It was stated that the misconduct in question amounted to the prices of Bitcoin futures and Bitcoins itself being artificial. 

An interesting fact here is that both claims cited the same study created by professors at the University of Texas stating that one Bitfinex account used the USDT stablecoin to inflate the price of Bitcoin. 

Bitfinex responded that the second class action was mercenary and without any foundation, adding that such claims present a continuing insult to the company’s efforts and its customers. 

However, these companies declared their legal victories in 2023. The class action in New York was dismissed stating that the plaintiff’s claims lacked any legal merit. A month ago, the same court dismissed another case against Tether based on claims that the firm’s statements about its reserves were inaccurate.