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Focus on Regulation

What blockchain can learn from the net neutrality debate: antitrust and regulatory aspects of “paid prioritization” for a nascent technology

First come, first served. That’s not the principle behind the clearance of Bitcoin transactions. Equally for other blockchain technology networks, the relevant factor to get a transaction on the next available block is not time, but often: money. “Paid prioritization” is a reality. Miners will first pick and clear those transactions which will most highly reward them.

Is this a problem? Not necessarily. As long as users have plenty of alternatives in the fields of cryptocurrency or smart contracts they can just use different networks. However, in the medium or long run this issue could trigger the attention of regulators and antitrust authorities. Blockchains in highly regulated industries such as financial services or stock exchanges and those with consumer-facing applications are most likely to be under the microscope.

Is this concern premature? No. Who would have envisaged ten years ago that antitrust authorities would choose internet search engines, e-commerce platforms and algorithms as their favourite subjects for investigations and conference talks? And compare blockchain with other internet industries that are actually subject to regulation: this article argues that blockchain activists and users can learn from the heated debate around the net neutrality of internet networks. In that case, regulators eventually prohibited higher fees for bandwidth-consuming content such as streaming services. So it is important that a blockchain network gets its governance issues right from the very beginning to avoid cumbersome regulation and antitrust procedures.

1. PAID PRIORITIZATION IN BLOCKCHAIN NETWORKS

Paid prioritization is a reality, in particular for Bitcoin. This phenomenon has already led to comparably high transaction fees for Bitcoin for small payments. While fees of around 300 satoshi/byte are almost guaranteed to get you on the next block, participants paying only at the lower end of the band will experience significant delay. In other blockchain networks alternative factors such as corporate affiliations or membership in a consortium could trigger similar disparity in clearing transactions.

A paid prioritization blockchain environment can create a dual speed blockchain: one for those who can or want to pay more and one for those who can’t or simply don’t want to do so and whose transactions accordingly lag behind. Depending on the governance of the blockchain network those with less buyer power will stand on unequal footing. This could in the long run particularly affect start-ups, SMEs or consumers.

2. PAID PRIORITIZATION AND NET NEUTRALITY

But this is not necessarily a problem from the antitrust perspective in itself. Paying more in exchange for a faster service is not a new concept. It is an integral part of our society in various business segments; a bank transaction is executed faster at an additional cost and next day delivery is available at a higher price.

There need to be additional factors affecting how different prices in a network trigger the attention of antitrust authorities or regulators. Paid prioritization has been at the heart of the net neutrality debate regarding internet access both in the EU and the US. A first possible explanation could be the fear of some regulators and internet activists that the increasing commercialization of the internet jeopardises the underlying idea of a de-centralised and open network which is accessible for everyone. More specifically, there is only one internet, and it has become a global enabler of freedom of speech and expression. We are far from having only one blockchain – so does the comparison with net neutrality really matter?

Probably yes. Regulators were not only interested in net neutrality because of the constitutional background and the intense lobbying of certain internet user groups. There were also commercial and competition law related aspects: internet bandwidth can reach a certain capacity and if fast lanes were to be created to prioritise certain content, slow lanes would equally have to be created. More bandwidth and thus faster content delivery comes at a higher price. In this way fast lanes would effectively be reserved for the prevailing service providers who can afford to pay more for faster content delivery. Simultaneously the delivery of rival content would shift to the slow lane.

In the EU, since 2016 a specific Regulation on open internet access enshrines the principle of net neutrality into EU law. In the US the Federal Communications Commission in 2015 explicitly prohibited paid prioritization and blocking or throttling end-users’ access. Interestingly, the new FCC chairman, Ajit Pai, announced his plans to repeal net neutrality regulations in the US earlier in 2017. As laid out in a testimony by the FTC, this could potentially increase the role of the FTC as antitrust enforcer stepping into the role previously played by the FCC (albeit that the current enforcement powers of the FTC regarding communication carriers are more limited).

3. FROM THE FIRST AMENDMENT TO FAIRNESS OF PLATFORMS

What can blockchain learn from the net neutrality debate? There are strong voices in particular from consumer organizations lobbying for net neutrality on the internet. Net neutrality has been described as a code word for the First Amendment, enshrining the principle of freedom of expression on the internet. The blockchain environment as an emerging de-centralised technology could well trigger attention from these groups even if the links to free speech are less obvious and there are more available alternatives. This is due to the fact that there is a general trend sometimes described as “hipster antitrust enforcement” which looks at the power of digital platforms in a gloomy way.

In the EU, these ideas are sometimes discussed under the term “Fairness”.  In an impact assessment of October 2017 on “Fairness in platform-to-business relations”, the European Commission expressly raised concerns regarding situations in which there is discriminatory access to data on a platform: “[s]ome platforms may favour own products or services, or discriminate between different third-party suppliers and sellers, e.g. on their search facilities or by capitalising on superior data access. The general inability for business users to verify the existence or absence of such discriminatory practices also leads to uncertainty that can in itself be harmful.”

Will we see a grass-root campaign for blockchain neutrality? And how would politicians and regulators react to such claims? While it is too early to predict the outcome of such a hypothetical debate regarding this nascent technology, it is conceivable that blockchain networks which are used in heavily regulated areas such as the banking sector or stock exchanges, could be the first to come under scrutiny. Relevant factors for policy or antitrust action will be (1) whether paid prioritization within a blockchain evolves into a problem for consumers or small businesses, (2) whether there are alternative blockchains to which those users can divert, and (3) whether those on the blockchain network who cause the clearance of transactions to be bottlenecked are easily identifiable. It will be more difficult, for instance, to take antitrust action against the masses of Bitcoin miners than against a more limited number of mining pools.

4. REGULATE BLOCKCHAIN?

Regulators might consider specific rules on blockchain and regulate the way they should operate in an effort to combat paid prioritization. But regulation is not the only supervisory mechanism available. Again, blockchain activists should carefully analyse how strongly the FTC argues against net neutrality regulation and in favour of antitrust supervision.

Acting FTC Chairman Maureen Ohlhausen in July 2017 commented: “[i]n dynamic, innovative industries like internet services, an ex post case-by-case enforcement-based approach has advantages over ex ante prescriptive regulation. It mitigates the regulator’s knowledge problem and allows legal principles to evolve incrementally. A case-by-case approach also focuses on actual or likely, specifically-pled harms rather than having to predict future hypothetical harms.”

The same comment could be made for blockchain. Competition law aims to preserve the competitive process while not dictating market outcomes. The premature stage of blockchain deployment in various business segments indicates that consumer demand cannot be forecasted by regulators and embodied in ex-ante regulation rules. Thus, competition law will be viewed as the most suitable tool to deal with such issues in the future, striking the fine balance between protection of competitive process and satisfaction of consumer demand.

And indeed, the determination of whether paid prioritization in a blockchain network harms consumers or competition requires a careful economic analysis. The precondition would be a dominant position or market power and a lack of competitive alternative which would set a high threshold for antitrust enforcement.

Thus, the lesson learned for blockchain from the net neutrality debate is: early engagement in political and regulatory discussions will help to educate decision-makers in order to fend off overly burdensome regulation. Existing antitrust powers may help shape the argument that ex post enforcement is more suitable for this dynamic technology.

5. DON’T HIDE BEHIND THE BLOCKCHAIN

Paid prioritization is not the only blockchain sphere where competition law might intervene. Recent speeches by EU antitrust officials and most importantly by Commissioner Vestager herself indicate the increasing focus of the Commission on antitrust issues caused by algorithms and other big data-applications. If a blockchain network were used to camouflage anti-competitive practices, antitrust regulators would use their existing investigation powers.

Information exchange through blockchain is probably blockchain’s most attractive aspect for competition law enforcers. As a matter of fact, competitors who are part of the same blockchain network can exchange commercially sensitive information given that each of them keeps an identical record of all transactions cleared within the distributed ledger. Other relevant antitrust aspects include the extent of access to closed blockchain networks if membership to such networks is a requirement for activity on the market.

The more blockchain technology evolves and penetrates into almost all industries, the more it will attract the authorities’ attention. Paid prioritization will most likely feature as one of the issues which regulators will carefully analyse. Blockchain activists should watch closely as the debate on net neutrality develops. These lessons learned will be important to help continue the dynamic growth of this exciting technology.

Watch Falk discuss potential blockchain competition issues

Myrto Tagara and Anna Stellardi, both trainees in Hogan Lovells’ Brussels office, contributed to this article.