China: Competition Law Implications Of Blockchain Technology

Last Updated: 20 December 2017
Article by Fangda Partners

INTRODUCTION

This briefing examines how blockchain technology and its applications may present competition law risks that need to be properly assessed and addressed. This briefing provides key definitions, a description of how blockchain technologies work, an overview of new uses for blockchain technology, and an examination of the possible risks under the Antimonopoly Law of the People's Republic of China (the "AML"), and the Hong Kong Competition Ordinance.

Key definitions

Discussions of blockchain technology typically use specialised terminology that is important to understand. A number of key terms that are useful to understand for the purposes of this article are:

  1. Blockchain: In simplest terms, a blockchain is a data file made up of 'blocks' of information (e.g. transaction data). This train of transactions is almost impossible to amend after a new 'block' has been added. As put by Nick Szabo (one of the founders of blockchain technology), this is like the process of a fly being suspended in amber - over time the fly is still visible, but more and more layers of amber are added. This data file (sometimes called a "distributed ledger") is securely stored across multiple 'nodes' which allow for the verification of new blocks without a centralised authority able to independently control any part of the process. The entire blockchain itself contains a record of every transaction ever completed in the blockchain system (e.g. with Bitcoin or Ethereum, a complete record of every completed transaction using these currencies).
  2. Blocks: Each block is made up of records of any transactions (currency transfers, contracts, etc.), and identifying information about the block. This identifying information includes references to the fingerprints of earlier blocks, and a fingerprint of the block based on the one-way encryption of the transaction data it contains. Each block has a single 'parent', and is organized chronologically, so there is a traceable 'chain' back to the first block of the blockchain.
  3. Nodes: These are the computers connected to the blockchain network that validate and relay transactions (i.e. the hardware behind the blockchain network). The Nodes play an important role in creating individual blocks out of transaction data (one block can hold information about multiple transactions), putting the blocks in chronological order, and storing the blockchain itself.
  4. Private Key: Private Keys are large numbers unique to each user in the Blockchain. Each time a user wants to confirm a transaction, their Private Key is used to verify the transaction, and prevent the transaction from being changed by any other users.
  5. Bitcoin: A digital currency created in 2009, which is one of the earliest and most well-known applications of blockchain technology in the real world.
  6. Ethereum: Sometimes called 'bitcoin 2.0', this is a newer digital currency which also allows for computer code to be added to the currency in each block of the blockchain. This means that Ethereum allows Smart Contracts and Distributed Applications ("ĐApps") to be integrated as part of the blockchain.
  7. Smart Contracts: Smart Contracts are contracts that use computer code to give effect to legal terms, to automatically verify that a set of conditions has been met, and to execute the contract. For example, a supply contract could be designed so that when the GPS coordinates of the goods match a pre-defined set of coordinates, the supplier is automatically paid for the goods delivered.
  8. Distributed Applications (ĐApps): ĐApps are basically software applications run on multiple computer systems simultaneously. Instead of running the entire application on a single computer, ĐApps are run on cloud computing platforms, and split up the tasks needed to run the application across the network. Simple examples of this process outside of the blockchain would include the internet, global banking systems, and GPS – none of which are centrally controlled.
  9. Public Chains: A fully public blockchain is one where anyone connected to the blockchain can see all the information contained in the blockchain, and participate in the verification process for each new block.
  10. Private Chains: A fully private blockchain, by contrast, would restrict verification of new blocks to a single node, or a limited group of nodes. A Private Chain may also have restrictions on who is able to read the information in the chain, and allow the consortium or the company running the Private Chain to change the rules of the chain, and reverse transactions, etc.

How does blockchain technology work?

Blockchain technology effectively works by creating a chain of data, like an accounting ledger, distributed across multiple nodes. Each node has a full copy of this accounting ledger and amendments need to be made by individual nodes which are then verified collectively.

In the context of blockchain currencies such as Bitcoin, when party A tries to send Bitcoin to party B, party A will use their Private Key to 'sign' a message containing: (i) party A's Bitcoin address, (ii) the transaction amount, and (iii) party B's Bitcoin address. These inputs are run through a one-way encryption algorithm which produces unique 'fingerprint' for the block. This message is sent from party A to a node to be added to a block and verified by each of the nodes in the Bitcoin network.

The verification process involves nodes in the network re-running the encryption of the transaction message based on the transaction inputs. If more than 50% of the nodes (in Bitcoin, calculated by computing power used to run the blockchain) on the network run the encryption and arrive at the same unique output, then the block (and the transactions it contains) is deemed verified. Once the block is verified, it is packaged into a block and added to the blockchain. The blockchain will then show party B as the owner of the Bitcoins sent by part A.

What can blockchain technology be used for?

There are a wide range of applications for blockchain technology across various industries, and this range of applications is constantly evolving.

Facilitating transactions

The security of blockchain systems and the self-verification of the chain via the blockchain's nodes are of particular interest to financial institutions. These features are especially relevant in the context of cross-border payments and on the trading floor, as they can help to reduce the time needed for clearing and settling trades (which can take several days). Relying on the self-verifying nature of blockchain transactions, trade execution, clearance and settlement could be performed by the same system without the need for trusted third parties to act as middlemen. Especially for algorithmic trading, the entire transaction could be completed in a matter of minutes instead of days.

Self-executing contracts

The use of Smart Contracts in conjunction with blockchain technology may also have a significant impact on financial institutions and other businesses. Especially in industries that typically rely on standard form contracts, the use of Smart Contracts based on predetermined inputs (e.g. price, parties, conditions, etc.) may significantly lower transaction costs.

Current initiatives in this field have examined the use of Smart Contracts in executing options contracts, shipping contracts in supply chains (where, for example, payment of the contract is conditional on a truck or ship reaching a pre-defined set of coordinates), and insurance.

Proving provenance

The unchangability and self-verification of blockchains are also relevant in industries that need to prove the origins of a particular set of goods or property. This would include supply chains (particularly for preserving food safety and maintaining quality standards), the ownership records of antiques and collectables, intellectual property ownership, and land registries.

Verifying identity

One final use that is being considered is using the biometric data of users to create their unique Private Key. This would create a digital ID card that can be used to verify the identity of individuals seeking to access services or pay for goods. This use of blockchain technology has been incorporated into voting (e.g. to verify voter registration), and is currently being explored as a way to provide legal identification to millions of refugees, and to tackle human trafficking.

What are the potential competition law risks associated with blockchain technology?

The transformative nature of blockchain technology has raised many potential regulatory issues. These issues range from the legal enforceability of Smart Contracts to anti-money laundering concerns, securities regulations to privacy issues. For the purposes of this briefing, we will focus on a number of key competition law concerns.

Cartels

One of the key issues with blockchain technology is the information-sharing aspect of the blockchain system. Once information is written into the chain, it can be accessed by any of the nodes that operate the system. Indeed, where the nodes are required to verify each block, they need to be able to access the raw inputs to run the one-way encryption.

Where transaction information is transparent, this may be used by competing firms to coordinate and fix prices, which would violate Arts. 13 and 14 of the AML, or be a concerted practice in violation of the First Conduct Rule ("FCR") in Hong Kong.

Especially in a Private Chain operated or accessible by competing undertakings with significant market power, it is important to restrict the visibility of transaction records. Sensitive information such as trading volumes, contract terms, pricing data, and party names in these chains should not be automatically shared with every user or node. One current example of a blockchain with an anonymization feature is 'Zcash', which can shield the identity of the sender and the recipient, and the value of the transaction on the Zcash blockchain.

A separate issue with regards to cartel activity relates to the use of Smart Contracts and ĐApps on the blockchain. Where undertakings work together to automate the setting of prices through the use of Smart Contracts and ĐApps, they should avoid using this code to facilitate price-fixing or to manipulate prices.1

Abuse of Dominance

A number of special considerations apply under competition law to undertakings with a dominant position in a given market. Where blockchain technology is used in the context of a supply chain, a refusal by manufacturers to supply downstream consumers without access to the blockchain could constitute a refusal to supply.

Similarly, there may be exclusive dealing concerns where a limited Private Chain only allows purchasers to buy goods from the dominant undertaking. Either of these acts could potentially constitute violations under Art. 17, AML and the Second Conduct Rule ("SCR").

In terms of pricing, a manufacturer or supplier using Smart Contracts or ĐApps to set minimum resale prices could also be at risk of Resale Price Maintenance for the purpose of Art. 17, AML and/or the SCR.

Investigations

In public, transparent blockchains, the visibility of transaction data may also enable the detection of anti-competitive conduct. A law enforcement agency with access to the blockchain could simply review previous transactions in the chain for patterns of suspicious activity. The transparency and immutability of transactions on the blockchain have therefore prompted some to refer to the technology as 'prosecution futures'. This was the case in the prosecution of Ross Ulbricht, accused of running the 'Silk Road' (an online black market website involved in the sale of drugs and other illegal activities). The Silk Road relied, in part, on the anonymity of bitcoin, as there were no identification requirements for opening a bitcoin wallet. However, once prosecutors were able to tie Ulbricht to his bitcoin wallet, the blockchain provided a perfect record of all the transactions his account was involved in. Ulbricht was eventually sentenced to life imprisonment in 2015.

In a Private Chain, it is less likely that law enforcement or third parties will have the chance to access the full chain on their own accord. A Private Chain used by a secretive cartel would be difficult to detect. However, the impact that a leniency application by a cartel member could have on the remaining members would be magnified by the submission of a copy of the blockchain.

Merger notifications

Concentrations of undertakings (including mergers and acquisitions) are notifiable in the PRC under Arts. 20 & 21 of the AML. In Hong Kong, the Merger Rule only applies to the telecommunications sector. Note, however, that in Hong Kong the FCR would still apply to agreements with the object or effect of restricting competition in Hong Kong, which may include certain joint venture agreements.

In the context of blockchain corsortia and alliances, the approach taken by the Anti-Monopoly Bureau of the Ministry of Commerce ("MOFCOM") has differed from that of other competition authorities. In June 2014, MOFCOM published only its second prohibition decision, which prohibited a proposed alliance between three container shipping companies, (the "P3 Alliance").

This decision was unexpected as the merger had already been cleared by US authorities, and the European Commission confirmed it would not open investigation proceedings (on the basis that the alliance did not constitute a merger). MOFCOM specifically noted the high market share of the parties, as well as the centralization of operational and management decisions. MOFCOM's approach was therefore to consider the P3 Alliance to be more of a joint venture, thus subject to notification requirements.

For consortia working on blockchain technologies, such as R3 (a consortium including more than 70 of the largest financial institutions), the creation of a single platform between multiple undertakings might result in notifiable transactions. Based on the P3 Alliance case, the creation of a network centre to jointly coordinate and manage the P3 network was enough to trigger notification requirements. Previous cases have shown that as long as the alliance or consortium can serve to eliminate or restrict competition in the PRC, notification would be required – even if the alliance or consortium was located entirely outside of the PRC. What is different for blockchain technologies is the distributed and automated nature of this coordination and management.

Jurisdictional issues

As mentioned above, the AML and Competition Ordinance may apply to blockchains operating outside of the PRC and Hong Kong respectively which have an impact on these markets. However, a separate issue may arise regarding the application of inconsistent legal principles from multiple jurisdictions to the apportionment of legal liability under a blockchain system.

For example, when dealing with an open-source blockchain platform with users and nodes located across multiple jurisdictions a number of unique questions arise:

  • Who bears liability in a distributed blockchain platform?
    • The developer, creator, or members?
    • What if the technology is open-source and created collectively by multiple programmers?
  • If a third-party algorithm creates trades and executes Smart Contracts in an anti-competitive fashion, who are the AML and Competition Ordinance going to be enforced against?
    • What if the anti-competitive effects were the result of a bug in the code?
  •  When entering into contracts with a distributed autonomous organization (essentially, a distributed software program) connected to a blockchain (such as the DAO, used for crowdfunding), how will the courts interpret the legal status of the distributed autonomous organization itself (which may not have separate legal identity)?

Concluding Comments

Blockchain technology is currently at the forefront of innovation in multiple industries around the world. It is therefore no surprise that companies looking to remain relevant in the global economy are examining and testing potential uses for this technology. This has not gone unnoticed by regulators. Regulatory bodies around the world have started to consider the impacts of blockchain technology on the industries they oversee, as well as how they can use blockchain technology themselves. In the PRC and Hong Kong, the People's Bank of China, and Hong Kong Monetary Authority have both started to look at the impacts of blockchain technology. Indeed, the Ministry of Industry and Information Technology and the Hong Kong Monetary Authority have both been involved in publishing papers looking at the impact of blockchain technology on their respective jurisdictions.

New technologies, however, bring with them new forms of regulatory oversight. It is not clear how exactly regulators will attempt to approach the regulatory issues raised by blockchain technologies. At this stage, we can simply flag potential issues that could have an impact on blockchain users in the future. It is important for companies looking to be early adopters of this technology to be aware of the potential regulatory risks involved, especially as governing rules for new chains are being considered. After all, if there are any transactions that breach the law, the blockchain itself will maintain an immutable record of these breaches.

Footnote

1 In a 2016 UK Competition and Markets Authority ("CMA") case, two competing online sellers ('Trod Limited' and 'GB eye') of posters implemented a price-fixing cartel through the use of automated repricing software. The CMA went on to warn software providers that they could violate competition law if they help clients to use their software to facilitate price-fixing arrangements. See: https://www.gov.uk/government/news/cma-warns-online-sellers-about-price-fixing  .

First published August 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions