The OECD asked Thibault Schrepel, Associate Professor of Market Law + Technology at the VU Amsterdam and member of ALTI’s board, to record a video on smart contracts and antitrust. Here it is, following its transcript.
Welcome, there are three topics I would like to address in this video. First, what is a smart contract? Second, can it help collusion between competitors? And third, can it help abuses of dominance? Let’s go. A smart contract is nothing more than a computerized protocol that executes the terms of a contract. That is the definition given by Nick Szabo, a computer scientist who coined the term in 1994.
In practice, a smart contract is not always a contract in the legal sense of the term, but a potential transaction following if/then rules: if the train is late, then you get compensation; if the value of Bitcoin drops below 40k, then you buy some.
Smart contracts can be implemented on top of a blockchain. When they are, they benefit from blockchain core characteristics, including immutability, I will come back to that in just a minute. But if you are interested in the legal and technical aspects of smart contracts outside the realm of competition law, I’ve written a report for the European Commission on the subject. It will soon be published; keep an eye on it.
Now, applied to antitrust, smart contracts are game-changers. This is particularly true of collusion. As we know collusions between competitors are non-cooperative games; none of the colluders can force the others to cooperate — that is, to stick to their illegal agreement. Should they have a contract, it is not enforceable. In a nutshell, they cannot force the other players to reach the optimum outcome, here, to stay in the cartel.
To be sure, smart contracts cannot be enforced by a court of justice if they are illegal by nature. But the immutable nature of blockchain ensures that code will be triggered if the conditions are met. Smart contracts, in short, create cooperative games. By doing so, they change the nature of collusion. This is why it is important to always discuss the medium used by companies to collude instead of focusing solely on the type of algorithms being used.
And so what’s the impact you may ask? Well, smart contracts help the social plus the economy perspective of cartel stability. The social perspective covers the trust colluders have in each other. The greater trust, the less likely one colluders will apply for leniency. Smart contracts help in this regard because colluders know that code will execute the terms of their cartel. Also, smart contracts help to ensure that staying in the cartel remains more beneficial than leaving it. They can indeed be used to automatically detect and punish deviations. It follows that collusion should become more stable with the use of smart contracts.
That said, collusion could also end more rapidly if smart contracts are used as ejection seats for colluders to leave the agreements if all the other colluders deviate from it. And of course, most collusion with smart contracts will be visible. For example, it will lead the price of a product to be the same for all competitors. Should agencies be given the means to become more proactive, they will detect such collusion.
When it comes to abuses of dominance, smart contracts seems to be less relevant. Related practices are about one competitor abusing its market power. There is no need to strengthen the trust between wrongdoers, so the usefulness of smart contracts is logically reduced.
Here I have listed some practices for which smart contracts could be used nonetheless, For example, one may imagine that dominant companies will want to implement rebate strategies using smart contracts. But at the end of the day, these companies will always question whether using a smart contract is more efficient for the purpose of infringing antitrust law than using a regular agreement. The answer won’t be as obvious than it is in the case of collusion.
Should you want to read more detailed analysis on the subject of smart contracts and competition law, and also learn about how smart contracts could help antitrust agencies, I am pleased to announce that my book, “Blockchain + Antitrust”, will be published at the end of September 2021. Despite the difficulties that smart contracts create, they are full of promises and can prove the common good. Let’s tackle the issues in a way to preserve their potential. Thank you for your attention.
Thibault Schrepel, Smart contracts and antitrust, ALTI Forum, September 7, 2021