Antitrust Law Meets Blockchain and Cryptocurrencies in Court: Lessons Learned on Market Definition and Antitrust Injury from the Bitman Case



Author: Luis Blanquez

Following DOJ’s remarks on blockchain, it was only a matter of time until antitrust law and the unstoppable blockchain world would meet in court. And it finally happened some months ago in the complex Bitmain case.

In this case a cryptocurrency developer and mining company sued Bitcoin Cash miners, developers, and exchange operators for violating of Section 1 of the Sherman Act and Section 4 of the Clayton Act. It accused them of manipulating a network upgrade to take control of the Bitcoin Cash blockchain. The Court dismissed the Amended Complaint twice (the last one with prejudice), for failing to plausibly show a conspiracy to hijack the network and centralize the market, an unreasonable restriction of trade, and antitrust injury.

  1. Blockchain and cryptocurrencies

Blockchain is such a complicated technology that just the simple task of defining it would require a much longer article. But the Southern District Court of Florida did a great job explaining in very simple terms what these two concepts––blockchain and cryptocurrencies–– are:

Cryptocurrency is a form of digital currency that trades in currency markets. The Satoshi Nakamoto whitepaper, published in October 2008, launched the idea of this “peer-to-peer” version of electronic cash that allows online payments from one party to another, independent of any financial institution. The Whitepaper coined the term “Bitcoin”, and today Bitcoin and Bitcoin Cash are different forms of cryptocurrency.

Cryptocurrencies are a “permissionless” system that rely on a network of decentralized encrypted public ledgers that document all digital transactions, known as a “blockchain”. The blockchain is a series of blocks, which are units of accounting that record new transactions in cryptocurrency. Confidence and trust in the accuracy of the transactions in the blockchain is possible because the decentralized ledgers are identical and continuously updated and compared.

The system has mechanisms that allow for consensus on the validity of the blockchain. One is “Proof-of-Work”, which is designed to eliminate the insertion of fraudulent transactions in the blockchain. Also, the “main chain” (normally, the longest chain) at any given time, is whichever valid chain of blocks has the most cumulative “Proofs-of-Work” associated with it. A consensus being reached on the longest blockchain is essential to the integrity of the network.

New cryptocurrency is created through a process called “mining”. Miners compete to “mine” virtual currencies by using computing power that solves complex math puzzles. The computer servers that first solve the puzzles are rewarded with new cryptocurrency, and the solutions to those puzzles are used to encrypt and secure the currency. The awarded currency is then stored in a digital wallet associated with the computing device that solved the puzzle.

  1. The Bitmain case

In a nutshell, this case is about how certain mining pools, protocol developers and crypto-exchange defendants allegedly colluded to manipulate a network upgrade by creating a new hard fork, taking control of the Bitcoin Cash cryptocurrency. In the end, however, the court concluded that the plaintiff ––a protocol developer of blockchain transactions and mining cryptocurrencies––, failed to (i) show a plausible conspiracy, (ii) define any relevant product market to prove an unreasonable restriction of trade, and (iii) show any antitrust injury.

The Parties

As Konstantinos Stylianou effectively explains in his article What can the first blockchain antitrust case teach us about the crypto economy?, in the cryptocurrency world it is important to understand what the different players are and how they are connected in the market: investors, mining pools (groups of miners that combine their mining resources), crypto-exchanges, and protocol developers. We highly recommend his article.

The plaintiff, United American Corporation (UAC), is a developer of technologies for both the execution of blockchain transactions and mining cryptocurrencies. One of them is called BlockNum, a distributed and decentralized ledger technology that allows the execution of blockchain transactions between any two telephone numbers regardless of their location, eliminating the need for cryptocurrency wallets. The other one is called BlockchainDome, which provides a low-cost energy-efficient solution for mining cryptocurrency. UAC built four domes in total that operate over 5,000 Bitcoin Cash-based miners, investing more than $4 million in technology.

On the flip side, there are three different categories of defendants:

  • The mining pools: (i) Bitmain Technologies operate two of the largest Bitcoin Core and Bitcoin Cash mining pools in the world: Antpool and It is also the largest designer of Application Specific Integrated Circuits (“ASIC”), which are chips that power the Antminer series of mining servers––the dominant servers mining on a number of cryptocurrency networks, including Bitcoin and Bitcoin derivatives; (ii) Wu, CEO of Bitmain Technologies and one of its founders; and (iii) Ver, founder of, which provides Bitcoin and Bitcoin Cash services.
  • The crypto exchanges––Kraken and its CEO Jesse Powell––which operate exchanges on which Bitcoin, Bitcoin Cash and other cryptocurrencies are traded.
  • The protocol developers Shammah Chancellor, Amaury Sechet and Jason Cox who––similarly to UAC––, work on the development of the software to execute blockchain transactions and mining of cryptocurrencies.

The Alleged Antitrust Conspiracy

Summarized from the briefing:

Bitcoin Cash (or “BCH”) emerged as a cryptocurrency from the original Bitcoin Core (or “BTC”) on August 1, 2017, as a result of a “hard fork”. A hard fork is a change to the protocol of a blockchain network whereby nodes that mine the newest version of the blockchain follow a new set of rules, while nodes that mine the older version continue to follow the previous rules. Because the two rule-sets are incompatible, two different blockchains are formed, with the new version branching off.

The 2017 hard fork resulted from a dispute over Bitcoin’s utility: whether it should primarily be used to store value or conduct transactions.

(Note: BTC’s resistance to this significant attempt to fork it further strengthened it by demonstrating that it can overcome an attack of this type. If BTC were subject to significant forks that change its nature, it would not have the trust it has now as a store of value. This and other attacks on BTC actually strengthen it—Bitcoin is Antifragile in this way).

In November 2018, BCH was scheduled for a routine upgrade, but the protocol developers disagreed on the rules set. Any disagreements are resolved in a democratic process whereby mining nodes “vote” with their computer power to support a particular update. This voting process, known as a “hash war,” unfolds when nodes download and run one of the competing updates on their computers. Individuals with CPUs can “vote” by choosing their preferred software code and are free to leave and rejoin the network at will.

As a result of the disagreement, two competing software upgrades—Bitcoin ABC and Bitcoin SV—contained incompatible rule sets. Because neither upgrade could command a consensus among stakeholders, the dispute had to be resolved by a vote.

Bitcoin ABC, led by Ver and supported by Bitmain Technologies and Wu, sought to preserve Bitcoin Cash’s basic structure, to include a limited block size of 32 MB and to prevent major developments in the future. In contrast, Bitcoin SV sought to increase the block size to a maximum of 128 MB, to accommodate more transactions with lower transaction costs.

In December 2018, UAC sued defendants alleging a decline in the value of its cryptocurrency and a deterioration in the quality of BCH. UAC alleged the following:

  • Miners Ver and colluded with Wu and Bitmain Technologies to reallocate pools of Bitmain Technologies servers from the BTC network to’s pools in the BCH network minutes before the implementation of the BCH network upgrade. That had the effect of “increasing’s hashing power by over 4,000%, diluting the ‘vote’ being exercised by other nodes, and ensuring the Bitcoin ABC rules set survived the “hash war.”
  • Protocol Developers Shammah Chancellor, Amaury Sechet, and Jason Cox implemented what is called “a software checkpoint” that locked down the new ABC blockchain after BCH bifurcated. The main effect of a checkpoint is to ensure that only the proponents of the resulting blockchain dictate any future software upgrades on that cryptocurrency network. Combining this checkpoint with the hashing power of Bitcoin ABC backers above allegedly amounted to centralization and control over the cryptocurrency network. As a result, the decentralized process whereby competing participants in the BCH network could propose software changes to improve upon the quality of Bitcoin Cash is now centralized and controlled by those who had dominated the hash war that caused the hard fork.
  • Crypto Exchanges Kraken and its CEO Jesse Powell released public statements in favor of the ABC implementation and against the SV implementation.

The Court dismissed the amended complaint with prejudice for failure to allege a plausible conspiracy among all defendants, any relevant market, or any harm to competition.

  1. Analysis of the Main Antitrust Arguments

No Antitrust Conspiracy

There are two ways that plaintiffs may prove an antitrust conspiracy: by direct evidence or circumstantial evidence, including “plus factors.” Like in most antitrust conspiracies, there is no alleged “smoking gun” in this case. Thus, to comply with the plausibility standard under Twombly and survive the motion to dismiss, UAC had to present circumstantial facts supporting the inference of interdependent conduct accompanied by “plus factors.”

What is the Twombly Motion-to-Dismiss Standard for Antitrust Cases? Comparing the Ninth and Second Circuits

There are several reasons why UAC’s compliant did not survive the motion to dismiss challenges (twice).

First, UAC did not provide the Court with a clear explanation of UAC’s role(s) and activities in the crypto market(s), nor did it include a definition of the relevant product market(s) for the purpose of an antitrust analysis.

That deficiency turned out to be fatal because the Court wasn’t able to determine whether the alleged conspiracy was (i) entirely horizontal––only the mining defendants Ver and Wu through his company Bitmain Technologies directly competed; (ii) vertical––there was no suggestion that defendants operated at different levels of either the production or distribution chain of Bitcoin Cash; or (iii) was a hub-and-spoke agreement––no evidence that one defendant is common to all others.

Second, the Court held that the complaint lacked factual assertions that all defendants entered into a shared agreement. Even though UAC alleged that defendants, in fact, agreed to a two-part scheme, the Court concluded that the complaint lacked the necessary factual support under the Twombly standard to plausibly show a conspiracy.

Third, the Court stated that the only truly parallel behavior was that of the miners. Ver, owner of non-defendant, and Defendant Bitmain Technologies and its CEO and founder Wu, were competitors to one another, as well as to UAC, as they all mined Bitcoin Cash at the relevant time. As alleged, defendants engaged in the similar conduct of pooling servers to mine Bitcoin ABC shortly before the hard fork.

The Court, however, concluded that: (i) such parallel conduct was pertinent to only the first part of the alleged conspiracy: to hijack the network by dominating the hash war.; (ii) there was no allegation of parallel conduct on the part of the Exchange defendants and the developer Defendants, and (iii) both the actions-against-self-interest argument and the public-statements arguments were rejected as lacking evidence of a “plus factor.” None of them could reasonably be read to constitute the existence of a two-part agreement among the three groups of defendants.

Because the complaint failed to plead the existence of a conspiracy, the court dismissed it for failing to satisfy the first element of a Section 1 claim under the Sherman Act.

But what would have happened if, for instance, UAC had better explained its role as both (i) a protocol developer by developing blockchain solutions at the network level for the execution of blockchain transactions, and also (ii) as an operator of mining pools at the mining level?

This could be particularly helpful considering the existence of not only one antitrust conspiracy, but rather several ones at the different levels of the production / distribution chain of Bitcoin Cash. Sure, UAC would still have to provide the Court with an analysis of the product market(s) concerned, flesh out its allegations and provide more specific evidence of “plus factors” about how the different conspiracies interacted with each other to survive a motion to dismiss under the Twombly standard.

UAC could try to do so by, for instance, showing evidence of a high level of interfirm communications. You can read about a couple examples of these type of allegations below.

Marketplace Bullying and Bona Law’s Antitrust Lawsuit in the Cement and Ready-Mix Concrete Markets

Drug Price Comparison Antitrust Lawsuit Brought by Bona Law Moves Forward

So, the final question is: would that been enough to survive a motion to dismiss? We will have to wait until the next round to find out. Besides, even if UAC was able to accomplish all the above––which is not an easy task––it would still have to face the biggest challenge: to show antitrust injury.

No Antitrust Injury: No Unreasonable Restrain of Competition

To show an antitrust conspiracy under the Twombly standard, UAC not only had to plead facts that raised a suggestion of a preceding agreement, but also plausibly allege how the agreement unreasonably harmed competition, either through a “per se” violation of Section 1 of the Sherman Act, or under a “rule of reason” analysis.

Per se” violations of Section 1 of the Sherman Act

UAC alleged two potential per se violations: bid rigging and group boycott, but both of them failed. The Court understood that the “per se” label only applies when previous history and analysis shows that in sufficiently similar circumstances, the rule of reason unequivocally results in a finding of liability, which, at at least one level of generality, is not the case of the cryptocurrency market(s).

For bid rigging, the Court held that the crux of what makes bid rigging per se unlawful is its tendency to eliminate competition between bidders to offer the best commercial terms. Such conduct is in no way analogous to the purported hijacking of a single cryptocurrency network, especially when the end result is additional cryptocurrency choices (i.e., more competition, not less).

In the case of group boycott, the Court held that plaintiffs failed the pleading requirements for a per se group boycott claim because, among other things, plaintiffs (i) did not show whether the alleged agreement precluded UAC from mining the ABC and SV cryptocurrencies, (ii) did not allege that defendants were horizontal competitors in any relevant antitrust market, (iii) did not allege that defendants possessed market power in a relevant product or geographic market.

Rule of Reason Analysis

Any contract, combination or conspiracy that unreasonably restrains trade and does not fit into the “per se” category above is usually analyzed under the so-called rule of reason test.

This test focuses on the state of competition within a well-defined relevant agreement. It requires an analysis of (i) definition of the relevant product and geographic market, (ii) market power of the defendant(s) in the relevant market, (iii) and the existence of anticompetitive effects. The court will then shift the burden to the defendant(s) to show an objective procompetitive justification.

In this case, the Court concluded that UAC also failed to draw the reasonable inference that defendants’ alleged agreement was an unreasonable restraint of trade, because it did not allege enough facts connecting defendants’ conduct to any anticompetitive effect.

First, the complaint did not expressly define any product or geographic market. All UAC did was allege that the relevant market was Bitcoin Cash worldwide based on the fact that: (i) each form of cryptocurrency has distinctive characteristics––size of the blocks associated with the cryptocurrency, the software design underpinning the cryptocurrency, and the utility of the cryptocurrency as a means of storing value or as a means of conducting day-to-day transaction; (ii) it is intended to be scalable, meaning that it is designed with larger block data limitations so that transactions using Bitcoin Cash can be performed quickly and with relatively low transaction costs in a peer-to-peer system; and (iii) it is the most widely adopted form of peer-to-peer cryptocurrency cash-like system in the world.

This was, however, not good enough for the Court, which held that: (i) different products competing in the same market may have distinctive characteristics; (ii) the fact that Bitcoin Cash is “unique” because of its utility for peer-to-peer daily transactions and is alleged to be the most widely adopted form of a cash-like cryptocurrency says nothing about the extent to which consumers prefer Bitcoin Cash; (iii) and UAC failed to show whether cross-elasticity of demand existed between the market for Bitcoin Cash and the market for other cryptocurrencies.

The lack of a thorough product market analysis is unfortunate here. For now, one may perhaps argue that the moment a hard fork is created, and a checkpoint is implemented, there is a lock down of the newly created blockchain. Only the proponents of the resulting blockchain dictate any future software upgrades on that cryptocurrency network, making it in theory incompatible with other cryptocurrencies. This could open the door to consider the new hard fork as––at least–– its own submarket, despite end users being able to choose between different cryptocurrencies in the wider market of cryptocurrencies to make an investment.

No Antitrust Injury: No Harm to Competition

Without any doubt, this is by far the most interesting and challenging argument in the new antitrust blockchain world.

In an antitrust case, plaintiffs must establish antitrust injury to recover under federal antitrust laws. This means (i) injury of the type the antitrust laws were intended to prevent and (ii) that flows from that which makes the defendant’s conduct unlawful.

In its complaint, UAC introduces several arguments to allege harm to competition:

  • The value of the cryptocurrency that it mines in its BlockchainDomes had fallen significantly, the combined value of the forked currency was lower than the pre-fork currency, and UAC had suffered significant damages through the loss of value of the currency;
  • The quality of Bitcoin Cash rests on its integrity, which depends on the market being decentralized whereby no one entity controls the market (allowing for unbiased value of the currency). It alleges that for a cryptocurrency network to remain secure and trusted, the entire process must remain distributed and decentralized so that no single individual, entity or pool can control more than 50% of the computing power. If this 50% figure is exceeded, the network is no longer decentralized which will cause its users to have a lack of confidence and trust;
  • Deterioration in the quality of Bitcoin Cash. After the hard fork, and with the implementation of the checkpoint, competing developers who wish to propose innovative ways to improve upon the software implementations used to mine for Bitcoin Cash will be unable to do so to the detriment of all participants in the Bitcoin Cash network. This harm is intended by defendants to inure to their benefit in that only the defendants can dictate to the market when and how upgrades are introduced. This concerted action has the effect of reducing the ability of Bitcoin Cash to innovate to prepare for greater and greater scalability as it is adapted more widely than its current use.

As defendants effectively explained in their brief, UAC does not allege any specific facts identifying actual indicia of diminished quality, nor does it explain how or why Bitcoin SV and Bitcoin ABC are of inferior quality to the previously unitary cryptocurrency.

Also, assuming that Bitcoin SV is the better vehicle (because sought to increase the block size to a maximum of 128 MB, to accommodate more transactions with lower transaction costs) then it would have made sense for miners, software developers, and other Bitcoin Cash stakeholders to switch to it. Which is in fact what some of them did. Defendants argued that the fork probably resulted in more competition not less, with Bitcoin SV and Bitcoin ABC each representing a different vision of how best to scale up Bitcoin Cash for use as a peer-to-peer version of electronic cash.

However, would the outcome of the above analysis be still the same if Bitcoin SV and Bitcoin ABC were considered––at least––submarkets within the overall cryptocurrency market(s)? How would the combination of hashing power and checkpoints affect competition and the product market(s) concerned? Would it have the negative impact of forcing the rest of the network to conform or create an unwanted hard fork? And if so, would this be sufficient to trigger the threshold of antitrust injury? Too many questions without an answer…for now.

Image by Pete Linforth from Pixabay

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