JONES DAY TALKS®: Takeaways from a Landmark Cryptocurrency Antitrust Case
The surging interest in cryptocurrency continues to raise new legal challenges for market participants and interested parties. This is largely uncharted territory, so there’s comparatively little case law. However, a recent federal court’s decision in United American v. Bitmain provided some insight as to how courts would apply antitrust laws to cryptocurrency.
Jones Day partners Craig Waldman, Mark Rasmussen, and Chris Pace talk about the key takeaways from the court’s decision and discuss the other potential types of crypto asset antitrust claims we might see in the months and years ahead.
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Read the full transcript below:
Dave Dalton:
Cryptocurrency continues to raise new legal challenges for market participants and interested parties. This is largely unchartered territory, so of course there's comparatively little case law. However, a recent federal court decision in United American v. Bitmain, Inc. Provided some insight as to how courts would apply antitrust laws to cryptocurrency. Jones Day partners Craig Waldman, Mark Rasmussen, and Chris Pace are here to talk about the lessons we can draw from the court's decision and what other types of crypto asset antitrust claims we could see in the future. I'm Dave Dalton. You're listening to Jones Day Talks.
Dave Dalton:
Since 2016, Jones Day partner Mark Rasmussen has advised clients on cryptocurrencies, blockchain technology, and fintech matters. In 2018, he was the first ever court-appointed receiver in an SEC enforcement action involving an initial coin offering promoter. Mark is co-editor and co-author of the book Blockchain for Business Lawyers and is a frequent speaker on legal issues related to blockchain technology.
Dave Dalton:
And Jones Day partner Chris Pace has prevailed in more than 20 trials and he has orally argued and prevailed in more than 25 appeals. Chris represents clients in commercial disputes, antitrust, and unfair competition cases, RICO actions, and False Claims Act matters. He has represented corporations in the financial services and technology industries, including healthtech and fintech companies, to litigate and resolve commercial antitrust and fraud and false claims lawsuits.
Dave Dalton:
And finally, Craig Waldman co-chairs Jones Day's global antitrust and competition law practice. He has more than 20 years experience representing companies in antitrust government investigations, private litigation, and in counseling them on how to manage antitrust risks and daily business activities. Craig also leads Jones Day's cross-practice technology law team.
Dave Dalton:
Craig, Chris, Mark, thank you all for being here today. And Craig, thanks for directing this discussion. So with that, please take it away.
Craig Waldman:
Thanks, Dave. And thanks guys for being here. Mark, we represented Bitmain in a fascinating case brought by United American in the cryptocurrency area. Can you just tell us a little bit about it and the products involved?
Mark Rasmussen:
Yeah. Sure, Craig. Thanks. It really was a fascinating case from the moment I saw the complaint. I knew it would be interesting and one we wanted to be involved in very much. To my knowledge, it was the first antitrust claim alleged involving the crypto industry. And it really arose out of what's called a hard fork of the Bitcoin Cash blockchain back in November of 2018. And Bitcoin Cash was a blockchain network derived from the original Bitcoin Core cryptocurrency that was created by Satoshi Nakamoto in 2008 and launched in early 2009.
Craig Waldman:
Great. And what was the essence of the claim on why the conduct was anti-competitive?
Mark Rasmussen:
Yeah. Well, from the defendants perspective really nothing alleged was anti-competitive and defendants were proved to be correct with the case being dismissed. But from the plaintiff's perspective, what they alleged is that some of the defendants colluded together to support one protocol versus another. So when blockchains, they periodically automatically go through updates. These are called forks. They could be a soft fork or a hard fork. A soft fork is one where if you don't update you can still communicate with the others on a network, your instance of the software is compatible with those that have updated. A hard fork is one where you got to update or you're no longer going to be playing by the same set of rules and you won't be able to participate in the network.
Mark Rasmussen:
So as blockchain networks are upgraded, there can be different proposals that are advanced. And that was the case with the Bitcoin Cash network. And leading up to November of 2018, there were two primary proposals that were being supported. One was called the ABC protocol and the other was called the SV protocol. And the plaintiff alleged that the defendants colluded together in various ways to support the ABC protocol to make it the dominant blockchain to emerge from this hard fork.
Craig Waldman:
Got it. And my recollection, this is not the first, it's certainly one of the first cases that a federal court has had to deal with antitrust claims and dealing with blockchain and cryptocurrencies. What challenges did that create for the team and how did you manage them? And for instance, I know you in particular made a tutorial presentation to the court. Where did that fit in and how do you think that worked?
Mark Rasmussen:
Yeah, it's a good question. You know, as I mentioned at the outset, when I read the complaint I was really interested in it, but I also thought that the claims should be dead on arrival. I didn't think there was a lot of merit to it, but that was because I understood the core technology at issue. And I understood the allegations. I understood and had read the white paper, which was a component of the complaint, the Bitcoin Core white paper. And I just didn't see any way that these antitrust theories would hold up. But I was concerned that a court could take a look at the allegations and think, well, at a superficial level, there was enough alleged there. The complaint certainly uses some strong terminology like mercenaries and it paints a decent picture of things.
Mark Rasmussen:
But fortunately, our judge really got into the case, studied the allegations, learned the technical components well so she could evaluate whether enough had been alleged. And part of that involved the court asking the parties to present to her what she called a tutorial on some of the concepts at issue in the complaint. You know, she recognized that she's got to take the allegations of the complaint as presented, but she wanted to understand some of the context. And so, yes, I had the opportunity to present to her this tutorial about the industry, about hard forks, and some of the concepts in the complaint. Co-defense counsel worked with me, plaintiff's counsel contributed to the contents of the tutorial, and we really strived to make it a neutral presentation to the court.
Craig Waldman:
Excellent. And Chris, let's get into a little bit more about the antitrust specifics of the case. And most cases that I'm aware of, not all certainly, but most cases deal with the rule of reason, which is basically a test as to whether a particular piece of conduct or agreement is on balance, pro-competitive or not. Why wasn't United American able to make out that kind of claim, especially so early on in a dismissal like this?
Chris Pace:
Thanks, Craig. Well, the biggest challenge in terms of the rule of reason that United American faced really was trying to establish what the relevant market was. And as Mark was just discussing in terms of the tutorial, that was really a critical aspect because, Craig as you know having done a lot of cases that involve industries that aren't consumer-facing, judges sometimes in those settings, because it's not an industry with which they're familiar or comfortable and maybe sometimes they're more reluctant to really analyze the allegations and say what really are you claiming here, the tutorial was just critically important to getting this judge comfortable to understanding how the technology worked, who the different players were, how the general industry and all the different markets are set up, and made her much more comfortable in terms of really scrutinizing the allegations by the plaintiffs and realizing the problems that existed, not the least of which is trying to claim that this Bitcoin Cash, which is just one form of cryptocurrency, was itself a relevant market.
Chris Pace:
As opposed to saying, if you look at all cryptocurrencies, or even if you just look at Bitcoin Cash plus Bitcoin, you start talking about a much larger market, a lot more players, a lot less impact by the action of any individual player. So the product market analysis was critical. And it was an area where not withstanding that United American when their complaint was dismissed the first time was very clearly told you've got to plead the relevant market, they really were not able to the second time around either. And again, primarily because it really isn't its own market when you start talking about the Bitcoin Cash. I don't know what to call it. It's not a market. It's not a submarket. It's just a little piece of a much larger cryptocurrency market.
Chris Pace:
And the judge recognized there was no discussion by United American. They didn't tackle the whole idea of cross-elasticity, that if something happened with Bitcoin Cash that made it less attractive to consumers, why wouldn't they just switch over to Bitcoin? Or in fact, in this context, after what Mark calls the hard fork and you now have Bitcoin Cash plus Bitcoin SV, if they don't like Bitcoin Cash, why can't they just move over to Bitcoin SV?
Chris Pace:
On top of that, the other issue that the plaintiffs really had a challenge with was trying to explain, and we're unable to allege, why there was harm to competition in the market, as opposed to simply harm to them. They had made their bet on Bitcoin SV. They didn't win in the hash war. They were upset about that, but as you know harm to any individual competitor does not mean harm to competition, so that's another hurdle they were simply unable to overcome.
Mark Rasmussen:
Craig, if I could just jump in and add a point to elaborate on something Chris said on the market. I mean, part of the tutorial to the court included a map of Bitcoin forks. And since Bitcoin launched in 2009, there have been just a number of hard forks of Bitcoin, and so lots of derivations of the original Bitcoin, including what was Bitcoin Cash and what is now Bitcoin Cash ABC and Bitcoin Cash SV. And I think those have even forked since then. That's just the nature of blockchains, that they fork and chains grow and split off. It's just a very natural part of how this technology is developing.
Mark Rasmussen:
You think of a fork is really just a software upgrade. The difference between sort of a software upgrade for your phone versus a blockchain is that the phone maker and the software developer sends you prompts to update the software and tells you what that software will be. With the blockchain, you're in control of your device. You're in control of what you put on your mining device and you decide what software to adopt. And there are developers out there that are competing and making proposals on rule changes. And so just the nature of forks in blockchain is very competitive in and of itself. And that's always been the case.
Craig Waldman:
I thought one of the most fascinating parts of the case for its worth was the United American argument relating to the Satoshi Nakamoto white paper. Anytime you bring him into the equation, it's pretty interesting. Can you guys tell me about that piece of it.
Chris Pace:
Of course. In fact, it was a critical part of the United American argument. Their argument was essentially, if I take just one step back, the issue in a hash war ends up being computing power, who has more computing power. Mark phrases better than I do, but who has more computer power pursuing showing one upgrade versus another upgrade. And the allegation here is that there were servers, there were individuals who were not mining this Bitcoin Cash, who came in just before the measuring period, before the vote as they call it, and started mining it on a short-term basis in order to influence the vote. And what the United American was claiming was that that was a violation of the tenants of the way that cryptocurrency markets are supposed to work per this white paper that they wanted to point to. According to them, if you weren't a kind of a long-term participant in this marketplace, you shouldn't be allowed to influence the vote.
Chris Pace:
As we all know, from going through actual political elections, there are people who are not terribly politically active, but obviously you vote when it comes time to vote. The court said, "Look that white papers isn't law, so I don't have to really worry about it." And that was the right answer as step one.
Chris Pace:
But really, the step two is even if you looked at the white paper, the white paper is very clear that people can come and go from any cryptocurrency market as they please. And the vote is simply based on who during this one window pursues one type of upgrade versus another upgrade. So in other words, there is nothing against somebody coming in and mining a coin just for a short time period and voting on their preference for an upgrade. In this case, in fact, all they were really alleging is that companies and individuals who were mining already in a certain cryptocurrency increased their mining capacity for a short term period in order to influence the vote. But again, that's kind of rational action by somebody who's an investor. You're investing in a couple of different industries or a couple of different products or whatever you're invested in, there may be some times when your attention turns to one more than the other. And that's one of the things that occurred in this case.
Mark Rasmussen:
And, Chris, this voting analogy, I think it's useful to a certain extent, but it also can be misleading. Unlike a political election, it's not a winner-take-all vote. It doesn't have to be. It's more of a vote your preference. Do you prefer one soda versus another? Both sodas are going to be around. It's just I like this, you like that soda, and so we all can continue on and drinking our preferred sodas here. That's what the hard fork was about. It's miners preferring one protocol, one rule set, one software upgrade. They're going to install that on their mining devices and support that particular version of the upgrade, whereas everyone else is going to support the other one, the competing one, and they'll both continue on.
Craig Waldman:
Got it. Interesting. Let me bounce back a little bit to something Chris was talking about earlier. We focused on the rule of reason, and that was I think the bulk of the work that the court did and focused on. But there were concepts of per se theories and whether there were plausible conspiracies also alleged. Can one of you tell me where that fit in and what we should glean from it?
Chris Pace:
Sure. Let me, this is Chris. Let me take the first crack, and I'm sure Mark will have something to add to it. And I really want to I think talk about the conspiracy allegations. One of the things that's common in antitrust cases, I believe, is plaintiffs will have some piece of evidence from a party that they believe is powerful, that shows that there was some kind of wrongdoing here, and they want to be able to get that into their case. And so they try to weave any one of those actors who they have a piece of good information from and say, "Oh, you guys were all conspiring together." So for example, in our case, they had some statements that were made by somebody connected to a defendant that ran a cryptocurrency exchange. They had some conduct by some software developers. They had these little bits and pieces. And then what they tried to say is, "Well, we want to get all that evidence in. So we're going to claim all of these folks are in one giant conspiracy."
Chris Pace:
And the problem with that obviously ends up being that you have a bunch of disconnected parties and you don't have any way of really tying them together. And I think that's what happened with United American here. When the judge looks at it and the judge says, "Okay, you may have an allegation as to defendant one or defendant two or defendant three, but how do you connect those together?" There's no logical connection between all these different individuals, all these different companies. They weren't even engaged in the same kind of activity. Some were engaged in mining cryptocurrencies. Some were software programmers. Others operating an exchange or the trading of cryptocurrencies. And you can't just simply throw all those people into a complaint and say they must have conspired without some actual evidence of that conspiracy.
Chris Pace:
Beyond that, even as to those defendants who were involved in the mining activity, you can say, "Okay, there is some form of parallel conduct because they were all mining and they all voted for one particular upgrade." But as the judge recognized, that's alone not enough. That's what we call parallel conduct. And you have to have something more, what generally is referred to as plus factors to be able to establish that there might actually be a conspiracy here. And again, that's what United American wasn't able to do. All they really were able to show is these mining defendants all voted for one particular upgrade. And that's fine. They all had their own self-interested reasons for pursuing that upgrade. That doesn't create a conspiracy.
Craig Waldman:
Okay, very good. So lastly, what are the implications here more generally? I think from my own perspective, we don't want to rush too much to judgment given that it was an early dismissal and make broad statements about what it means or doesn't mean for potential antitrust cases in this fascinating environment and industry. But on the other hand, there are some takeaways I'm sure. So what do you guys think clients and companies should take away from this matter?
Mark Rasmussen:
Well, my personal view was that crypto assets are here to stay. And we'll see just how successful they become. There's a lot of froth and speculation out there, but the core fundamentals of the technology are strong and can help a lot of different market participants. And I'm optimistic in that view. And if they come anywhere close to their full potential, this is going to be a huge target for plaintiffs to pursue claims. I think they'll certainly be some consolidation and some of the strongest companies will acquire others and they'll become even bigger targets as a result. We've seen what regulators are doing in terms of pursuing antitrust claims against other high-tech companies, both at the federal and state levels currently.
Mark Rasmussen:
But for the blockchain industry I think, to some extent, the antitrust risk depends on a few factors. You know, are we talking about a public permissionless blockchain like Bitcoin Cash, or are we talking about a private permissioned one that you see emerging in some industries? I think the public blockchains may be slightly less risk because anyone can join. Anyone can leave. On the private permissioned ones, there's criteria that have to be met to join and participate. And so in that permissioned world where a lot of larger companies will probably end up, there can be a little bit higher risk. What's the composition of participants? Is it just a big group of competitors? Or how are we determining who's included, who's excluded? How are we determining what consensus is on the state of the ledger? Are those rules well-defined and well-known to everyone? What kind of market power does the group have that's in this permissioned world? And what kind of information is being shared? Because sharing confidential information can lead to type of collusive activity that plaintiffs will try to claim violates the antitrust laws.
Mark Rasmussen:
So I think those are some of the factors you got to look at. Again, on the public blockchain space though where participants can freely go in and out, fewer risks there in my view.
Chris Pace:
Just to echo what Mark is saying. I definitely agree that as the notoriety or as more and more attention is paid to crypto assets and to blockchains, and as more and more money flows into it, that tends to simply increase the litigation exposure. The dollars then that could be involved, then damages go higher. The attention that is being paid to the space increases, we're likely to see more of these cases going forward in the future.
Chris Pace:
And from this case, one of the lessons is certainly, at least that I take away from the case, the others should as well, is really the importance of being able in these kind of cases to explain to the court and get the court to understand the way that these markets and the way that these assets operate, the way that they function. There's a certain reluctance. Even our judge indicated it herself when we had our very first hearing in the case, that there's a lot of terminology, there's a lot of concepts that people are not readily familiar with. And you really have to understand those in order to be able to get to the heart of the legal issues so that you're understanding the facts correctly, and then you can apply, in this case, well-established law.
Chris Pace:
I mean, the law that the judge was applying was not something novel or new. It was the application of that law to this, at this time still somewhat novel, but becoming less so, industry. And so I expect that we're going to see more of these cases in the future. And I do think that one critical element of that is going to be having lawyers who are able to demystify the industry or the markets and let the judges be able to apply existing law accurately to these spaces that they're not immediately comfortable with.
Craig Waldman:
Great. Very interesting discussion. Thank you guys. Appreciate it very much.
Chris Pace:
Thanks, Craig.
Mark Rasmussen:
Thanks, Craig.
Dave Dalton:
Okay. Craig, Chris, Mark, thanks. And Craig, thanks again for leading that discussion. I'm sure we'll talk about this soon. This is a very fluid, evolving, quickly changing area of the law, so we're anxious to hear more from you Chris and Mark in the future.
Dave Dalton:
You can find complete bios and contact information for Craig, Chris, and Mark at jonesday.com. While you're there, be sure to visit our insights page. It's updated constantly with more podcasts, videos, publications, newsletters, blogs, and other useful content. Subscribe to Jones Day Talks at Apple Podcasts or wherever else you get your podcasts. It's free.
Dave Dalton:
Jones Day Talks is produced by Tom Kondilas. As always, we thank you for listening. I'm Dave Dalton. We'll talk to you next time.
Speaker 5:
Thank you for listening to Jones Day Talks. Comments heard on Jones Day Talks should not be construed as legal advice regarding any specific facts or circumstances. The opinions expressed on Jones Day Talks are those of lawyers appearing on the program and do not necessarily reflect those of the firm. For more information, please visit jonesday.com.
