The Adequacy of Competition Policy for Cryptocurrency

Markets
Peder Østbye∗
Draft, 24 August 2017

Abstract
Several cryptocurrencies are now circulating in the economy. Many have significant market value
measured in national currencies. The intention behind most of these currencies is to replace or supple-
ment the traditional payment system based on national currencies. Cryptocurrencies can potentially
obtain a significant role in the payment system. However, the presence of cryptocurrencies raises
several public policy concerns. This paper addresses competition policy. It discusses as to whether
traditional competition policy instruments such as antitrust and regulation are adequate to address
competition policy concerns. It is found that traditional competition policy instruments are inade-
quate. Direct participation by the public in the form of central bank digital currencies may be an
adequate remedy. The relationship between competition policy and other relevant policies for the
cryptocurrency markets is also discussed.
Keywords: Antitrust law, Competition policy, Cryptocurrencies, Regulation, Monetary the-
ory
JEL: E42, E51, G28, K21, K23, L12, L13

1 Introduction
Several private cryptocurrencies are now circulating in the economy. Many have significant market value
measured in national currencies. Although much of this market value probably can be ascribed to spec-
ulation, the intention behind many of these currencies is to replace or supplement the traditional pay-
ment system based on national currencies. Cryptocurrencies may potentially obtain a significant role in
∗
Dr. Philos. Special Adviser, Norges Bank. This paper should not be reported as representing the views of Norges Bank.
The views expressed are those of the author and do not necessarily reflect those of Norges Bank. For correspondence, please
use p.e.oest@gmail.com. Thanks got to the author’s colleagues, especially Thorvald Moe and Farooq Akram, for commenting
on earlier manuscripts of this paper.

Electronic copy available at: https://ssrn.com/abstract=3025732

the payment system, and large financial institutions are increasingly taking cryptocurrencies under their
wings. The introduction of cryptocurrencies raises several public policy issues. This paper addresses
competition policy. It discusses as to whether traditional competition policy instruments such as antitrust
and regulation are adequate to address competition policy concerns.
This study draws on several lines of literature. Cryptocurrencies are studied in several branches of
literature, among which computer science, economic, and legal literature are particularly prominent. The
literature is often interdisciplinary. There is a growing body of literature on the economics of cryptocur-
rencies which also includes competition issues. Fernández-Villaverde and Sanches (2016) provides an
analysis of competition between cryptocurrencies within a Lagos and Wright (2005) framework. The
typical targets of many economic currency competition models are monetary policy objectives. It is less
research into traditional competition policy objectives such as market efficiency and consumer welfare.
However, there is a literature that studies the network effects and the possibility of a winner-takes-it all
equilibrium where efficiency and welfare are touched upon. Examples are Teo (2015) and Gandal and
Halaburda (2016). It is also a branch that is heavily computer science and economics interdisciplinary,
which studies the possibility of control over a cryptocurrency by a single participants coordinated group
of participants, and how such control may influence the path of the cryptocurrency. An example is Natoli
and Gramoli (2016).1
Competition policy also intersect with regulatory issues. Tu and Meridith (2015) provide an overview
of regulatory issues related to cryptocurrencies. Chuen (2015) also covers regulatory and legal issues in
some detail. The present paper adds to the regulatory literature by studying the application of competition
laws and competition-promoting regulations in the cryptocurrency markets. To the author’s knowledge,
this is not well explored in the literature.
This article follows a traditional competition policy framework in addressing the research questions.
In Section 2, cryptocurrencies markets and public policy will be briefly described. The relevant markets
constitute the basis for analyzing both strategic competition and public policy. In Section 3 strategic
competition and market power in the cryptocurrency markets are discussed. In Section 4 the adequacy
of competition policy instruments is discussed. This includes the role of antitrust law and non-antitrust
competition policy instruments such as regulation and government participation in the markets. Section
5 concludes the paper.
It is found that traditional competition policy instruments are inadequate. Direct participation by
the public in the form of central bank digital currencies may be an adequate remedy. The relationship
between competition policy and other relevant policies for the cryptocurrency markets is also discussed
where needed.
1 It is debated as to whether this should be separated as a new interdisciplinary field “cryptoeconomics,” see
https://www.coindesk.com/making-sense-cryptoeconomics/

Electronic copy available at: https://ssrn.com/abstract=3025732

2 Cryptocurrency markets and public policy
2.1 The introduction of cryptocurrencies into the payment system
To explain the introduction of cryptocurrencies into the payment system a small detour into the tradi-
tional payment system is necessary.2 Historically, means of payment were facilitated by having intrinsic
value or being claims on assets with such value. Commodities such as grain, seeds, and precious metals
were used as means of payment. Occasionally, there were also conventions on using tokens in scare
supply with no apparent intrinsic value, such as sea shells or animal teeth, as money. With the estab-
lishment of states and legal order, sovereign rulers minted official coins in precious metals such as gold
or silver. Governments “guaranteed” future value by making the currency legal tender and medium for
tax payments. Parallel to this, banknotes issued by early private banks as receipts for deposits in minted
coins or other assets were also used as money. However, there where shortcomings with both officially
minted coins and the banknotes. Kings were tempted to dilute the coins with less precious metals, with
the loss of value as a consequence. Banks were tempted to profit on debt by issuing more banknotes than
backed by their asset holdings. Policy responses were necessary. Institutional arrangements were used to
substitute for the intrinsic value of coins and to prevent over-issuance of banknotes. Independent central
banks with legal mandates such as inflation targeting and banknote monopoly are now used to maintain
the trust in the value of the national currency.
Governments could spend its minted money into circulation. This is, however, not how money is
mainly put into circulation today. Most money are created by banks on the top of central bank base
money.3 Banks bring the bankmoney into circulation by granting credit that creates deposits.4 The
deposits function as money as such through the deposit-based payment system. Hence, the money is
lent into circulation.5 The payment system relies on settlement between the transacting parties’ bank
accounts. Banks have initiated card schemes and other instruments to facilitate such settlement. If the
parties to the transactions have accounts in different banks, the imbalances between banks are settled in
base money, normally the banks’ deposits in the central bank. As banks creates money by expanding
their balance sheets on both the asset and liability side by making adjustments on electronic ledgers, the
banknote issuance prerogative of the central banks does not impose a significant constraint on the banks’
money creation.
The current system is not necessarily an optimal system of money and payments and is not bulletproof
in gaining trust. We have on several occasions experienced that banks have created excessive money
creating asset bubbles and bursts. Since bankmoney is a liability of the bank, the credit and market
2 For an accessible description of the money and payment system and its historical context, see Huber (2016).
3 Base money is money created by the central bank, mainly compromising banknotes and coins, and electronic deposit in
the central bank. Today, most countries only allows financial institutions and the government to hold deposit in the central
banks. Base money is usually labeled as M0 in the money and banking literature.
4 For an elaboration on this process, see McLeay et al. (2014) and Huber (2016).
5 For a discussion on the merits of spending vs. lending into circulation see, for instance, Ricks (2016).

3
exposure of the banks’ assets have resulted in loss of confidence in the banks’ ability to meet their
obligations. Panics and financial crises have resulted. Various bank regulations and public policies, such
as capital regulation, deposit insurance, and rescue policies such as lender of last resort (LLR) have been
introduced to facilitate trust in bankmoney. However, experience has shown this to be insufficient to
prevent crises. For instance, so-called shadow banks have been able to avoid regulations by providing
money substitutes in terms of short term debt.6 It is no surprise that alternatives to bankmoney are
explored.
Proponents of sovereign money argue for the government to take back the prerogative to create money
and put it into circulation.7 Some consider government intervention as the main problem and advocate
free banking.8 Others see a role for cryptocurrencies. Proponents of cryptocurrencies are not only con-
cerned with the shortcomings of money creation in the current system, but also the shortcomings of a
payment system based on bankmoney, such as lack of fast and low-cost decentralized settlements, and
lack of privacy. The declining use of cash exacerbates these issues.
Cryptocurrencies are of fundamentally different nature than today’s bank-based monetary system.
They share similarities with early tokens with no intrinsic value, but augmented with 21th century tech-
nology. Most cryptocurrencies are not backed by any real assets or guarantees. Hence, they have no
intrinsic value. Their value is totally dependent on trust in the future value.9
A cryptocurrency is in essence a digital register that uses cryptography, distributed ledgers, and mech-
anism design to control changes in the registry. The entries of the register are intended as tokens serving
as a medium of exchange. If we consider the cryptocurrencies as assets we could say that they are digital
assets to be used as a medium of exchange using cryptography to secure the transactions and to control
the creation of additional units of the asset.10 Cryptography is used to validate transactions. The register
is distributed among the users on the internet. No centralized entity is maintaining the register and no-one
is intended to be in control . The technology will be described in some detail in the next section.
6 See Ricks (2016) for an in-depth analysis of shadow banks.
7 For an appraisal, see Huber (2016).
8 See Hayek (1976). The literature is discussed in Huber (2016).
9 In game theoretic terms, we can say that their value is dependent on the participants being in a equilibrium with a mutual

rational belief that the currency has a value. For more on the game theory behind the value, see, for instance, Camera (2017).
Note that it is easy to construct a model where a rational person can have trust in a currency that is perceived as doomed to
fail in a probabilistic sense. Assume that the perceived probability that the currency will fail and have no value in the next
period is 0 < p < 1; the perceived probability that a currency will maintain its utility U for the user in the next period is
1 − p; and the benefit of holding a currency in a period is B. The expected utility for the user to hold the currency is then
E(U) = B + (1 − p)E(U), which solves to E(U) = Bp . Consequently, a currency may have a positive expected utility for a
user, even of it is considered doomed to fail. The simple model can be expanded to construct an equilibrium where a currency
that is perceived to fail among all agents in a probabilistic sense, will still have positive equilibrium value.
10 Inspired by the Wikipedia definition, https://en.wikipedia.org/wiki/Cryptocurrency, but slightly modified. On Wikipedia

it is stated that a cryptocurrency is intended to be used as a medium of exchange. This is mainly true, but not always. A
cryptocurrency may also be an intended as a pump and dump scheme. Also, as explained below, several cryptocurrencies have
a broader intention beyond being a medium of exchange.

4
 Although there were earlier attempts to create cryptocurrencies, the largest and most famous cryp-
tocurrency is Bitcoin. Bitcoin was launched in 2009, but documentation was available already in 2008.
The creator or creators of Bitcoin are unknown to the general public. The Bitcon white paper, Nakamoto
(2008), is written under the pseudonym Satoshi Nakamoto.11 The intention behind Bitcoin expressed in
the white paper is that “[w]hat is needed is an electronic payment system based on cryptographic proof
instead of trust, allowing any two willing parties to transact directly with each other without the need for
a trusted third party.” The genesis block of Bitcoin contain the following text “The Times 03/Jan/2009
Chancellor on brink of second bailout for banks”. An interpretation of this is that the creator(s) of Bitcoin
had a grudge against monetary systems protecting big banks trough bail-out policies as manifested by the
financial crisis of 2008. Later cryptocurrencies have real persons appearing as creators, and some even
have mechanisms including more-or-less centralized governance.

2.2 Cryptocurrency technology and supply

There are several references available describing the technology of cryptocurrencies.12 Some technical
context is provided here to make the text self-sufficient for the competition policy discussion. This is nec-
essary both to understand what products cryptocurrencies are, and how competition in the cryptocurrency
markets works. Simplification is necessary to illustrate the principles.
One question is as to how how cryptography is utilized to provide a trusted means of payment. Sim-
plified, every participant in the network controls a private key and a corresponding public key practically
unique to the private key. The keys are randomly assigned to a participant when registering a node in
the network, usually by downloading and installing a cryptocurrency wallet on a computer.13 With these
keys the participants become nodes in the network. The public key can be used to generate addresses
corresponding to the public key, which is used to transfer units of the currency between the nodes in the
network. The nodes do not need to be linked to any other register of real identities. If a person A wants
to transfer an amount to person Bs address, person A can transfer from an address holding a sufficient
amount, and the private key is necessary to validate that the person has access to transfer money from
this address. This operation is usually done by the wallet application, so no technical skills are needed to
perform transactions.14
11 Available at https://bitcoin.org/bitcoin.pdf.
12 See, for instance, Narayanan et al. (2016). The various white papers and documentation accompanying the different
cryptocurrencies also provide valuable references for the technical aspects and mechanism design behind cryptocurrencies,
such as, inter alia, Nakamoto (2008), Duffield and Diaz (2014), Duffield (2017) and Schwartz et al. (2014).
13 The public–private key principle is a commonly used method in cryptography not specific to cryptocurrencies. In simple

terms, the public key is just a function of the private key, but the function is for all practical purposes non-invertible. Hence,
the function is a cryptographic function. This means that it is practically impossible to reverse engineer the private key from
the public key. Several standardized cryptographic functions exist, and different cryptocurrencies may use different functions.
14 Person A can also, if needed, check that an address belongs to person B, by checking that the address is compatible with

person B’s public key. Person B can also check that the amount comes from person A by checking that the transfer comes

5
 Cryptocurrencies utilize blockchain technology. The ledger of transactions is not stored and admin-
istered by a single trusted party. Rather the chain is stored by the nodes in the system by utilizing
distributed ledger technology (DLT). In simple terms this means that the blockchain is distributed among
all the nodes in the system, and consensus technology is used to secure a single unified blockchain. A
single transaction is broadcasted to the nodes. Valid transactions are pooled in to a new block and added
to the ledger by someone authorized to do so. However, the new block also has to be accepted by future
authorizers to constitute a part of the consensus chain. The blockchain technology provides a solution to
the so-called double spending problem by making double spending prohibitively difficult. A transaction
has to be consistent with the rest of the blockchain. Hence, double-spending cannot occur on the same
blockchain. That is, if a person tries to use the same money for two transactions, only one of them can
remain on the consensus blockchain. A question is how the receiver can be sure that it is the transfer to
him that will be established on the consensus blockchain. The simple answer to this is that he can never
be sure. However, he can be sufficiently confident by waiting until several blocks have been built on the
top on the block including the transaction to him. This can take some time, depending on how confident
he wants to be. In fact, a substantial part of the short Bitcoin white paper is devoted to a model supposed
to illustrate this point with probabilistic certainty.15
There are several alternatives for providing a node the authorization to add a block to the chain. Bit-
coin and several other cryptocurrencies use so-called proof-of-work (PoW) to authorize block extensions.
The authorization is provided by combining cryptography with computing power. In simple terms, this
means that the transactions in the pool, a hash code genuine to previous blocks, and a random number
are put into a function that, similar to the private and public key generation, generates an output. The
problem is to find the right input consistent with this output. The function is for all practical purposes
non-invertible, so the input can only be found by trial and error. This trial and error requires computer
power. The person who manages to solve this puzzle can assign the new block consistent with the puzzle
to the chain. This block will remain in the chain if future miners build upon this block. Then it becomes
a part of the consensus chain. Once the puzzle is solved, its validity is easy to verify. PoW requires both
hardware and energy, so the question is why someone would do this. There is even a severe competition
to “find” new blocks. The reason is that the new block also automatically includes newly minted coins
to the node who solved the puzzle. Hence, the generation of new blocks is referred to as mining, and
the validator of the block is called a miner. This is how new money is created in a PoW cryptocurrency
scheme. In addition, the miners are awarded the transaction fee voluntarily set by the sender in a transfer.
As the miner can choose what transactions to include into the pool, transaction fees set by the sender
from an address compatible with Person A’s public key (if known to B). However, the public key cannot be inferred from only
knowing the address.
15 Under certain models of the process we can say that the block will converge into consensus blockchain with probability

one as more blocks are built on top of it. Such a model is provided by Nakamoto (2008). The more blocks that are added,
the more costly it will be to create some competing blockchain not including the transaction. It can be argued that by this
mechanism, a transaction is never settled as there is always a theoretical chance that a transaction will not be implemented in
the consensus chain.

6
will normally be necessary to include as long as there are capacity constraints. For instance, for Bit-
coins, where there at the moment are binding capacity constraints on the number of transactions that can
be processed in a second, transaction fees have risen as the use has increased. Many cryptocurrencies,
including Bitcoin, have an upper limit on the volume of currencies to be issued. This is combined with
lower mining awards as the limit is approached. A consequence of this is that transaction fee will be a
more important revenue source as the limit is approached. The hardware and energy needed to mine new
blocks makes the transactions expensive in real resource costs. One estimate, based on the US dollar
value of the reward is that as of April 2017, one transaction costs 9 USD.16 Bitcoin mining started as
something everyone in the Bitcoin community could do with their personal computers. However, mining
has now developed into a business requiring investments into specialized hardware and access to low-
priced energy. There also exist mining pools where miners pool resources together and share mining
rewards. This reduces the risk associated with mining.
Another commonly applied method to grant authorization to add a block is proof-of-stake (PoS).
In essence this means that the authorization is probabilistically assigned to the nodes according to the
amount of currency held by this node. The larger the amount of currency held at the node the higher
the probability. Some PoS schemes also include the age of coins held at the node in the probability
function, giving also coin age weight. PoS is much less resource-intensive that PoW. Normally, as with
PoW, the generation of a new block is awarded with newly minted coins and transaction fees. Several
currencies combine PoS and PoW. For instance, some cryptocurrencies have two-tier structures where
miners generate blocks to be validated by “masternodes” determined by PoS.
Cryptocurrency schemes are in essence more-or-less clever combinations of information technology
and mechanism design guided by game theory. Cryptography and distributed ledger technology (DLT)
are combined into blockchain technology and utilized to minimize the risk of abuse and fraud. Mech-
anism design is used to keep the currency going. A crucial element in the incentive mechanism is that
holders of nodes authorized to create a new block have an incentive to maintain the value of the currency.
This is facilitated by providing the rewards for authorizing blocks in the same currency. Furthermore, as
a newly created block easily can be neglected by the next node authorizing a block, the incentive to create
a fraudulent block is reduced assuming a sufficient amount of honest nodes. The authorization reward
is dependent on that the block created being accepted as a part of the consensus chain. However, the
technology and mechanism design is not bulletproof. Several currencies have experienced a high con-
centration of mining power or currency stakes sufficient to threaten the trust in the currency. Controlling
participants may have incentives beyond maintaining the value of the currency. For instance, participants
with a high stake in a competing currency may have an incentive to destroy the trust in a currency to
trigger substitution to that competing currency.
16 https://blockchain.info/stats.

7
2.3 Cryptocurrency markets
A large number of cryptocurrencies are developed and traded. WorldCoinIndex lists 498 currencies as of
April 2017.17 Measured in US dollar market value, the largest are Bitcoin, Ethereum, Litecoin, Dash, and
Ripple. Bitcoin is by far the largest with a market value more than six times that of the second largest,
Ethereum. This is, however, rapidly changing, and the currencies are substantially volatile. Market shares
for various cryptocurrencies will not be provided here. One reason is that the market shares measured
in market value are rapidly changing and such numbers will soon be dated.18 Another reason is that,
from a competition perspective, all cryptocurrencies cannot necessarily be considered to be sufficiently
substitutable to be considered competitors.19 Besides, cryptocurrencies may be in competition with other
currencies, such as national currencies and other private currencies in serving money functions.20 Hence,
calculating the market share among cryptocurrencies according to market capitalization may provide
limited information from a competition point of view.
Most currencies have white papers or other documentation describing their protocols, functionality,
and intended purpose. Many currencies aim at providing an alternative to national fiat currencies as a
general widespread means of payment. As money, cryptocurrencies compete for serving as medium of
exchange, unit of account, and store of value.21 Except from cash, national currencies need an instrument
to be used for payment, such as a solution for giro payments, a payment card, or a payment application.22
Cryptocurrencies, with their associated wallets, are also integrated payment solutions making them self-
sufficient payment systems. So far, cryptocurrencies have been inferior to national currencies with respect
to the money function. As mediums of exchange, they have been limited by few counter-parties accepting
cryptocurrencies. This is changing as they become more widespread, as user-friendly payment solutions
are developed, as more merchants accept cryptocurrencies as payment, and as regulatory frameworks
are developed. Cryptocurrencies are seldom used as a main unit of account as most prices are listed in
national currencies. Because of the volatility of the cryptocurrencies, prices in cryptocurrencies are too
unstable to be used as a practical unit of account and the volatility impedes their property as a store of
value.
With respect to payment services, cryptocurrencies have shortcomings relative to the traditional pay-
ment system in terms of capacity, speed, and general adoption. However, taking into account all the
layers of the traditional payment system, from the card schemes meeting the retail customers to the com-
plex system of settlement in the central banks, there is arguably potential for cryptocurrencies to provide
17 See https://www.worldcoinindex.com/ or https://coinmarketcap.com/.
18 Relevant numbers can easily be found at, for instance, https://coinmarketcap.com/ or https://www.worldcoinindex.com/.
19 Although they may be all competitors as alternative speculative assets.
20 Other private currencies include so-called platform currencies intended for a specific platform, such as World of Warcraft

Gold.
21 These are the characteristics usually describing money. See, for instance, Ali et al. (2014a).
22 Many payment application use payment cards underlying payment technology, but money can also be transferred to

e-money companies, such as PayPal, with their own payment technology.

8
better and more efficient solutions. Several cryptocurrencies claim to have protocols where the payment
can be performed as fast as the traditional payment system with lower cost. There are, however, some
important differences. Firstly, within the settlement constraints described above, cryptocurrencies give
the receiver irreversible access to the money. This protects the payee from fraud by the payer. The other
side of this is, however, weaker protection of the payer. If the payer pays money to a wrong address, the
money is normally lost. If a person’s private key falls into the wrong hands who transfer the money to
another address, the money is lost. The traditional solutions provide more protection to the payer in case
of fraud or negligence. Cryptocurrencies, naturally, do not provide credit and are hence no competitor
to credit card schemes as such. The traditional payment system also provides a solution for anonymous
payments by the availability of cash. However, by providing pseudo-anonymity, the cryptocurrencies can
compete more-or-less with cash in this aspect. Cryptocurrencies also compete with cash by being avail-
able even if the banks’ payment system is out of service for some reason, as long as the Internet is still
running. Hence, it can be an emergency solution for payments. However, as payment with cash require
no technology at all at the moment of payment, cryptocurrencies’ dependence on internet access makes
it inferior to cash as means of payment during a total black-out of the electronic infrastructure. There is
now research into the possibility of combining the best from both worlds. Banks as well as central banks
are looking into how they can utilize cryptocurrency technology, in particular blockchain, to improve the
efficiency of the payment system.
Many cryptocurrencies aim at improving on perceived shortcomings of the incumbent, Bitcoin. For
instance, Litecoin tries to improve upon the capacity constraints characterizing Bitcoin. However, sev-
eral currencies provide additional attributes satisfying special needs. For instance, Dash and several other
cryptocurrencies provide protocols to facilitate anonymous payments.23 Ethereum has ambitions beyond
being a digital currency. It aims at being a blockchain-based platform for smart-contracts.24 In this re-
spect, Ethereum competes with, inter alia, certain legal services. Several other cryptocurrencies aim at
combining cryptocurrencies with contracts and trade, such as Syscoin.25 Ripple aims at being a real-time
gross settlement (RTGS) currency for banks for international transactions.26 Another large cryptocur-
rency, Siacoin, aims at providing blockchain-based storage.27 There are also several coins linking the
23 The anonymity of Bitcoin is facilitated by transactions performed between addresses not linked to personal identities
in any central register. The identification can, however, to some extent be identified by graph analysis and machine learn-
ing, see Fleder et al. (2015). Guidance to performing such an analysis in the free statistical package R can be found here
https://www.r-bloggers.com/querying-the-bitcoin-blockchain-with-r/. A more detailed description of network analysis can be
found in Kolaczyk and Csárdi (2014). Anonymity is improved by relying on some sort of coin-mixing making inferences
from network analysis harder. See, for instance, Duffield and Diaz (2014) and Cloak (2017).
24 See https://www.ethereum.org/. Ethereum claims to be Turing complete, which means that any program can be built

on the blockchain platform. See, for instance, https://ethereum.stackexchange.com/questions/2464/what-does-it-mean-that-

ethereum-is-turing-complete.
25 See http://syscoin.org.
26 https://ripple.com/.
27 See http://sia.tech/.

9
currency to a public good. For instance, some dedicate a part of the newly minted coins to fund science
and charitable organizations.
There are several services that exist on the top of cryptocurrencies, such as exchanges. Some ex-
changes only provide exchange in cryptocurrencies, while others also provide exchange between national
fiat currencies and cryptocurrencies. Exchanges facilitate liquidity for the users and transactions between
persons holding different cryptocurrencies.28 Most exchanges are custodian. This means that cryptocur-
rencies are transferred to an address controlled by an exchange before the trading can be performed. The
trader will then have the balance at the exchange. In principle, the exchange could operate on a fractional
reserve basis not having full backing for all the users’ balances of cryptocurrencies. The extent of backing
is a contractual and regulatory question. The possibility of fractional reserves blurs the distinction be-
tween exchanges and banks. Dealers make wholesale purchases of selected cryptocurrencies to be resold
to purchasers.29 There is also a variety of wallets to be used for transactions. Most wallets are a graphical
user interface through which users administer transactions. Some wallets also provide the opportunity for
users to store keys on a web service, making the node accessible to the user on the web without the need
to bring lengthy keys around. Furthermore, some wallets give the user the ability to administer several
currencies within the same interface. Other wallets are more like e-money providers, where a user can
upload currencies to be used for payments. As many wallets also provide integrated exchange services,
the distinction between exchanges and wallets is blurred.30 There are also several third-party payment
services solutions for merchants who want to accept cryptocurrencies as payments. Merchants normally
want to avoid the volatility risks associated with cryptocurrencies and prefer payment in national curren-
cies. This creates a demand for third-party services for the handling of cryptocurrencies. Such services
include updating the merchant prices in various cryptocurrencies to match the prices denoted in national
currencies, handling the cryptocurrency payments, and making the exchange to provide the merchants
with the corresponding amount of national currencies.

2.4 Public policies for the cryptocurrency markets and the interaction between
competition policy and other public policies
The current neoclassical paradigm in regulatory theory is that well-functioning markets produce efficient
outcomes.31 This is justified by the invisible hand argument provided by Adam Smith and refined by
neoclassical economics and the Coase theorem.32 However, market failures might impede the efficiency
28 Large exchanges include Poloniex, Bitfinex, Kraken, and Livecoin.
29 One such dealer is Wesellcrypto.com.
30 See Hileman and Rauchs (2017).
31 Other policy issues such as distributional concerns may also justify intervention in markets. However, correcting for

market failures increases the social surplus to be fairly distributed according to political preferences.
32 Coase (1960).

10
of markets justifying corrective regulation.33 Regulatory analysis is performed in several steps.34 First a
market failure should be identified. It must the be assessed whether this failure can be properly addressed
by regulation or other public policies. In this assessment, it must be analyzed as to whether it is possible
to reduce the impact of the market failure by regulation, and whether the cost of this regulation is less
than the gain. The existence of regulatory failure must also be taken into account. While market failure
might provide a rationale for regulation, regulation is associated with its own failures.35 The theories
of regulation provide insight into the failure of regulation. Regulation may fail due to informational
asymmetries. For instance, we may want to regulate the price of a monopoly, but the result may be
poor due to asymmetric information and incentive effects. There might be uncertainties associated with
the science behind regulations, and the regulators might pick the wrong science,36 such as picking the
wrong model for inference. Furthermore, the regulator may be captured by the industry it regulates.
Capture may occur for political reasons or because of collusion between the regulator and the industry
for other reasons, such as career concerns for agency employees (revolving doors).37 Regulators may
also be subject to cognitive fallacies distorting the efficiency of regulation.38 Regulation is only justified
if, despite possible regulatory failure, it provides a better outcome than an unregulated market.
Most regulatory policies relevant for cryptocurrencies can be justified by certain market failures.
Externalities are costs associated with providing a service that are not taken into account when providing
the service. A cost associated with most money-related services is that they can be used to support
crimes, whether it is money laundering, payment for illegal services, crime financing, or tax avoidance.
Hence, regulations such as know your customer (KYC) obligations and anti money laundering (AML)
requirements are justified from this perspective.
Asymmetric information allows persons with more information to take advantage of persons with
less information. This justifies marked integrity regulations such as the prohibition of market abuse and
insider trading. Asymmetric information also justifies investor and consumer protection. Cryptocurrency
markets are, of course, not immune against market abuse and insider trading.
Financial services are also associated with certain failures that may lead to financial instability and
costly disturbances in the real economy. This is referred to as systemic risk. A package of market failures
contribute to such risk. There are externalities because a single institution may not take into account the
full costs to the economy if their institution fails. For instance, the failure of a bank my ripple into the
33 This means that the burden of proof is on regulation. It is not obvious that this should be the starting point. Another
starting point could be that markets are associated with a lot of failures. Only if properly justified, the provision of certain
services could be left to markets, but then only under strict public scrutiny and regulation.
34 See, for instance, Baldwin et al. (2012) Chapter 2 and VanHoose (2009) Chapter 9.
35 See, for instance, Baldwin et al. (2012) Chapters 4 and 5.
36 See, for instance, Hammond (2011).
37 Political economists have been concerned with capture theory, and more generally collusion in regulation. Seminal

contributions include Stigler (1971) and Becker (1983). See Østbye (2013) Chapter 5.3.3 for a more detailed description.
38 The research on cognitive fallacies has been available to the public by the bestseller Kahneman (2011). See Østbye (2013)

Chapter 5.3.4 for a discussion on cognitive biases in regulation.

11
financial markets with substantial consequences for the real economy. Limited liability in combination
with government rescue packages makes moral hazard an important source of risk for the financial sector.
Numerous and voluminous titles on these issues have been written in the aftermath of the financial crises
of 2008.39 This literature also illustrates the failures of regulation, both in terms of using wrong remedies
and possible regulatory capture. It is assumed in Ali et al. (2014a) that cryptocurrencies have not reached
a significance necessary for them to impose a risk to the financial system. Financial institutions are not
heavily exposed to cryptocurrencies, and cryptocurrency exchanges lack sufficient volume for failure to
cause systemic risk consequences. Nevertheless, this might be an issue in the future.
The market failure we will be most concerned with in this study is lack of competition and its con-
sequence: market power. Lack of competition is associated with inefficiencies in the economy and dis-
tributional concerns. From a static point of view, market power is associated with prices about marginal
costs, which creates an allocation inefficiency in terms of a deadweight loss. The increased price in-
volves a distribution of surplus from the buyers to the sellers. Such monopoly-profits may give rise to
organizational slack, also known as X-inefficiency. In addition, market power is assumed to impede the
incentives to product development and innovation, although the effects on innovation are less robust.40
As we will see below, some of these concerns may be relevant for cryptocurrency markets. A particular
feature of financial markets is that it might be a goal of conflict between competition and financial stabil-
ity.41 In popular terms, cut-throat competition may make for less robust financial institutions, but it may
also promote financial stability by, inter alia, fewer systemically important institutions. These trade-offs
may also be relevant for cryptocurrency-related markets.
In addition to direct market failures, it must also be taken into account that money is a rather special
good in a policy perspective. While the money’s primary function is to provide a means of payment
to facilitate trade, it is also an important macroeconomic policy instrument. Monetary policy is used to
keep the economy close to its output-potential, maintain a stable currency, and keep the financial system
stable and robust.42 There has been a long debate as to whether the private provision of currencies
would impede these macroeconomic goals. Seminal contributions to this debate are Hayek (1976), who
argues for a system of private currencies, and Friedman and Schwartz (1986), who stresses the role of
government in providing money. If recognizing these monetary policy goals for money, these should also
be taken into account when implementing competition policy for cryptocurrencies. If competition policy
might impede monetary policy, a trade-off is necessary.
39 One of many volumes with a particular focus on money and banks’ liquidity creation is Ricks (2016).
40 See Østbye (2013) for a further elaboration of the inefficiencies due to market power. Such an elaboration is also to be
found in most industrial organization and antitrust textbooks.
41 The big body of literature on this issue is discussed in, inter alia, Vives (2016).
42 See, among many alternatives, Langdana (2016) Chapter 9, Matthews and Thompson (2014) Chapter 15, and Ricks

(2016).

12
3 Strategic competition and market power
3.1 Analytical framework for analyzing competition in the cryptocurrency mar-
kets
The economics sub-discipline industrial organization covers topics such as the strategic interaction be-
tween firms in markets with imperfect competition, regulatory policy, antitrust policy and market perfor-
mance.43 An early paradigm of industrial organization was the structure-conduct-performance hypoth-
esis, which assumes that market structure determines conduct, which then determines performance in
terms of welfare. The more concentrated a market, the less competition and the poorer the performance.
The paradigm was criticized, inter alia, by the Chicago School in the 1970s for being in line neither with
with observations nor economic theory. Rather, a concentrated structure may be a result of effective com-
petition, with the most efficient firms taking largest market shares. Post-Chicago industrial organization
evolved by incorporating analytical innovations from microeconomics, especially game theory. More re-
cently, behavioral economics is now (controversially) also included in the analytical framework.44 This
article relies on insight from industrial organization to understand the competitive dynamics in the cryp-
tocurrency markets and the competition policy implications. However, as money possess some features
not usually studied in mainstream industrial organization, insight from monetary economics is necessary
to inform competition between cryptocurrencies.
Epistemically, economic analysis relies heavily on theoretical models to make inferences. Models
are representations of a target and are usually highly simplified and stylized to inform certain aspects of
the target: the quantity of interest. Mainstream industrial organization models, such as various oligopoly
models, are, at least implicitly, based on the existence of a profit-maximizing firm. Normally the firm
maximizes profits in terms the values of sales – that is, price multiplied by quantity – minus costs. The
firm sets prices and/or quantities more or less continuously. The profits are maximized in an oligopoly
setting, possibly influenced by collusion. A firm may also deter entry and competition by price strategies,
or other strategies such as bundling or vertical restraints. However, the supply of currencies has several
characteristics distinguishing them from mainstream industrial organization models. The income of a
currency issuer normally comes from seigniorage from issuing the currency. This seigniorage is the
purchasing power the created money generates for the issuer. Money issuers may also generate income
from fees providing payment services related to transactions in their currency and related services. The
currency must be put into circulation. If it has value, it can be spent or lent into circulation by the issuer.
A currency can also be exchanged for other currencies on an exchange, but this means that the issuer
must support a competing currency. These are important aspects not taken into account in mainstream
oligopoly models. Costs may also substantially differ from standard cost models. If the money issued is
43 Theseminal textbook volume on the current paradigm is Tirole (1988).Other textbooks include, among many, Church
and Ware (2000), Tremblay and Tremblay (2012), Cabral (2015) and Belleflamme and Peitz (2015).
44 See, for instance, Østbye (2013) for a brief historical description of industrial organization.

13
backed by some asset with value independent of the currency, such as precious metals or financial capital,
the acquisition of these assets shares similarities with conventional costs. However, if the currency is not
backed by some asset with intrinsic value, as is the case with most currencies, some costs of producing
money must be constructed to facilitate trust against excessive production (issuance). In that way, the cost
functions become endogenous, and cost minimization is not necessarily guiding the choice of production
technology. This is the case for cryptocurrencies, in particularly those that are based on PoW for block
validation.
When it comes to analyzing competition between private currencies, several specialized models are
available that capture certain essential features of currencies. However, much of the debate takes the
amount of money created as the quantity of interest, and the question is whether private provision of
money creates the optimal amount of money according to macroeconomic standards. Contributions to
this debate are Hayek (1976), who argues for a system of private currencies, and Friedman and Schwartz
(1986), who emphasize the role of government in providing money. The proponents of government
money stresses the fact that private money issuers have an incentive to issue too much money. The focus
on the amount of money puts the strategic interaction between issuers from a competition perspective
in the background. A framework that provides some insight into competition between private curren-
cies is Klein (1974). The primary interest of Klein (1974) is the debate regarding the amount of money
generated by competition between private currencies. To inform the debate, Klein (1974) adds a quality
dimension, showing that reputation influences the incentives in money creation. As money providers
are concerned with their reputation, they will be disciplined to maintain the value of the currency. This
analysis provides insight into the impact of quality competition among the suppliers of money. More
recently, several authors have adopted the framework of Lagos and Wright (2005) to include competition
in private currencies. In essence, the Lagos and Wright (2005) framework extends the research by pro-
viding a microeconomic foundation for the role of money as a medium of exchange in macroeconomic
models. It explains money as a means to facilitate transactions with random interactions of sellers and
buyers. Money facilitates trade between these persons even if they do not produce goods that satisfy
mutual needs. This may sound trivial in practice, but it is not trivial to model. Lagos and Wright (2005)
assumed a single national currency, but, inter alia, Waknis (2016) and Fernández-Villaverde and Sanches
(2016) modify the model to include competing currencies. These articles are inspired by the develop-
ment of cryptocurrencies and emphasize the role of a money issuer of being able to credibly commit to
not over-issue the currency.45
45 The theory of currency competition literature intersects with the banking literature. Some scholars have advocated for
so-called free banking. This is a system where each bank issue its own currency (e.g. Bank A and Bank B dollars). In a free
banking system, Bank A and Bank B dollars denominated in the same amount may have different value in terms of purchasing
power. Today, most countries prohibit private banks from issuing banknotes. However, today’s fractional reserve system
also involves competition between banks in issuing money, although not independent currencies. Money is created by credit,
because the credit provided by bank creates a new deposit that can be used for payments; see McLeay et al. (2014). The claim
on the bank is in practice a risk-free to the extent it is covered by deposit insurance. This also makes deposit money created
by banks to a large extent indistinguishable from the money issued directly by the central bank. The money creation banks

14
 In addition to the special characteristic of currency competition compared to normal competition in
providing goods and services, the competition between cryptocurrencies has additional characteristics
that should be taken into account in modeling. As indicated above, cryptocurrencies include technology
that makes it credible that the money supplier has strict restrictions on the amount of money to be issued.
Such technology is taken into account in, inter alia, Fernández-Villaverde and Sanches (2016). However,
with this technology it come additional features. Once a cryptocurrency is released to the market, protocol
changes involve rigid procedures. The creator has normally no special privileges as such to alter the
protocol or manipulate the transactions on the ledger. It is not technically impossible to assign the creator
such a right, but this might impede the trust in the currency. The creators of the currencies usually obtain
their gain by mining the first coins on the blockchain. Later, they can increase the value of these mined
coins by promoting the currency. Many currencies have implemented mechanisms in the protocols that
facilitate the development of the protocols and promotion of the currency in addition to the incentives
provided by the creators’ pre-created coins. Usually, cryptocurrencies have a developer team and often
also a promotion/marketing team. The protocol can be designed such that some of the newly created
coins are allocated to the assigned teams. Such teams may not be guaranteed funding, and may be
replaced if the consensus chain decides to do so. To date, there is not much literature and models studying
these particular aspects of a cryptocurrency from a strategic competition point of view. However, this
body of literature is growing. Halaburda and Sarvary (2016) provide industrial organization perspectives
on cryptocurrencies. Gandal and Halaburda (2016) and Teo (2015) study network competition in the
cryptocurrency markets. Hileman and Rauchs (2017) provide valuable descriptive data for industrial
organization aspects. However, this literature is too narrow to analyze the various issues that arise in
competition policy. Hence, it is necessary to utilize the general industrial organization literature when
analyzing strategic competition in the cryptocurrency markets for competition policy purposes.
are constrained in several aspects: bank deposits are claims on the banks redeemable in money issued by the central bank,
banks make interbank settlements in central bank base money, and banks are subject to capital regulation. The competition
between banks in creating money through credit is not a competition in providing currencies, but in creating money on the top
of central bank base money. In the literature, money created inside the banking system is referred to as “inside money,” while
base money created by central banks is “outside money.” Still, the broad literature on impact of competition between banks
in creating money sheds light on private money creation and potential failures associated with such competition, in particular
when it comes to financial stability. It is also noteworthy that private digital currencies will not necessarily destroy the business
model of banking regarding creating deposit money on the top of base money. Banks could continue their business replacing
central bank base money by cryptocurrencies as base money. There are already such services today. Banks have a role if they
through netting agreements, can provide settlement more efficient than through doing it directly on the cryptocurrency ledger,
or can provide other value-added services.

15
3.2 Strategic interaction
3.2.1 Network effects and platform competition
In industrial organization terms, money and the payment system can be said to be network goods. Net-
work goods are products and services that gain value from connecting people in networks, such as tele-
phony and, ultimately, the internet. Such markets often have winner-takes-all characteristics, but multiple
competing networks may also be an equilibrium.46
The simplest form of network effects is the direct network effect, where one user’s utility of con-
necting to a network increases with the number of other users that are connected to the network. Hence,
there is a positive externality for the other users when a new user joins the network, such as telephone
services.47 Clearly, both money and payment systems share this property. The more people who use
a particular currency and the bigger the network allowing for payments in this currency, the higher the
utility for the users.
The mechanism of the network effects might however be more subtle, giving rise to indirect network
effects. Indirect effects arise because more users of a service increases potential income from producing
complementary goods associated with high fixed costs. For instance, the more users of a computer
or mobile operating system there are, the more programs are likely to be developed for that operating
system. Hence, when a new user enters the service it generates a positive externality to the other users.48
This is also a characteristic with money and payment systems. The more adopted a currency is, the more
additional services will be built on top on this currency, such as credit services, payment applications,
and so on. There is a small but growing literature applying network economics to the cryptocurrency
industry.49
Platform models develop network effects models even further by taking into account pricing to the
different users of a platform.50 Platform models takes into account that the platform operator sets prices
46 See Belleflamme and Peitz (2015) Part VIII for an up to date description of the theory. Closely related to the network
effects literature is the path-dependence literature. Path-dependence is well known in evolutionary theory and economics.
Seminal contributions in economics are Arthur (1988) and Arthur (1989). By path-dependence, one can be locked into inferior
solutions due to historical circumstances. An example is the QWERTY organization of the keyboard that was once developed
to prevent jamming in mechanical typewriters. This precaution is unnecessary for electronic keyboards today. However, the
switching costs associated with changing to an optimized keyboard system suitable for today’s needs have created inertia
towards an inferior keyboard construction that was once superior.
47 Influential papers include Katz and Shapiro (1985) and Farell and Saloner (1985). A specific model for telephone services

was presented already by Rohlfs (1974).

48 An early contribution is Economides and Salop (1992).
49 Network dynamics for cryptocurrencies is discussed in by, inter alia, Gandal and Halaburda (2016), Teo (2015) and Luther

(2015).
50 As pointed out by the authors in the seminal article by Rochet and Tirole (2003), platform models combine two modeling

traditions: network effect models, and models of multi-product firms. Multiproduct firms typically produce more-or-less
related products such as computers and computer equipment. If the products i and j are complementary, the demand for
product i is likely to decrease if the price of the complementary product j is increasing. For a multiproduct firm the challenge

16
to different user groups.51 Platform competition models have been used to analyze money and payments.
In fact, the payment card industry was one of the main inspirations for the development of platform com-
petition models, and there exists a large body of literature applying the theory to payment card schemes.52
A crucial element of the studies of the payment card industry is cross-subsidization among users. Typ-
ically, consumers are subsidized through low fees, free credit, and other services, while merchants are
charged excessive prices. The business case for this cross-subsidization is to increase the user-mass,
which “forces” the merchants to accept the card. At first sight, it might seem that platform models are
less relevant for cryptocurrencies, as all users are treated as equal and pay the same transaction prices,
rendering it impossible to discriminate among users. This is, however, not the full story. Different
cryptocurrencies have developer and marketing teams rewarded by newly minted coins or an increase in
value of the coins they possess. They might have financial resources and incentives to subsidize retailers
to accept the relevant cryptocurrencies or to subsidize providers of other complementary services.
A crucial element of the network and platform competition literature is the study of multi-homing
versus single-homing among users – that is, if there are mechanisms that force some or all users to only
be active on one platform or if users can be active on several platforms at the same time. Competition
is more easily facilitated if it is possible for users to be on multiple platforms. If users, for instance,
must invest heavily in one particular platform, the user is more easily locked in. This also influences
complementary users on the other side of the platform as the platform has a monopoly of access to
the single-homing users. In principle, there should no barriers to multi-homing in cryptocurrencies.
Halaburda and Sarvary (2016) identify two costs associated with holding multiple currencies: exchange
costs and cognitive costs. Exchanges are available online, and exchange from one coin to another can be
accessed from a mobile application. Competition between exchanges should force down the exchange
fees. Multi-currency wallets with built-in exchanges are available. Such services should also reduce
exchange costs as well as the cognitive costs of multi-homing. A price in one currency can easily,
without mental processing, be translated onto a price of the currency the user holds. However, in practice
there are obstacles. If the exchange involves blockchain transactions, transaction costs may be high.
Furthermore, dependent on the cryptocurrency, the transfer of the funds may take time. Exchanges, for
security reasons, may require a larger number of block verifications before the funds become available
to the user. An additional complication may be lack of liquidity in a financial market sense. Exchange
may not be available between the desirable currencies, with the consequence that the exchange must be
performed via a liquid currency such as Bitcoin (at the moment). This requires additional time and fees.
Furthermore, most cryptocurrencies are volatile at the moment. This means that the purchasing power
is to set the optimal composition of prices. If the multiproduct firm needs to cover some fixed costs, so-called Ramsey prices
will be efficient. See Viscusi et al. (2005) p. 415. The term Ramsey pricing originates from the recommendations on optimal
taxation in Ramsey (1927).This means that the products with lowest elasticity of demand should be determining for what
products that should cover fixed cost. This is often used as a benchmark for regulation.
51 Seminal contributions include Rochet and Tirole (2003) and Armstrong (2006).
52 A few examples are Schmalensee (2002), Rochet (2003), Rochet and Wright (2010) and Tirole (2011).

17
associated with several currencies are likely to be uncertain. This creates a benefit to the most stable
currencies, and can reinforce network effects.
When considering cryptocurrencies as payment systems platform effects are more likely to be stronger
on the merchant side. Many merchants post prices that to some extent are sticky. The currency used as
a unit of account by most users will have an advantage. Furthermore, to reduce risk, retailers are likely
to prefer to post prices in a stable currency. For now, national currencies have the most to offer in these
aspects and are preferred as a unit of account for most merchants. Customers that want to pay in cryp-
tocurrencies, must pay according to the exchange rate at the time of purchase. It is not unlikely that a
large and stable cryptocurrency can fill such a role in the future, rendering that cryptocurrency as a unit of
account. Gaining this position will give the cryptocurrency a major network advantage relative to other
cryptocurrencies.
A major challenge for cryptocurrencies as network goods is entry. To be accepted by exchanges and
merchants, and to gain partnership with payment service providers, such as wallets, a critical mass is
likely to be necessary. There are several ways cryptocurrencies can gain critical mass. A cryptocurrency
may take certain action to make the critical mass as small as possible. The currency could reduce the
critical mass by giving the currency value even for a few users. One way to do so is to add a niche
element to the currency, such as strengthening the anonymity feature. A small group may have strong
benefits from this feature and may be willing to adopt the currency even if there are few users. Making
the currency particularly suitable for bank settlements may be another way to create value for a niche
user group. This niche group may in some cases be the creators themselves creating the currency for
their own need. Adding services that might have stand-alone value beside being a cryptocurrency such as
the possibility to build smart contracts on the platform, is another way to provide a few users with high
value. Another way to gain access to the market recognized in the platform literature is to attract marquee
users – that is, certain users that provide value for other users. For instance, cryptocurrencies with the big
banks “on board” may attract other users. A cryptocurrency may also gain critical mass by leveraging
users from another network. For instance, a cryptocurrency may obtain a large user group by being
supported by Facebook, Google, Microsoft, or other companies that themselves are subject to network
effects. Several creators of cryptocurrencies have also tried to gain scale of their currency by selling
pre-created coins in a bunch by a so-called initial coin offering (ICO). They can thereby spread coins to
investors who are in a better position to facilitate the adoption of the currency. Finally, cryptocurrency
creators may lower the cost and risk associated with trying out a currency. User-friendly and free wallets
reduce the efforts and costs associated with testing out a currency. Risk may be reduced by providing
early adopters with free coins.53
53 This requires clever mechanism design as users may try to exploit this opportunity by creating multiple nodes.

18
3.2.2 Product differentiation
The design of cryptocurrencies renders day-to-day strategy adjustments of the cryptocurrencies difficult.
Block validators may try to implement changes in the protocol and rely on consensus by the other nodes,
but this involves risk and takes time. Large miners in a PoW currency or persons with large stakes in PoS
currencies may influence the strategic development, but such influence interferes with a cryptocurrency’s
usual business model of being non-centralized. Protocol changes give some leeway for strategic deci-
sions, although time-consuming to implement. Developer and marketing teams may respond to customer
demand and competing currencies. Developers may respond to competition from competing currencies
by developing and suggesting protocol changes to be implemented by the block validators. A visit to
the web-page of several cryptocurrencies reveals that the developer teams are eager to suggest changes
to be implemented in the protocol. However, this comes with certain risks. A protocol change may be
approved by some validators but not others, which may result in a fork in the blockchain, which may
have the consequence that the cryptocurrency will fork into two competing currencies.54
Consequently, many of the strategic decisions with respect to a currency must be established already
in the initial protocol taking into account the obstacles to make changes. Many cryptocurrencies have
improvements to perceived shortcomings in Bitcoin, as explained in Section 2.3, as the main selling
factor. The typical elements of differentiation are transaction capacity, speed, anonymity, and security.
There might be some technical obstacles to improve on all attributes at once which means that the strategy
of a currency involves a trade-off. For instance mixing protocols to reduce the traceability of transactions,
might slow down the speed of transactions. Some cryptocurrencies have approached this trade-off by
letting the users choose attributes when initiating the transactions. For instance, the user can either
choose for a transaction to be difficult to trace or to be fast as options in the wallet.
For other cryptocurrencies, the currency is just an element of the potential services that can be pro-
duced on the protocol. From a mechanism design point of view it makes sense to link additional services
with a cryptocurrency. As long as the cryptocurrency has value, miners or stakeholders have incentives
to create new blocks and keep the blockchain updated, which also benefits the operation of the additional
services. For instance, the dynamics of a smart contract requires the blockchain to update the progress of
the contract. Currency transactions will secure such updates.
Recognizing this strategic competition between currencies in differentiated products, industrial orga-
nization models of competition between differentiated products becomes relevant. For instance, spatial
competition-models can have informative value. Such models can inform as to whether cryptocurren-
cies are likely to be too close in certain quality dimensions, or too differentiated, from a welfare point
of view.55 In other words, differentiated products models may be informative as to whether there will
be too many Bitcoin-lookalikes or if cryptocurrencies are likely to be too differentiated. Such models
54 Forinstance, Bitcoin has forked into two competing cryptocurrencies: Bitcoin and BitcoinCash.
55 See,for instance, Church and Ware (2000) Chapter 11, Tremblay and Tremblay (2012) Chapter 7 and Cabral (2015)
Chapter 14.

19
are informative for competition policy assessments, as competition policy instruments may influence the
degree of differentiation in the market.

3.2.3 Dynamic strategic behavior and exclusionary practices

Developer and marketing teams of a cryptocurrency may take steps to gain a strategic advantage. The
various web-pages of different cryptocurrencies reveal the efforts of the marketing teams in communi-
cating achievements, such as that their currency is accepted by a new exchange or has entered into a
deal with a merchant or payment service provider to facilitate the currency’s use as a means of payment.
Hence, industrial organization models of dynamic strategic behavior and exclusionary practices are rel-
evant. One category of such models is models of vertical restraints. For instance, marketing teams may
have an incentive and opportunity to enter into exclusive agreements with certain partners – for instance
merchants – which may have an exclusionary effect on other cryptocurrencies.56 As certain exclusionary
practices may impede competition, they are crucial for illuminating competition policy. Various types of
strategic behavior that may have exclusionary effects will be covered when discussing the application of
antitrust law in Section 4.1.

3.3 Market power

In this section, we will use the insight from the previous sections to gain insight into the potential for
market power in the cryptocurrency markets. The assessment will be split into two. First, we will look
at the potential for agents to obtain market power within the operation of a given cryptocurrency that has
gained adoption, such as Bitcoin. We will then look at the potential for relevant agents to gain market
power in the markets within which cryptocurrencies operate. Before this, a short recap is provided on
what market power is.
In economic terms, market power is the ability to price above competitive prices – that is, marginal
cost. This difference forms the basis for the Lerner index, which is the difference between the price and
marginal cost as share of the price for each firm in the market multiplied with their market share. Another
measurement of the market power in a market is the Herfindahl–Hirschman index, which is the sum of
the squared market share of all the suppliers in a market.57 A third measurement is the concentration
ratio index (CRx) which is the accumulated market share of the x largest firms in the industry, where x is
usually 2, 3, or 4.58 Market shares, more generally, are traditionally used as a first approximation of the
market power of a firm.
56 See, for instance, Belleflamme and Peitz (2015) Chapter 17, Church and Ware (2000) Parts IV and V, and Cabral (2015)

Chapter 12.
57 In certain oligopoly models, it can be shown that HHI is proportional to the Lerner index, rendering them identical as

measurements of market power. See, for instance, Belleflamme and Peitz (2015) p. 34 or Church and Ware (2000) p. 239.
58 See, for instance, Cabral (2015) p. 252 and Church and Ware (2000) pp. 126 and 239.

20
 In a competition policy context – and, in particular, in antitrust policy – the power to act more or
less independently from customers and competitors stands strong as an indication of market power. In
particular, the power to exclude competitors without competing on the merits is an indication of market
power.59 US Courts describe the similar legal term “monopoly power,” as the power to control price or
exclude competition.60 Market power can also be indicated from several characteristics, such as entry
barriers, lack of substitutes, lasting abnormal high profits, and stable market shares.

3.3.1 Market power within a cryptocurrency

If a cryptocurrency has already gained a qualified adoption, users of this currency are potential targets
for exploitation. Market power will then be the ability of certain agents who provide services to charge
excessive prices from these users – that is, prices not justified by corresponding costs. To be able to do
this, the agent must exert certain control over the operation of the currency. Duffield (2017) describes
certain ways a cryptocurrency may come under control by some centralized entity:
“There are many places a cryptocurrency can become centralized [...]. The most important areas that
we’ve identified are:
1. Centralized database ( Ledger ) This is the problem Bitcoin solved by decentralizing the ledger in
a trustless way.
2. Core Development ( Dev ) Must be opensource and not centralized to the will of a few powerful
individuals. (i.e., Decentralized Governance via voting to make decisions)
4. Infrastructure ( Infrastructure 1 ) If the network hardware is mainly provided by one company or
person that leaves the network prone to monitoring and weak to attacks.
5. Lack of Infrastructure ( Infrastructure 2 ) If the level of hardware providing public service is not
great enough to support the users, that can leave the currency prone to DOS attack, make syncing
slow and creating other similar problems.
5. Lack of decentralized funding ( Funding ) If a project is receiving its financing only from central-
ized sources that can leave a project weak to coercion or undue influence from these sources.
7. Centralized mining pools ( Mining ) One issue that’s always plagued cryptographic currencies is
the rise of pooled mining which leaves the system weak to attack by a party or small group of parties
that has more than 51% of the hash power.
8. Centralized decision making ( Decisions ) By not having a clear way to resolve disputes, the
currency is subject to stagnated development or control of a minority party.
9. Centralized money transfer ( MT ) If all points of entry into the ecosystem from fiat are controlled
by centralized companies, that’s a weakness as well.”
59 See Krattenmaker et al. (1987), Klotz (2008), and Rodger and MaCulloch (2014) p. 99 et seq.
60 See Krattenmaker et al. (1987).

21
The users of a currency may be exploited by agents within the currency and agents related to the cur-
rency’s interaction with the outside world. The most obvious way users can be exploited within a cur-
rency is from the transaction fees set by the block validators. Excessive transaction fees can be obtained
if there is a lack of competition between block validators. Block validators do not compete in terms of
transaction fees in either PoW or PoS schemes, so the mechanism is more indirect. In a competitive race,
block validators may have no incentive to pick transactions to include in the block selectively.61 In a
race between miners, the decision to not include a transaction in the block means that some other block
validator might pick up this transaction and the associated transaction fee instead, and put it on the next
block. This threat depends on the marginal cost of including a transaction in the block. In a competitive
scheme, it is better to pick up a low fee transaction than to not receive any fee at all if the marginal cost
is zero.
Excessive transaction fees might be a dangerous play for block validators. High transaction fees will
make the currency less attractive and, hence, diminish the value of the currency with which the transaction
fees are paid and new coins are awarded. The extent of this effect will depend on the outside alternatives,
which will be discussed in the next section. Furthermore, excessive transaction fees might be an indicator
to the users that the currency is under control by a centralized entity. The whole idea for gaining trust
behind several cryptocurrencies is based on decentralization. A crucial assumption in the model in the
Bitcoin white paper, Nakamoto (2008), is that the share of honest miners is about 50 percent. A miner
with a more than 50 percent probability of generating a new block, can destroy the integrity of the chain
by being able to reverse several blocks. Consequently, the mechanism design of many cryptocurrencies
to some extent prevents too excessive transaction fees.
Core team developers may also abuse control. Since they normally, as the block validators, are
awarded in the cryptocurrency they develop, the incentives to do so should be low. However, core de-
velopers may attempt to realize short term gains conflicting with the long-run value of the currency.
For instance the development team in collusion with block validators may fail to develop protocols that
increase competition among block validators.
Persons external to the currency who hold market power in services vertically or complementarily
related to a cryptocurrency’s operations may also exploit the users of the currency. They have the advan-
tage that they may be awarded for their services in other currencies, such as national currencies, and are
less sensitive to a loss in the value of the currency. Still, the value of the currency is not irrelevant, as the
value of the currency indirectly affects the willingness to pay for the complementary services. Miners
61 Itcan be argued, however, that excessive competition between miners in a PoW scheme also can give excessive prices.
An arms race competition between miners will result in too much cost incurred because one miner’s efforts impose a negative
externality on competing miners in terms of the probability of “finding” and validating a new block The mining competition
and cost externality can easily be illustrated by a traditional “race to discovery” model used for discovery of treasure chests,
natural resources, and intellectual property rights. Assume that the mining reward is R and the probability for miner i to obtain
the reward is pi (xi , x−i ), where xi is the effort of miner i, and x−i is the effort of competing miners. Ci (xi ) is the costs for miner
i. The expected profit of miner i is E(πi ) = Rpi (xi , x−i ) − Ci (xi ). This models shares characteristics with standard oligopoly
models. See also Teo (2015) for another model specification.

22
in PoW schemes need hardware, internet connection, and power. Mining hardware has become heavily
specialized, which means it potentially may be monopolized both by structural entry barriers and intel-
lectual property rights. A large mining facility is not very mobile and may be subject to exploitation by
the local energy provider or internet provider. Certain exchanges may be subject to network effects with
the consequence that the exchange might exploit the users of a currency.

3.3.2 Market power in the markets in which cryptocurrencies operate

While the preceding section was about market power in the markets related to the operation of a specific
currency, the question is now whether a specific currency can have market power. For such an exercise,
it is tempting to look at the market shares of the specific currencies measured as a share for market
capitalization of all cryptocurrencies. However, as pointed out in section 2.3, it is not obvious what the
market is and how it should be measured. Bitcoin is large in a cryptocurrency market measured in market
capitalization, but probably has a small transaction volume in the total transaction market. Hence, in a
cryptocurrency market one could infer from market share that Bitcoin has market power, but in a more
general payment service market the market share is probably small.
To figure out if a cryptocurrency has market power, one must start with the cryptocurrency in question
and ask if it provides services unique and valuable enough to someone in control of it to exercise market
power. In competition law, this is referred to as the SSNIP-test62 , which is used to delineate markets.
Starting from the cryptocurrency in question, we must ask whether substitution to candidate services is
possible to prevent a hypothetical monopoly provider of this particular cryptocurrency to increase the
price of the relevant services more than a certain threshold.63 If such services exist, they should be
included in the same market.64
Assume that somehow a currency was centralized in a way described in the previous section, allow-
ing for the exploitation of its users. Let us first consider whether users could easily switch to another
cryptocurrency in the presence of exploitation. Users already holding the currency would have to sell
their currency. In an extreme case, it would be a run on the currency, which would cause its value to
collapse. However, as with runs in general, individuals would not take into account the total effect of
their decisions. In other words, a rational user will not take into account the externality imposed on oth-
ers in terms of the reduced value from switching the currency. Such substitution would reduce the value
of the currency, reducing the value of transaction fees and the investments by the block validators. For
potential users, not holding the currency at the moment, transaction fees would in the normal way make
the currency unattractive. Hence, it is reasonable to assume that competition from a substitute competing
currency would constrain market power of persons in control over a currency. Hence, it is reasonable
62 Small but significant non-transitory increase in price.
63 Usually taken to be 5–10 percent in the application of competition law.
64 See, for instance, Rodger and MaCulloch (2014) p. 95 or Posner (2009) Chapter 5. The delineation of markets is a

controversial issue in the application of competition law.

23
to assume that it is possible for competition to constrain market power in the cryptocurrency markets,
leaving a role for competition policy.
Many cryptocurrencies are open-source and well-documented to gain trust. Hence, intellectual prop-
erty or trade secrets should not, at the moment, constitute a major challenge to create a substitute for
most currencies. This is confirmed by the range of available substitute cryptocurrencies in terms of tech-
nical characteristics. The question is then, what can protect a cryptocurrency from competition from
cryptocurrencies of similar characteristics? The main answer to that is likely to lie in the network and
platform nature of cryptocurrencies. A cryptocurrency is subject to both network effects and platform
effects as described in Section 3.2.1. In addition, there are coordination failures. If all substitute to
the same substitute currency, barriers due to network and platform effects could be less of a challenge.
However, coordination failures may cause users to switch to a variety different substitutes. This would
prevent a competing currency from providing the same value to the users as the incumbent. Rational
players would recognize this coordination problem, which would benefit the incumbent cryptocurrency
at an earlier stage of the game.
However, users may not only switch to other competing cryptocurrencies. Today, it must be assumed
that the traditional payment system puts a restraint on the possibility for the exploitation of market power
in cryptocurrencies. This may change if the traditional payment system provides inferior solutions and/or
the network effects associated with a particular cryptocurrency or a few particular cryptocurrencies be-
comes too strong.

4 Competition policy
In this section, the use of competition policy instruments to promote competition in the cryptocurrency
markets will be discussed. The main issue to be discussed is the effectiveness of such instruments to
prevent market power, but the interference of such instruments on other public policy objectives will
also be discussed. Antitrust law is the main general legal instrument to promote competition and will be
discussed first. However, antitrust laws have several shortcomings in promoting competition, rendering
other policy instruments necessary. Such instruments will also be discussed.

4.1 Antitrust laws

The antitrust laws are legal rules regulating actions that restrict competition between businesses in the
market place. Broadly speaking, the antitrust laws cover cooperation between businesses that restricts
the competitive pressure among them, practices that might prevent competitors from competing fiercely
in the market place, and mergers and acquisitions that restrict competition. Many jurisdictions follow the
same template of competition law: prohibiting anti-competitive agreements, prohibiting unilateral abuse
of market power, and a merger regulation that provides the legal basis for controlling mergers that restrict

24
competition. This template will also guide the discussion here. It will not delve into the details of any
particular jurisdiction.65
The position of many economists is that the pursuit of efficiency should be the purpose of antitrust law.
Despite economists’ recommendations on what the purpose of antitrust law should be, this purpose must
be derived from the sources that are relevant to interpreting laws according to the accepted methodology
of determining and interpreting the law. For instance, both in the EU and US, consumer welfare stands as
a goal, influencing the application of law. In addition, the pursuit of competition as such has been argued
to guide the EU courts.66

4.1.1 Liable entities

A main prerequisite for the application of antitrust law is that there is someone to pursue legally – in
other words, a liable entity. Most cryptocurrencies do not follow the standard organization of businesses.
There is normally no CEO or Board of Directors with a registered physical business address who are op-
erationally and legally responsible for the operation of the currency. The block validation is decentralized
to nodes on the system according to the authorization procedures set out in the protocol of the currency.
In addition, block validators are at the mercy of the nodes in the network for consensus. Transaction fees
and terms of use for a currency are not posted as contractual obligations that can, ultimately, be enforced
in a court of law.
Block validators have a crucial role for the operation of the currency. Block validators might be
anonymous or pseudo-anonymous nodes, but this does not prevent the real identities behind them to be
liable entities as such. This is an enforcement issue that will be returned to below. Block validators
might disregard transactions with insufficient transaction fees, and could in principle be liable in that that
capacity. However, if the currency is truly decentralized, the block validators may change from block
65 In the US there are several acts that constitute the body of federal antitrust laws. The most prominent are the Sherman
Act of 1890 and the Clayton act of 1914. Sherman Act section 1 prohibits anticompetitive conspiracies, while section 2
prohibits monopolization. The Clayton Act covers merger control. These rules are enforced by the Antitrust Division of the
US Department of Justice. The Fair Trade Commission (FTC) was created with the FTC act of 1914. The FTC act gives the
FTC the powers to intervene against unreasonable restraints of competition. In addition, the FTC has overlapping powers with
the Antitrust Division in enforcing the Clayton Act. In addition to the public enforcement there is a substantial amount private
enforcement in the US. The EU competition rules can be found in the Treaty on the Functioning of the European Union
(TFEU). TFEU Article 101 prohibits anticompetitive cooperation between undertakings while TFEU Article 102 prohibits
abuse of dominance by undertakings. Despite some differences, TFEU Articles 101 and 102 can be considered as parallels to
sections 1 and 2 of the Sherman Act. In addition to the prohibitions, the Merger regulation addresses mergers and acquisitions.
The EU competition rules are enforced by the European Commission and the competition authorities of the member states.
The main provisions in the TFEU are supplemented by detailed regulations on enforcement and procedure. In addition to this,
notices, guidelines and best practices are issued by the European Commission. Private enforcement is also possible, but not
as common as in the US.
66 This can be referred to as an ordoliberal approach. See Østbye (2013) for a more detailed study of the purpose of

competition law.

25
to block and build on each other’s blocks subsequent to consensus by the network nodes. Hence, under
the normal operation of a cryptocurrency it can be questioned whether an independent block validator is
sufficiently in control to be liable according to antitrust law.
Core teams influence the path of a cryptocurrency, but are dependent on acceptance from block valida-
tors and network nodes to adopt changes in the protocol. However, since a core team is a non-transitory
entity with influence on the currency, it seems reasonable that a core team has sufficient control to be held
liable according to antitrust law. In the same way, marketing teams should also be able to be held liable
for their actions according to antitrust law. In particular, as marketing teams often deal with external
parties, such liability may be relevant.
Services associated with cryptocurrencies, such as exchanges, wallets, and other financial industry
partners, are more often provided by conventionally organized companies suitable for antitrust liability.
Indeed, several of these service providers are companies subject to either general financial regulation or
specialized cryptocurrency regulations.

4.1.2 Anticompetitive agreements

In an antitrust sense, a formal agreement is not necessary for antitrust liability. Informal agreements and
cheap talk suffice. Several anticompetitive agreements may facilitate market power in the cryptocurrency
markets.
The standard anticompetitive agreement typically involves cartels (i.e. competitors replacing terms of
competition, usually price, with an agreement). Such agreements are already widespread in the operation
of cryptocurrencies. In PoW schemes, miners often pool their resources into mining pools and agree on
terms to, inter alia, reduce risk. In essence, this is a cartel. However, there are certain characteristics
of cryptocurrencies that distinguish mining pools from traditional cartels. Miners do not compete on
offering low transaction fees to users. The parties in a transaction cannot choose a miner based on
competitive transaction fee offers. Still, competition may benefit the users in terms of lower transaction
fees, as explained in Section 3.3.1, but not directly, and not to the same extent as direct competition on
transaction fees. Furthermore, since mining involves duplication of resources, it could be argued that a
mining pool that reduces the resources that are put into the race may generate efficiencies.
Exchanges and wallets also normally charge transaction fees in addition to those imposed by the block
validators. On the contrary to the block validation process, exchanges compete directly in transaction
fees, making the harm of a price-fixing agreement more direct. Efficiencies are also harder to justify.
Consequently, agreements between exchanges to fix exchange fees will fall under the normal scope of
antitrust law.
Agreements may also be of a vertical nature. An example is an agreement between the marketing
team of a cryptocurrency and a provider of ancillary services. Such agreements may have exclusionary
effects. A typical agreement that may have exclusionary effects is an exclusivity agreement between
the marketing team and payment services provider, where the latter agrees to deal exclusively with that

26
particular cryptocurrency. Another example is an agreement with a payment service provider and a
marketing team to exclude certain competing cryptocurrencies from the payment provider’s services. For
cryptocurrencies that aim at being a settlement currency among banks, similar exclusivity agreements
may raise concerns. For instance, an agreement to exclude competing banks from access to a settlement
currency may constitute an illegal boycott according to antitrust law.

4.1.3 Monopolization
Monopolization is about how firms with market power can exclude competition without competing on the
merits.67 In most jurisdictions, a legal manifestation of market power, such as monopoly power in the US
or dominant position in the EU, is required to be within the reach of monopolization rules. The implicit
rationale is that market power is necessary to be able to compete on non-meritorious terms. Hence,
monopolization concerns, according to antitrust law, are only an issue regarding the behavior of firms
with market power. This requirement is, however, somewhat circular because the scrutinized behavior
itself may be an indication of market power. Unfortunately, antitrust law does not provide a coherent
approach to the precise separation of monopolization and competition-on-the-merits. Rather, a complex
system of case-law guides the practice. The commentary community has suggested coherent and holistic
standards, such as whether an “as efficient” competitor is excluded from the market, but such standards
are not implemented in practice.
Several stakeholders in the cryptocurrency markets may have market power. Several practices of
these stakeholders may be considered monopolization according to practice. So-called predatory pricing
may be considered monopolization. Predatory pricing involves a supplier setting prices below cost and
thereby forcing a competitor out of the market, with the long term goal of exploiting market power when
the competitor has exited the market. An example might be a large block validator or a mining pool to
set transaction fees below cost to exclude a rival cryptocurrency. Another example, well known from the
platform competition literature as described in Section 3.2.1, would be to cross-subsidize certain marquee
users of the platform to prevent entry of competing cryptocurrencies. For instance, the marketing team of
a cryptocurrency could provide important merchants and suppliers of payment services free or services
charged below-cost in exchange for preferential handling of this particular currency. It should be noted
that predatory pricing may come in several variants. For instance, instead of setting below-cost prices a
supplier provides rebates rendering the prices effectively below zero.68
Another practice targeted by monopolization rules is bundling. The idea is that a firm with market
power either can leverage its monopoly power in one market to another, or protect its original market, by
bundling services. Many new cryptocurrencies provide bundled services by building services on top of
67 Inthe EU the abuse of dominant position also covers excessive pricing, but since regulation requires specialized industry
knowledge, the European Commission seldom pursues this option in practice, leaving the task to regulators.
68 A consequence of the fragmented approach to monopolization in practice, such rebates may not be assessed coherently

with predatory pricing.

27
the cryptocurrency, such as Ethereum. If a cryptocurrency with market power decides to build additional
services upon its cryptocurrency, this might be an antitrust issue. Bundling might also be an issue with
respect to ancillary services. Wallet providers may build in exchanges into their wallets, and exchanges
may offer wallet services. A dominant wallet player could gain a position in the exchange market by
integrating it in the wallet.
Various contractual terms imposed unilaterally on customers and partners could also be considered as
monopolization. For instance, if a cryptocurrency marketing team provides services to service providers
on the condition that other cryptocurrencies are treated less favorably, this may constitute monopoliza-
tion. Volume obligations in terms of market share – for instance, making services provided dependent
on that a particular currency constitute more than 80 percent of trading volume – may also constitute
monopolization. Dominant wallet providers may also discourage competition by setting conditions that
foreclose wallet competitors. For instance, a dominant wallet provider could set as a condition to accept
a currency that the core team do not aid the integration of a currency into competing wallets.

4.1.4 Merger control

Merger control is about the change of control over a company’s decision making. In a traditional merger
two formerly separate firms merge, and the control is transferred from two formerly separate entities
to one new entity. In acquisitions, the control of one formerly independent entity is transferred to the
acquirer. In a competition law sense, mergers might also be more exotic, such as setting up joint ventures
and pools. What is required is the transferring of control from one entity to another on a lasting basis. For
cryptocurrencies as distributed systems, the traditional merger categories do not fit well. Presumably no-
one has control over such a currency, although control in practice might be gained according to mining
power or currency stake. A person, depending on the scheme, might, however, gain control over a
cryptocurrency by acquisitions. In a PoW scheme, such a control might be achieved by buying mining
resources. In a stretch of the merger control, such a purchase – for instance the purchase of a rival miner
(if organized as a company), or the mining equipment of a rival miner – could be considered as a merger
subject to merger control. In a PoS scheme, the purchase of coins might give the acquirer increased
control over a currency, which also may be subject to merger control. For PoW schemes, mining-pools
that on a lasting basis involve transfer of control to the administration of the mining pool could also be
considered to be a merger. These are mergers within the operation of single cryptocurrencies.
Similar mergers could occur across cryptocurrencies. A person who holds significant mining re-
sources in one PoW cryptocurrency or a significant stake in a PoS cryptocurrency might buy signifi-
cant mining power or a significant stake in another cryptocurrency. This could bring the two currencies
under single control subject to merger control. It has been increasingly popular for cryptocurrency en-
trepreneurs to sell pre-created coins in the form of an initial coin offering (ICO). In a PoS scheme, this
might involve a transfer of control, which could be relevant for merger control if acquired by someone
controlling a competing currency.

28
 Merger control also covers so-called vertical mergers. Vertical mergers might foster a possibility and
incentive to exclude competitors. If a person with a large stake in a specific currency, for instance acquires
a multi-currency wallet or exchange, it is possible to constructs theories of harm where the acquirer will
use this position to foreclose competing cryptocurrencies.
Mergers between providers of ancillary services of cryptocurrencies more easily fit standard merger
control cases. For instance, a merger between exchanges may be assessed in a similar manner as used
for other financial exchanges. A merger between wallets could be assessed in the same way as mergers
between payment service providers. Vertical merges between providers of ancillary services could also
easily be imagined to have antitrust relevance, such as a merger between a major wallet provider and a
major exchange.

4.1.5 Enforcement challenges

As noted above, an idea behind cryptocurrencies is that stakeholders may be pseudo-anonymous in the
sense that the participants are represented by virtual nodes not officially linked to real identities. If
enforcement includes stakeholders with unknown identities, such as miners or currency stake holders,
the lack of identification might render antitrust enforcement difficult or impossible. Another issue related
to the use of pseudo-anonymous nodes is that control is difficult to assess. Although network analysis can
be used to make inferences about identity of nodes, it might be difficult to gain sufficient legal evidence
that two nodes, especially nodes of different cryptocurrencies, are under the same control.
An additional issue is the international dimension of the cryptocurrency markets. Stakeholders in the
industry are spread all over the world. For example, enforcement against the actions of a wallet-provider
hosted in China for effects in the US might raise difficulties. Thus, international cooperation between
legislators and competition law enforcers is necessary to face challenges associated with market power.

4.1.6 The shortcomings of antitrust

It has been shown above that although the international dimension may create obstacles, antitrust laws
may be suitable to address market power problems related to ancillary services in the cryptocurrency
markets. However, when it comes to the operation of a cryptocurrency as such, traditional antitrust law
has shortcomings. From a substantial point of view, the decentralized nature of cryptocurrencies does not
fit well with the standard business organizations subject to antitrust scrutiny. The control flowing from
the possession of mining power or currency stake in a PoW or PoS cryptocurrency, respectively, does
not fit well with control as it is approached in antitrust law. Control must be inferred more indirectly,
possibly with the aid of models presented in the white paper accompanying the various cryptocurrencies.
Furthermore, pseudo-anonymous nodes create obstacles for enforcement.
However, even if enforcement was possible, the standard assessment criteria may not be compatible
with the other public policy objectives associated with cryptocurrencies. The supply of a currency –

29
in particular a cryptocurrency – interferes with several public policies as described in Section 2.4. The
application of antitrust law, may interfere with such policies.
Antitrust enforcement towards the operation of a cryptocurrency might also end up to be used against
its own purpose. The idea of antitrust enforcement is to protect consumers by punishing those responsible
for an action. But enforcement against a cryptocurrency may hurt the currency and ultimately the users
in terms of volatility and loss of value. In other words, those who are the victims of exploitation may end
up losing under the rules that are supposed to protect them.
Finally, antitrust is a reactive tool. Antitrust law does not prevent market power in the first place as
long as it is not obtained by lawful means. Often, some irreparable harm to competition is done before an
action becomes relevant for antitrust law. Regulation or other public polices may be necessary to foster
competition in the first place.

4.2 Non-antitrust competition policy instruments

As explained above, antitrust law is mainly a reactive tool to promote competition. It has shortcomings
in fostering competition in the first place. In this section, we will look at two instruments to prevent
negative effects of market power in the cryptocurrency market: regulation and direct participation in the
market by the government.

4.2.1 Regulatory instruments

Several sectors have regulations in place to foster competition, such as the energy sector and telecommu-
nication sector. These are typically network sectors associated with large economies of scale and natural
monopoly characteristics. Regulation may be used to cap end-user fees directly. Access regulation is
also common in suitable industries. Such regulations provide service providers access to the incubator’s
network, allowing for competition on the top of the network. Recently, the payment account structure has
become a target for regulation. In the EU, the revised payment services directive (PSD2) paves the way
for regulated access to the payment account infrastructure for independent payment service providers.
Several regulatory instruments may be relevant for the cryptocurrencies markets. Leaving enforce-
ment problems aside, transaction fees could be capped. However, the usual problem of determining
the cap will apply. To prevent market power gained by holding of mining equipment or the stake in
a currency could be capped in a PoW or PoS scheme, respectively. To promote a viable competition
among cryptocurrencies, non-discriminatory access to ancillary services such as exchanges and wallets
could be imposed. A more strict regulation would be to mandate exchanges and wallets to accept all
cryptocurrencies satisfying certain standards.
Wallets and exchanges are also subject to platform and network effects. Regulatory instruments
could be used to prevent certain wallets and exchanges from becoming dominant. Several regulations
have been imposed in Europe that, among other objectives, promote competition in the trade of financial

30
instruments. Such regulations include the possibility of securities being listed at several exchanges at the
same time and the use of central counter-parties (CCPs) to create a safer environment for over the counter
(OTC) trading. Such regulations could inspire trade with cryptocurrencies, and perhaps making smaller
cryptocurrencies more liquid.
Regulation could also be imposed on merchants who are accepting certain currencies to also accept
other cryptocurrencies. To prevent one currency from gaining the advantage as a unit of account, such
merchant could be obliged to post stable prices in several currencies. However, a major advantage of
money is its property as a unit of account. Policies to post prices in several currencies could impede the
goal of a common unit of account. Hence, regulations must be balanced against other public policy goals.
Several of the regulations suggested above would prevent the network and platform effects being too
strong to the advantage of one or a few specific cryptocurrencies. As with regulation in general, there
is a fine balance between regulations that promote static competition and regulations that discourage
dynamic competition. Normally, regulations that promote static competition are often applied to rather
mature industries. In emerging industries it is important that regulations do not discourage innovation.
It safe to say that the cryptocurrency industry is not very mature. Hence, regulations should be applied
with utmost caution to not discourage the innovative potential of the industry.
Many of the regulations described above are about easing entry and lowering the barriers for new
suppliers to gain a market position. It is not an understatement to say that the financial industry is heavily
regulated to protect public policy concerns, as described in Section 2.4. Many regulations, such as AML
and KYC compliance, impose costs on the participants, raising the barriers to entry. Capital require-
ments to protect customers and foster financial stability may have the same effect. The cryptocurrency
industry would be likely to argue for easing of such obligations as a means to promote competition. Such
arguments should be met with caution as the regulatory instruments promoting competition can coexist
well with regulations promoting other public policy concerns. Excessive regulation may be scrutinized,
and one-size-fit-all regulations may be reconsidered to not impose unnecessary regulatory burdens on
new participants. However, regulations promoting competition between cryptocurrencies fostering their
use may also call for strengthening regulations promoting other public policies. For instance, the lack
of widespread use of cryptocurrencies today may make them less attractive in use for criminal purposes
than if in more widespread use. In addition, competition policies may promote the development of new
cryptocurrencies are that are more suitable for criminal purposes. Strengthened or new regulations and
policies may be needed to address these concerns.
Monetary policy is also a concern when it comes to competition among cryptocurrencies. This is a
more fundamental problem for competition policies promoting the widespread use of cryptocurrencies.
With more competition and more widespread use, it might be more difficult to control money growth and
inflation. Furthermore, the technical features of cryptocurrencies make them less flexible than national
currencies in meeting instabilities in the currency itself. If a cryptocurrency’s value is on a spiral up
or down, few responses may be available to stabilize the currency. Another possible consequence is
that the use of the interest rate as a policy instrument becomes more difficult. An extreme example

31
is if a cryptocurrency gains a widespread adoption as a settlement currency between banks. It is to a
large extent the banks’ accounts in the central banks that are the epicenter of monetary policy via the
interest rate. An important element of the so-called transmission mechanism of the interest rate policy
is the transmission of the central banks interest rate from the banks accounts in the central banks to
the economy. If a cryptocurrency is used for settlement, this mechanism may be seriously impeded.
Furthermore, in times of distress, liquidity rescue packages from the central bank, such as lender of last
resort (LLR), are difficult if the central bank does not possess the liquidity needed or must acquire it
through market operations. However, some would probably not consider this as a major problem to the
stability of the financial system, but rather an advantage. The argument is that such rescue packages
(combined with limited liability) are the very source of the moral hazard that contributes to, or even
causes, the distress in the first place.

4.2.2 Government alternatives

As an alternative to regulation, market power might be addressed by direct intervention in the market.
Instead of regulating private services, the government might provide the relevant services itself on terms
and conditions promoting public policy goals. Public services could be a government prerogative, or be
supplied in competition with private alternatives. If the government service is provided in competition
with private services, it would impose constraints on private market power, as customers could switch to
the government service if market power is sufficiently exploited.
The governments may prevent exploitation of market power in the cryptocurrency markets by aug-
menting their national currencies to be better substitutes to private cryptocurrencies. A way to accomplish
this is to allow the public to hold central bank issued base money in a similar fashion as cryptocurrencies.
The cryptocurrencies could be based on augmented blockchain technology allowing for monetary policy
policies. Several central banks are exploring the issuance of electronic base money to the public and
have initiated research on the motivation for providing such currencies, including the attributes to put
on such a currency, the technical implementation, and the economic consequences. Preventing market
power from private cryptocurrencies is probably just a minor consideration in this assessment, but should
be taken into account.

5 Concluding remarks
Among competition professionals, it is often claimed that any industry will characterize itself as special,
different from all other industries, and not suitable for the application of antitrust law or competition
policy in general. It is important to not make the same mistake when it comes to cryptocurrency markets.
However, there are certain obstacles to performing competition policy in the cryptocurrency markets.
The production of cryptocurrencies has some characteristics rendering much of the standard workhorse
for competition policy, industrial organization and its associated of-the-shelf models, a poor fit for the

32
cryptocurrency markets. Several standard models of competition between profit-maximizing firms max-
imizing profits do not capture the particular features central to the cryptocurrencies markets and may
not provide robust inferences. Consequently, the epistemic foundation to base competition policy in the
cryptocurrency markets upon is underdeveloped. That said, innovations in industrial economics, such as
models of network competition and models of spatial competition, are informative for the cryptocurrency
markets, and are to some extent used for this purpose. This framework needs to be developed further to
be applied to competition policy for the cryptocurrency markets.
The distributed network architecture of cryptocurrencies constitute a barrier when it comes to legal
enforcement, such as antitrust enforcement and regulation. Legal enforcement is usually based on ad-
dressing those in control of the operation of an undertaking with legal remedies. This is in conflict with
cryptocurrencies, where the lack of control by a single entity is one of the core business principles. Con-
sequently, it can be argued that the best way to prevent market power in the cryptocurrencies markets is
to provide government alternatives that discipline the abuse and exploitation of market power by private
alternatives.
Although the nature of cryptocurrencies constitute a barrier to competition policies addressing the
service providing nodes of a cryptocurrency, actions can more easily be taken against providers of an-
cillary services, such as wallets and exchanges. They are more often organized as traditional businesses
and are more accessible targets both for antitrust law and regulation. By regulating such ancillary ser-
vices, one can also indirectly promote competition among cryptocurrencies as such. A challenge for such
enforcement, however, is the international dimension, and, hence, the need for international coordination.
An additional challenge facing competition policy in the cryptocurrency markets is that there are sev-
eral other public policy concerns associated with cryptocurrencies. Competition policy may coexist and
work hand-in-hand with other public policy objectives, but there may also be areas where the objectives
are conflicting. Traditional tools such as antitrust and regulation may have shortcomings when it comes
to taking into account such public policy objectives.

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