On Jan. 28, a federal judge in Florida dismissed without prejudice the nation’s first antitrust suit involving cryptocurrency. The plaintiff, United American Corporation Inc., (UAC), alleged that five entities and six individuals conspired to hijack and centralize the Bitcoin Cash network by combining their efforts during a crucial software upgrade vote, causing the diminution in value of UAC’s cryptocurrency mining operation. The court’s decision to permit UAC to amend its complaint leaves open the potential applicability of antitrust laws in this already legally opaque industry.

Bitcoin Cash and Blockchain

Bitcoin Cash is a form of cryptocurrency. Cryptocurrencies are peer-to-peer versions of electronic cash. Since there is no central financial intermediary, a decentralized “blockchain” network of ledgers verifies and records the currency’s transactions. Blockchain networks depend upon cryptocurrency “miners” to verify and record new transactions. Miners compete by solving complex mathematical equations and are compensated for their efforts with newly minted currency. UAC and the defendants are participants in the community of software developers, miners and exchanges that supports Bitcoin Cash.

Background of the Case

In 2018, Bitcoin Cash was preparing for a software upgrade, which led to what is known in the industry as a “fork.” Forks allow individual miners to “vote” on the proposed changes in the rules governing aspects of the operation of the blockchain. Miners vote by implementing the relevant upgrade of their choice and then using that upgrade to “mine” the currency – voting by doing, as it were. Disagreements among miners can lead to “hard forks,” where a single currency and corresponding blockchain split into new currencies and new corresponding blockchains governed by their own respective rules.

According to UAC, there were two competing potential upgrades, known as Bitcoin ABC and Bitcoin SV. UAC was a proponent of the Bitcoin SV upgrade. Apparently, some of the defendants were proponents of the Bitcoin ABC upgrade and allegedly rallied others to their cause, similar to how a shareholder might wage a proxy war to install a new director.

In the end, the Bitcoin ABC upgrade won the vote. However, although Bitcoin ABC received more votes than Bitcoin SV, both systems survived the fork and now compete in the market for users and miners. After the vote and subsequent split, some of the defendants associated with Bitcoin ABC installed checkpoints in the software to prevent miners from reversing the software upgrade, in essence locking in the upgrade and irreversibly splitting the two systems.

The Allegations and Defenses

In its complaint, UAC alleged that even though individual miners could vote as they pleased, the defendants “effectively hijacked” the vote by renting computing power from “mercenaries from another network to temporarily mine [on the Bitcoin Cash network] during the software vote.” Although no internal rule prohibits such conduct – indeed, internal operating procedures permitted individual miners to join and leave at will – UAC alleged that this action was anticompetitive in nature, evidence of the premeditation and planning of the defendants, and in any event, amounted to an antitrust violation under both per se and rule of reason analyses. Additionally, UAC alleged an antitrust violation in the defendants’ installation of checkpoints that limited competition by effectively centralizing a cryptocurrency that was designed, by its very nature, to be decentralized.

In their motions to dismiss, and further in their nearly four-hour oral argument, the defendants argued that despite the relative complexity of the cryptocurrency industry, UAC’s complaint failed for reasons typical to antitrust cases: (1) the complaint failed to plead sufficient facts to support an antitrust claim under either a per se or rule of reason theory, and (2) even if it had pled sufficient facts, the alleged anticompetitive behavior did not harm competition as a matter of law – in fact, it increased competition through a legitimate and democratic process of voting that resulted in two networks rather than one, each competing for miners and users.

The Court’s Findings

The court agreed with the defendants that the complaint did not plead sufficient facts to support any element of an antitrust claim under either theory. However, the court did not agree that the complaint should fail as a matter of law, and seemed to believe that the allegations, if pleaded properly, could at least possibly state a plausible claim under the Sherman Act.

First, the court found that UAC alleged a conspiracy but never alleged that any of the 11 defendants ever communicated regarding the supposed scheme. In other words, UAC never provided any allegations concerning the who, what, when and where of the conspiracy. Instead, UAC asked the court to infer a conspiracy by the parallel conduct of the defendants. The court declined to draw such an inference in the absence of facts sufficient to plausibly support either the idea that (a) the parallel conduct was against the defendants’ individual self-interest or (b) there were some other “plus factors” that tended to show that the parallel conduct was coordinated, as opposed to simply being in the interest of each individual actor.

Second, in its complaint, UAC alleged that the acts of the defendants amounted to an unnamed per se violation of the Sherman Act. In its response to the motions to dismiss, UAC labeled the alleged misconduct “bid rigging.” Although that label was not used in the complaint, the court expressed doubt about the applicability of bid rigging to this case. Focusing on the conduct alleged in the complaint, the court held that since even UAC admitted this case presented an issue of first impression, the court would not and could not be the first to say the conduct at issue is “so well understood that it is a per se violation.”

The court also disposed of UAC’s rule of reason theory. The court found that UAC did not allege or define a specific product market, geographical market or any harm to competition in any relevant market. And even the harm to UAC itself – the diminution of the value of its mining business – was not plausibly pled as resulting from any of the defendants’ acts, as opposed to the result of market-wide adjustments in the cryptocurrency industry.

Third, the court held that it was not convinced that the conduct itself – voting together for one upgrade over another, installing software checkpoints or bringing in additional miners during the voting period – violated the Sherman Act.  But the court explicitly said its “mind was not closed on the subject.”

Despite the shortcomings of UAC’s complaint, the court remained open to the possibility that a properly pled conspiracy to harm competition in the mining of a single cryptocurrency could potentially support an antitrust action if the conspiracy actually harmed competition. Were that true, cryptocurrency miners that collectively “vote by doing” might unknowingly find themselves subject to criminal and regulatory liability.

If this case proceeds, the court must answer a fundamental question: Is a single cryptocurrency network more akin to a market or a company? If the network is more akin to a company, then the alleged conduct is more like a shareholder proxy war, where shareholders attempt to convince other stakeholders to vote a particular way. Historically, such behavior has rarely, if ever, been considered anticompetitive. But if the network is more akin to a market, collective voting may run afoul of the law.

What to Look For

In its upcoming complaint, UAC may abandon its per se argument and focus instead on establishing its claim under the rule of reason. In doing so, UAC likely will seek to narrow the applicable market to the Bitcoin Cash network rather than extend the applicable market to cryptocurrency in general, despite other cryptocurrencies being reasonable substitutes for each other as it relates to miners. Regardless which market it identifies, UAC must show that the defendants’ acts caused harm to competition within that market as opposed to harm to UAC alone. And that may prove much more difficult given the industry-wide adjustments taking place.