A recent European Parliament report discusses competition issues within FinTech as they relate to cryptocurrencies.
Requested by the European Parliament’s Committee on Economic and Monetary Affairs, a July study titled Competition issues in the Area of Financial Technology (FinTech) analyzes anti-competitive forces and their effect on the overall FinTech ecosystem. One of the report’s key markets of focus is cryptocurrencies.
The authors of the report assert that the cryptocurrency market features competition between currencies (inter-cryptocurrency), “where different cryptocurrencies compete against each other with diverse strategic behaviours,” and between providers (intra-cryptocurrency), “where different service providers (mining, wallet, exchange and payment services) compete.”
Concerning the inter-cryptocurrency market, the study notes that in March 2017, bitcoin and Ether accounted for 88 percent of the total crypto market capitalization. This demonstrates that the market is concentrated on these two cryptocurrencies, leaving only 12 percent for the rest.
The authors argue this market concentration suggests the presence of significant network effects acting as an anti-competitive barrier. Merchants, wallets, and exchanges often support only certain cryptocurrencies – enhancing their market power while blocking others from gaining traction.
However, the authors state, “The arrival of permissioned cryptocurrencies promoted by banks, even by central banks, will reshape the current competition level in the inter-cryptocurrency market, broadening the number of competitors.” They note that wider public participation in the cryptocurrency market through central bank-issued digital currencies (CBDCs) may be a “remedy” for the “potential inadequacy” of traditional competition policy.
To complicate the competition issue further, the report discusses the international nature of cryptocurrencies and its effect on European-level policy. Because many key crypto players operate globally, the “investigation or prosecution on anticompetitive behaviours [is] more difficult.”
For example, most mining activity occurs outside Europe, so the European Union has no jurisdiction to regulate it. The US Internal Revenue Service exhibited similar insight, as it formed the internationally based Joint Chiefs of Global Tax Enforcement earlier this month to combat tax crimes across borders.
Concerning the intra-cryptocurrency market, “incumbent banks” may employ “pre-emptive acquisitions or predatory pricing schemes” to limit competition. Another anti-competitive practice is the denial of access to exchanges or wallet gateways, sometimes manifested as “low service quality, delays in negotiation, proprietary technical standards or excessive pricing.”
The report does not explicitly cite bank-issued bans on the crypto purchases as an anti-competitive practice, but does state that anti-competitive behavior by banks ultimately deters consumers from using permissionless cryptocurrencies and may encourage them to use permissioned, bank-promoted ones instead.
The authors conclude their report by noting that the FinTech ecosystem, including cryptocurrencies, is “too fluid to reach firm conclusions on the existence of competition challenges that need the deployment of competition tools on a large-scale basis.”
However, they believe that “the FinTech ecosystem shows the need for a more symbiotic [relationship] between regulatory and competition frameworks” because of present insufficiencies in this sphere. In other words, cryptocurrency competition policy is a work in progress and requires further research.
The European Parliament published another cryptocurrency– and blockchain-related study this month titled Cryptocurrencies and blockchain: Legal context and implications for financial crime, money laundering and tax evasion.
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