Unpacking three key competition issues for digital asset innovators and investors: M&A, interlocking directorates, and interoperability.
By Kelly Fayne, Anna Rathbun, and Evan Omi
In a sea of regulatory hurdles and issues, antitrust and competition laws may be low on the list of concerns of digital asset innovators and investors. But competition in the digital asset space is front of mind for key industry regulators. On October 24, 2022, SEC Chair Gary Gensler noted in a speech at the SIFMA Annual Meeting:
“We’ve  seen centralization in the crypto market, which was founded on the idea of decentralization. The field actually has significant concentration among intermediaries in the middle of the market. Thus, we must remain vigilant to areas where concentration and potential economic rents have built up; or may do so in the future.” (emphasis added)
In addition, President Biden’s March 9, 2022, Executive Order on Ensuring Responsible Development of Digital Assets instructed dual antitrust regulators — the Federal Trade Commission (FTC) and the Department of Justice (DOJ) — to engage in efforts to consider “the effects the growth of digital assets could have on competition policy.” (For more information on the Executive Order, see this Latham blog post.) And private plaintiffs are eagerly exploring ways antitrust laws can be used to advance strategic goals such as securing interoperability.
For digital asset innovators and investors, overlooking antitrust can lead to company-threatening liabilities or stop innovators from executing on their strategic vision. Given this backdrop, this blog post highlights three essential antitrust issues for digital asset players to keep top of mind:
- Mergers and acquisitions: When considering M&A opportunities, companies should remember that antitrust enforcement agencies (both in the US and globally) have been more aggressive in investigating and seeking to block acquisitions across a range of industries, including fintech. Working with antitrust counsel to identify filing requirements and assess antitrust risk early, especially before negotiating deal terms such as outside dates and potential termination fees, can minimize costly and disruptive regulatory delay. A lengthy regulatory investigation can postpone the close of an acquisition, which can jeopardize deals, particularly when companies have limited cash reserves and are near bankruptcy. Relatedly, companies should not assume that regulators will ignore an acquisition if the target faces bankruptcy or is likely to exit the market. Regulators may still investigate these deals, particularly if there are other potential buyers who may raise less competitive concerns.
- Interlocking directorates: The DOJ’s Antitrust Division made a recent push to investigate competitors that share officers or directors. On October 19, 2022, the DOJ announced the resignations of seven directors who served on multiple boards. Section 8 of the Clayton Antitrust Act prohibits the same person (or company) from holding officer or director positions of companies that compete with one another unless certain exceptions apply. In addition, Section 8 investigations can lead to follow-on investigations under other antitrust laws.
In nascent industries, including those with active private capital and/or M&A, an extra degree of vigilance can help ensure against creating or growing into illegal interlocks. In addition to monitoring the other affiliations of directors, companies can benefit from building awareness among directors, investors, and management of the potential risks associated with the antitrust laws and establish best practices to avoid potentially unlawful behavior.
- Interoperability: As digital asset companies choose which firms they will partner with or integrate into their ecosystem, other firms that are excluded or disintermediated may rely on antitrust laws to seek access (or, alternatively, damages). In the US, Section 2 of the Sherman Antitrust Act makes “monopolization” illegal, and the government and private parties have used this law to argue that cutting off access to a “must-have” platform or input is a form of illegal conduct. The European Commission has a similar cause of action referred to as “abuse of dominance.” Bundling, tying, and predatory pricing are similar and common antitrust claims by plaintiffs and government regulators. The digital asset ecosystem, built on interconnected blockchains and exchanges, will likely be fruitful ground for antitrust claims against companies that do not take competition concerns into account when making critical ecosystem design decisions about how and with whom to collaborate.
While this list is by no means complete, it highlights some of the prominent antitrust issues that companies in the digital asset sector may face in the coming months and years. Just as digital assets are changing by the day, the antitrust regulatory and litigation environment is evolving rapidly and requires close attention along with the broad spectrum of other regulatory regimes that are critical to the industry.
Latham & Watkins will continue to report on antitrust developments in the digital asset space. If you have questions about this blog post, please contact one of the authors or the Latham lawyer with whom you normally consult, or visit Latham’s Antitrust & Competition Practice page.