TRADING COMPETITIONS BY CRYPTO EXCHANGES VIOLATE COMPETITION LAW
Crypto Exchanges in India have always projected themselves as self-regulatory entities despite lack of crypto regulation and claimed to have been compliant of existing legal trends.
Considering the stringent KYC norms followed by the Crypto exchanges such as Zebpay and Unocoin, it is undisputed that opening a bank account is easier than to have a crypto account with Indian crypto exchange.
In the unregulated Crypto regime in various countries including India, crypto currencies are not recognized as currency/ money/ legal tender. In such hazy legal atmosphere, if at all, the crypto currencies can only be treated as securities or digital assets and therefore the exchanges should incline to streamline their dealings with security exchange and other applicable laws of the land.
Trading Competitions Violate Competition Law Principles
Trading Competitions are being organized by various exchanges in which participants are being asked to trade in a particular digital asset/ crypto currency (Traded Crypto) and the reward is pegged with the higher trading volume of participants.
Crypto Exchange’s job is to provide a secure, fair and non-discriminatory trading platform for sale and purchase of digital assets. The obligations of fairness and non-discrimination are not only confined to the dealings with investors but they also encompass the conduct of the exchanges in relation to the digital assets/ crypto currencies available for trading on the exchange.
Trading competitions, in the present form, are a tool to promote ‘Purchase’ of a particular Crypto currency. Verily, such competition organized by an exchange has adverse effect on a fair market competition and denies a level playing field to other Crypto currencies/ Digital assets available for trading on such exchange. It gives undue advantage to the traded Crypto and on the other hand prejudices the interest of other digital assets.
Primary objective of the Indian Competition Law is to prevent practices which have adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets.
As per Section 3 of the Competition Act, 2002, any agreement between enterprises and/or persons, inter alia, in respect of provision of services which causes an appreciable adverse effect on competition is anti-competitive and void.
The word ‘Agreement’ has been explained in the Act under Section 2 (b) and the same reproduced hereunder:
“(b) “agreement” includes any arrangement or understanding or action in concert, — (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;”
In view of the above definition, an anti-competitive agreement need not be necessarily in writing and can also be an informal arrangement between two or more parties. In most of the cases, the anti-competitive agreements are unwritten understandings between the parties.
By organizing trading competitions and announcing lucrative rewards for participants with highest trading volumes in a particular digital asset, the Exchanges are restricting the purchaser’s choice of trading whose purchase is then driven by his greed for reward/winning prize.
The said arrangement of the exchanges with the traded Crypto is akin to an Exclusive Supply Agreement which means any arrangement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person. The Exclusive Supply Agreement contravenes Section 3 (1) and is considered anti-competitive and void.
Although, the Crypto exchanges or Crypto currencies have not been brought under the law net, however, the exchanges should draw the analogy from the existing laws in order to keep themselves compliant with, at least, the well settled legal principles of law.
Is Exchange Ready To Compensate Investors’ Loss?
Imagine an exchange in the conventional world say for e.g. BSE running a trading competition and promoting RIL shares. Our instant reaction would be negative and BSE and RIL both will lose credibility in the eyes of investors. So, if we presume that most of the crypto exchanges are self-regulated in India and act very responsibly then somewhere trading completions are against the ethos of being responsible.
Imagine a newcomer in the crypto world who does not know much about trading and he creates an account on the exchange. The newbie will presume that if an exchange is promoting a competition of trading in a particular digital asset then there is an implied endorsement of the exchange for that digital asset. Without getting into the basic fundamentals of that crypto currency, the investor will invest his hard earned money into the same.
These competitions are also a method of promoting “Pump and dump” show as few investors with deep pockets can play around with buying and selling bids with multiple accounts on the same exchange.
The exchanges who are indulging in these competitions are ignorant of the fact that price is determined by demand and supply. If the coin/digital asset has strong basics and investors think that there is some value in it they will buy it without any competition or scheme. When an exchange runs such competition, coins/digital assets with weak fundamentals get promoted and tomorrow these coins can exit the market as well. Now, who will take the responsibility on their exit?
Exchange is service provider which makes available for investors a platform for secure sale and purchase of Cryptos. The exchanges, therefore, should act in a self-regulatory fair manner and should refrain from acting like a marketer.
Disclaimer: The views expressed in this article are personal and purely informative in nature.