Unpicking the Gordian knot around blockchain patents

By Dr. Justin Hill for TC

Earliest mentions of the term “bitcoin” in patent titles and abstracts date back to around 2009, while the term “blockchain” begins to appear in patent titles from around 2011. As of June 22, 2016, there were 492 published patent families directed to the theme of blockchain and 192 relating to bitcoin.

Patent applications filed over the last year and a half would not be visible in these statistics, and it is expected that significant numbers of new patent applications connected to these themes have been filed in that period. The numbers we are seeing likely represent the tip of the iceberg.

It’s tricky to say exactly who’s filing these patents, but, anecdotally, the early-stage business community is out-innovating the incumbent banking organizations by some measure, and are likely to be responsible for much of this innovation.

A recent Reuters piece, for example, drew attention to Craig Wright’s holding company EITC Holdings limited, suggesting a total of 400 or so new patent applications in the pipeline. The patent applications are alleged to focus on mechanisms ranging from paying securely online to operating systems for implementing blockchain on the Internet of Things.

Given that this evolving technology is widely anticipated to disrupt the banking sector, patent filings at these levels are not at all surprising. Indeed, it is likely that a number of geographically diffuse technology clusters, such as the fintech community in London, are busily designing blockchain architectures and will be independently building intellectual property portfolios in these areas.

Does this herald a democratization of (previously jealously guarded) banking sector tech?

The banks see the potential for increased efficiencies; for example, higher transaction speed and volume, as well as audit trail and potential security benefits. Banks are not historically averse to paying for access to technologies, but it will have been a significant period of time since one so fundamental to their existence has come along in the hands of others.

There are analogies in the telecom sector, where operators relying on later evolutions of the telecom standards (such as 4G or LTE) found themselves implementing technologies that were no longer controlled exclusively by traditional incumbent partners, and they needed to solve technology access challenges to implement the functionality mandated by the standards. In this case, it is possible that a type of de facto blockchain standard will materialize over time and that those wishing to use it will need to pay the key IP holders for the privilege.

There are likely to be real technical challenges requiring technical solutions in implementing blockchain architectures. For example, public blockchain architectures run the risk of abuse by users hiding behind pseudonyms. Private blockchain architectures are challenged by multi-jurisdictional transaction mechanisms, requiring data to be transferred among participants holding distributed ledgers in different countries. Without the need for a trusted third party, there is less supervision of transactions, and with that comes a need for algorithmic detection of suspicious or fraudulent transactions.

The data persistence in the blockchain is both a benefit and a challenge, particularly where data authorities require the blockchain to be updated after the event in order to protect the privacy of a connected party. Security solutions are numerous, but architectures implemented by a combination of tokenization and hashing (or more conventional encryption) are likely technical in nature. Without doubt, these and many other areas will present opportunities for patenting as blockchain technology continues to be implemented.

What’s it all worth?

There is a tension between economic valuation of IP assets and valuations derived from speculative investing in the businesses that hold them. In early-stage technology companies, it can be difficult to get accurate benchmarks or make concrete predictions about future income derived from patents. The value of a patent depends on the scope of its claims, whether it covers something important and, ultimately, whether it is valid and enforceable in practice. It also depends on the availability of alternative technologies.

Clearly, generic blockchain architectures will be difficult to protect; in large part because they have been widely published, patents to non-technical aspects are also likely to fail. Further, the process of patent examination will lead to patent claims being narrowed; in such cases, the prospect of alternate technologies being able to solve the same technical problem (without infringing the claims) increases materially.

The inherent pace of development and disruptive nature of blockchain makes the patenting opportunity interesting, but valuation of individual patent assets will remain difficult in the short term. External influences like changes in regulatory environments could, and probably will, materialize suddenly, as the legislative system attempts to keep up with progress. When valuing IP that otherwise looks good, it is important to consider the commercialization risks carefully. It is useful to look, among other things, at the size of company, the pace of change, rival technologies, access to capital, stability of regulatory environment and the barriers to market that the IP actually provides.

Setting the standard with savvy patent procurement

Innovators necessarily prioritize their time and resources, but all too often, failures to get to grips with patenting prospects means opportunities are missed or potential risks aren’t managed effectively, and therefore develop into material risks. This risk of losing control of a technology is very real when SMEs or scale-up businesses are dealing with much larger target customers for their technologies.

Of the many patents being filed today, some will doubtless survive the rigors of the process and the regulatory regime, and also turn out to cover aspects of widely implemented platforms in the financial services sector. Banks are risk averse and have historically been willing to pay to access third-party technologies; it is likely the surviving patents will be very valuable.

Banks and other businesses seeking to access blockchain technology should be monitoring the evolving landscape and investing to procure access to the technology best suited to their needs. The banks need their own IP and technology access strategies, irrespective of whether or not they are doing their own R&D or paying others to do it for them. No doubt the banks will use the technology as they need it, but the smart ones will seek to minimize their exposure to patents likely to surface in years to come.

First appeared at TechCrunch