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13 February 2019

The Relationship Between Patents & Cryptocurrency

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Blockchain, one of the most notable new technologies of our time, has triggered a paradigm shift in the way in which the world conceives of financial transactions and digital identities.

Its rapid growth, and its speculated value, have made it attractive to investors and companies who see its infinite potential. One way that many companies signal their belief in the future of blockchain is through securing patents.

Defining Blockchain

Blockchain is a distributed ledger with a unique ability to establish identity and ownership and translate data.

Blockchain can be conceptualized in the following way:

  • A uniform agreement is written on a set of enchanted documents;
  • Any user can take part in the agreement by owning one of these documents;
  • Rules govern potential changes users can make to any of the documents;
  • Any change to one document automatically updates the others;
  • Each user owns an identical copy of the distributed agreement; and
  • The agreement continually undergoes revision, which translates for each user.

Blockchain → Cryptocurrency → Bitcoin, etc.

Cryptocurrency builds upon this foundational conception of blockchain, and expands it by utilizing the methodology as a distributed-ledger based transaction system. This system enables the ownership of non-centralized accounts with real value, founded upon the idea of utilizing decentralized and encrypted currencies in monetary transactions.

There are myriad types of coins within the cryptocurrency database, such as Bitcoin and Ethereum.
There are myriad types of coins within the cryptocurrency database, such as Bitcoin and Ethereum. / Pixabay

Applying the above conception of blockchain, the rules that apply to the set of potential changes that can be made to the documented agreements known as Bitcoin are:

  • Each enchanted document contains a list of all accounts and balances;
  • People own accounts, and can send their own bitcoins to other accounts;
  • This system creates a digital cash.

Bitcoin is entirely deterministic, meaning that it is governed by mathematics, encryption, and the rules set forth by its users.

Cryptocurrency + Innovation = Patents

Innovations in the world of blockchain-based currency focus on evolving original methodologies into more simple processes. This place where cryptocurrency overlaps with innovation is where patents play a central role.

Crypto-specific patent applications grew by 16 percent to a total of 602 patent applications in 2017, while the blockchain-specific patent application number increased by 300%.

These growth figures demonstrate that there are many large companies dedicated to investing in the future of cryptocurrency.

Do Cryptocurrency Patents Qualify Under USPTO Requirements?

Obtaining a patent on cryptocurrency is akin to getting a software patent based on the abstract idea/algorithm behind the technology’s functionality, since both are based on the performance of a series of steps.

Under the United States Patent and Trademark Office guidelines, §101 of the Patent Act defines the subject matter that is eligible for a patent:

  • “Whoever invents or discovers:
  • Any new and useful process, machine, manufacture, or composition of matter,
  • Or any new and useful improvement thereof,
  • May obtain a patent therefor, subject to the conditions and requirements of this title.
Given this definition, cryptocurrency has to fall within the ‘new and useful process’ or ‘any new and useful improvement’ scope to be patent eligible./ Pixabay

 “Therefore, says JD” Houvener, USPTO licensed patent attorney and founder of Bold Patents, “If a patent applicant seeks protection over an algorithm-based invention, the invention will generally only receive a patent if the application includes a method designed to solve a problem or make a process more efficient.”

This translates to cryptocurrency patents because financial transactions can be done by humans alone, so an inventive step that covers a solution is critical to demonstrate eligibility.

Cryptocurrency Patent

The following are notable examples of cryptocurrency patent applications that have either been filed or granted:

  • Mastercard obtained a patent with the USPTO that grants it rights for a method for “managing fractional reserves of blockchain currency.” The method covers the storage of both fiat wealth and cryptocurrencies under one account.
  • Paypal filed a patent with the USPTO for a technology that allegedly can speed up cryptocurrency payments through the utilization of secondary wallets. The process that PayPal seeks to optimize settles cryptocurrency payments between merchants and buyers, on retail or e-commerce platforms. The use of secondary wallets would allow the transfer of unique keys of buyers and sellers to be transferred privately.
  • Amazon obtained two patents with the USPTO:
    • The first patent covers “Signature Delegation” and describes cryptographic signatures in a Merkle-tree based data scheme. Merkle-trees are one of the fundamental components of the blockchain. Amazon’s patented data structure enables participants to check if data is unaltered, or to ensure that other participants are not sending fake data.
    • The second covers “Extending Grids in Data Storage Systems” and describes a method for creating extendable shards in a database. This is useful for creating considerable flexible datasets, like those seen in a blockchain. The idea behind the patent is that layering the system structure will ensure the efficiency and portability of the system.

As evidenced by the complexity of each innovation, these applications qualify under USPTO requirements because they include the inventive step. Each makes processes more efficient or solves an industry-wide problem.

Given the names of these big players who have secured blockchain-related patents, along with the volatility of the entire cryptocurrency industry, one must ask the question: does the future of cryptocurrency look bright because these big companies have invested in patent protection?

Adversely, does the fact that only big companies have secured patents, because they have the assets to do so, signal that they have obtained patents just in case crypto becomes valuable, acknowledging that it may very well fall short of expectations?

Carly Klein

Loyola Law School

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