What are the IP aspects of financial tools created using blockchain technology?
Whilst crypto currencies have been in the news recent as a result of their falling values, their long term utility especially Bitcoin and Ethereum seem assured. There are many IP considerations when it comes to this asset class. The article explores the IP aspects of financial tools created using blockchain technology, namely cryptocurrencies and related financial tech in the decentralised finance or “DeFi” world.
What exactly is crypto?
Let’s start with some crypto basics. There are many types of cryptocurrencies, from Bitcoin to Ethereum to Solana to Dogecoin. Cryptocurrencies are best understood as stores of financial value. For some, they are investments and for others, they are currencies to use for payments, from buying products to criminal ransoms! However, these investments are incredibly volatile, as has been demonstrated by the recent plunge in most crypto values.
You can convert money to crypto on a trading platform, then borrow, lend, trade or invest, then convert back into fiat currency (i.e., government-backed paper currency). All with marginal fees as, unlike traditional financial institutions, transactional fees on blockchain are much lower. Crypto is used to refer to blockchain tokens used for financial purposes but many other types of tokens exist, including Non-Fungible Tokens (NFTs) which are digital assets representing ownership of real-world objects including art. The difference is that NFTs are unique (or at least limited), unlike a currency where each coin or note is the same and exchangeable.
How does blockchain support crypto?
Cryptocurrencies are held on distributed ledgers called blockchains. For instance, Bitcoin runs on its own blockchain. Ethereum also runs on its own blockchain, but other crypto like Mana run on Ethereum’s blockchain.
Blockchains are decentralised because they run on peer-to-peer networks of computers, operated by no single individual centrally. Originally in blockchains, the computers are incentivised to dedicate computing power to run nodes (i.e., connected electronic devices that contribute a block of data to the crypto infrastructure), solve puzzles to operate and secure the network through the grant of cryptocurrency rewards in a process called “crypto mining”. Due to the high energy consumption in crypto mining, this process will gradually be replaced by a new energy-efficient system called proof of stake.
This is computing, so what’s the software?
The underlying blockchain technology can have many purposes only one of which is cryptocurrency. The code, rules and software that make up most cryptocurrencies are open source, so no individual owns them. Developers therefore use open-source software licenses to create their own blockchain based products and services. Open-source licenses are legally binding contracts containing rules on how developers may use, distribute, modify, and share open-source software. More restrictive licenses might cover copyright ownership, trade secret use and disclosure, copyright notices, re-licensing, derivative works and so on. More permissive licenses may have no hard rules.
The key software-related IP issue to flag is that developers may need to make their code publicity available and free which may require waiving trade secret rights. Bitcoin, Ethereum and others have different licenses that developers will need to carefully read and follow. Common licenses include the MIT, GPL (General Public License by GNU) and Mozilla. Note Ethereum is currently undergoing structural change which means all its licenses may be modified in the future.
Who owns it all?
Cryptocurrencies such as Bitcoin are inherently a community-based asset which is why it uses permissive licenses. It was designed to be owned and operated by no one. Even the identity of its supposed architect, the pseudonymous Satoshi Nakamoto, is unknown. IP monopolies over any part of it would be detrimental to its operators and many users. No one claims copyright in the software, and this includes the companies and industry groups that funded the development of Bitcoin Core (i.e., the software that makes Bitcoin work).
Nakamoto’s purported anonymity has led to disputes. Several people have claimed to be Nakamoto. One is Dr Craig Wright. Dr Wright claims he is the sole founder of Bitcoin and has filed for various Bitcoin software patents and sued people who challenged his claims. Ira Kleiman, representing David Kleiman, argued that Bitcoin was jointly developed between Dr Wright and David Kleiman. Legal proceedings were pursued against Dr Wright in Florida for the alleged missing Bitcoins from Kleiman’s estate. The biggest issue is with the number of Bitcoins (worth USD 56 billion now) that Nakamoto theoretically holds although it is possible some are missing due to lost encryption. The court held Bitcoin was not developed on the basis of a business partnership, and Dr Wright was its sole founder aka Nakamoto, but that Dr Wright’s estate did owe USD 100 million in intellectual property rights to a joint venture between the two men.
Does crypto, like Bitcoin, function as a trade mark?
The name Bitcoin is probably too descriptive to be a trade mark, but there are around 1000 trade marks filed in countries around the world incorporating the word ‘BITCOIN’. Some are piggy backing, like the Indian BITCOIN cookware application, or Mexican BITCOIN Tequila! Yet others, especially in class 36 (a trade mark category for financial and banking services) are probably descriptive – such as the Barcelona-based applicant for a Spanish BITCOIN mark for financial services!
It is clear there will be descriptiveness/distinctiveness challenges for trade marks trying to incorporate cryptocurrency terms and names. The difference between distinctive and descriptive trade marks is important as only distinctive marks are eligible for registration and enforceable against infringers. Descriptive trade marks are not ‘distinctive’ in the sense that there is no clear connection between a name and a service or product other than its literal meaning.
At what point does a name describe the underlying coin? For successful ones, there will be a myriad of copycats and misuses leading to disputes. Foundations and creators are routinely failing to protect the underlying IP, particularly copyright and trade marks.
For example, the Dogecoin Foundation is in the process of protecting and enforcing its trade marks ‘Doge’ and ‘Dogecoin’ against a plethora of copycat coins including Dogelon Mars and ElonDoge. Dogecoin was a meme coin which initially started on a whim and without a commercial purpose. This is not uncommon. Coins often launch based on an idea which leads to capital being raised quickly without a business structure in place. This creates IP challenges, as unlike traditional businesses, crypto-based businesses often have no legal entity and no IP protected before launch. This is often done later often after others have started copying them. Yet others like the Squid coin, which used the Netflix TV show Squid Games as inspiration, turned out to be a scam. It might have been an IP infringement had it not been a scam!
Are there Bitcoin and crypto patents?
Many companies, universities, and individual inventors are applying for patent protection in this space. A quick search for crypto on patent databases reveals thousands of patents. Applications include those for mining, trading and financial transactions and networks. There are also over a thousand patents using the term ‘Bitcoin’, which emphasises the generic, descriptive nature of its usage. Companies like PayPal, IBM, Microsoft and Siemens are filing some of them, indicating a high level of corporate interest in cryptocurrencies.
Why is Ethereum different?
Some crypto systems have other functions apart from coins/currency. Ethereum, a decentralised open source blockchain, is widely used because its programable blockchain network can support the use of decentralised Apps (dApps) and smart contract execution. dApps are digital applications run across a peer-to-peer network of computers. Two well-known examples of its usage include BitTorrent and Tor. Smart contracts, on the other hand, are transaction protocols that automatically executes the terms of a contract (usually a line of code) which exists across a distributed and decentralised blockchain network.
Ethereum’s smart contract protocol is used by Opus, a music royalty payment system, which executes payments on Ethereum’s blockchain when a music track is played. Ethereum also has its own cryptocurrency called Ether by which the underlying Ethereum blockchain help process trillions of dollars of transactions per year, roughly equal in value to Visa.
What’s the story behind Ethereum?
Ethereum was founded by a Russian-Canadian programmer, Vitaly Buterin and others, as an open-source system. As Ethereum runs on a decentralised blockchain network owned by no single individual at its centre, there is no claim to IP/copyright in the underlying code or its programming language (Solidarity) used to create and execute smart contracts. The Ethereum Foundation (EF) is a non-profit organization dedicated to supporting Ethereum and related technologies. It owns trade marks in some countries. However, there are also a few dozen trade mark applications by third parties in various countries from third parties presumably trying to piggyback on or to deliver specific services through Ethereum.
There are many Ethereum patents, and the patent titles (i.e., the description to a patent claim which forms the basis of its enforceability) explain how widespread the application use is. A few examples of Ethereum patent titles include ‘detection of inconsistent Ethereum behaviours’, ‘optimising Ethereum storage’, ‘Ethereum cryptographic algorithm location’ and ‘intelligent contract auditing’. Note these are mainly for delivering specific services and is not owned by the Foundation.
Ethereum is the blockchain of choice for many new digital business models requiring currencies or tokens to operate. The Basic Attention Token (BAT) is a way the digital advertising industry can distribute ad payments instantaneously. Bancor enables users to create new cryptocurrencies. OmiseGO is an international payment solution for digital wallets including Alipay in China in any currency. Anyone building a digital system on the Ethereum Virtual Machine (i.e., the platform that developers use to create dApps on Ethereum) must follow various rules for it to work. Fundamentally, it requires no legal advice or software agreements since the process of building digital systems is automated, but the commercial business steps ‘off the chain’ (i.e., in the real world) will need legal advice. Key questions here include: which entity is operating, in which jurisdiction, and subject to what regulatory regimes?
How do you create new crypto?
Initial Coin Offerings (ICOs) are the process through which a coin or any token is launched, and these require investors. It starts with a group, often an unofficial collection of crypto experts and programmers, who produce a White Paper (in which there might be joint copyright) setting out the business model. Far too few of these people have or seek IP advice, often leaving that component out of the business model. Many wait until after launch then try to design a corporate infrastructure to own IP which can be too late. This is not helped by scams like the recent Squid Games crypto scam in which a digital gaming token collapsed on launch when the promoters vanished with the launch funds submitted by investors and the token ceased working. Such events are not uncommon and are called “rug pulls” in the crypto community.
One of the IP challenges is creating a crypto business with revenue when the underlying concept behind it entails some altruistic solution. While transaction fees are usually met through the transaction, Ethereum use must be paid for (i.e., energy usage fees) and general operating expenses / overhead costs still need to be met. One way is, in fact, using IP and royalties to create revenues for the operator to maintain the system. This use of IP is how some founders cover their costs and generate profit.
What exactly is the difference between crypto and tokens?
There is a difference between cryptos and tokens. One is a currency that can be exchanged for traditional currencies e.g., USD. Tokens are used for some other purpose, trading, asset representation or related functions. Gaming tokens are common in the multitude of games available online. One recent launch seeks to equalise gamer earning potential by empowering gamers in emerging markets to acquire tokens in a way that developed market gamers can do more easily in traditional gaming environments due to their higher relative wealth. The fundamental difference is how limited they are. Cryptocurrencies can have millions of tokens. NFT art might have a single token. Gaming NFTs might have thousands of limited editions e.g., a particular weapon or feature.
What use of crypto in gaming?
Crypto use in gaming is huge. A popular concept for online games is F2P or Free to Play. This type of game allows players to play games for free, but players can buy in-game items, characters, clothing. The game company recoups their investment in creating the game this way. This leads to another concept – P2E or Play to Earn. This refers to games built upon blockchain platforms. Players earn crypto or NFTs by simply playing. The crypto / NFT obtained from the games can be traded for other items, other crypto, or real money at various trading platforms.
As of February 2022, the three largest most successful crypto games that issue their own coins are Decentraland (MANA coin), The Sandbox (SAND coin), and Axia Infinity (AXS coin), with a combined market cap of more than USD 10 billion. These are now substantial businesses. The Sandbox started in 2012 as a game, was then acquired, and has since become virtual real estate with Snoop Dogg owning a parcel of digital land, alongside a Hong Kong property developer. Japanese VC firm Softbank has since invested USD 93 million in The Sandbox.
Crypto in gaming can be short-lived. CryptoMines lasted for only 4 months from September -December 2021. The game allowed players to buy starships and mine an in-game resource called Eternal (which is also a crypto currency) in various planets across the universe. The game became wildly popular in late 2021 and many players/investors flocked into the games. The value of one Eternal coin started at USD 1.3 in September, peaked at USD 799 per Eternal coin in November (60,000% return in 2 months), and crashing down to USD 16 before the game was shut down. Both players and investors late into the game lost their investment.
Some see gaming as the origin of the metaverse (i.e., a network of 3D virtual words that is focussed on social connections) where people can interact with each other through virtual worlds. This will broaden the use of NFTs from something adjacent to crypto currency to representing all kinds of goods in the metaverse. The boom in traditional brands expanding trade mark registrations into digital goods/assets (class 9), and retail of digital goods/asset (class 35) has already started.
How does crypto trading work and who runs trading platforms?
Business exchanges for trading on blockchains include trading and investment platforms like Binance, Gemini, Kraken or Coinbase. These are private companies which own investment trading and financing systems. The largest, Binance is Chinese in origin but now operates from the Cayman Islands and Seychelles, with US customers obliged to use a US version. Binance Holdings Limited owns a large global IP portfolio of hundreds of trade marks.
Bitget is a large Singaporean exchange, which sponsors Italy’s Juventus football club. It is in a dispute over its Army Coin, named after Korean pop band BTS’s followers. BTS has claimed this is not endorsed by the band and threatened legal action (what for is not clear, perhaps passing off). Bitget’s Monetary Authority of Singapore license was suspended in December 2021.
The finance world owns many patents – do these platforms own them too?
Coinbase owns a number of patents for blockchain node management, sensitive data storage and recovery, transaction validation, network management, wallets and storage keys. It is unclear how patents for blockchain technologies will be enforced. Given the decentralised global nature of blockchains, it will be a challenge to isolate where the individual infringement occurs and who committed it. In addition, as patents are territorial, it may also be a challenge to identify which national right was infringed.
The platforms also own software and trade marks too, right?
The exchanges own the copyright in the software running their platforms. Many exchanges also own stable coins which are essentially their own pegged currencies, and native coins used to pay platform fees. Binance has an unnamed stable coin simply called “Binance USD” (BUSD). Tether is a cryptocurrency with tokens issued by Tether Limited, which in turn is controlled by the owners of Bitfinex, a BVI based business. It has made a number of applications of this coin which is pegged at USD 1. The exact status of stable coins as trade marks is unclear. Stable coins ought to all be registered as they are, in essence, corporate brands of the operators but many have not been.
Where exactly is crypto stored?
Users keep their cryptocurrency in digital, written paper or hardware wallets. Digital wallets are software applications or apps that store the public and private keys and require passwords to access. Most of the exchanges will hold your crypto in a virtual digital wallet on their system. Paper wallets are where the cryptographic private keys allowing crypto to be spent are written down on a piece of paper or engraved into metal and kept at the holder’s own risk, for example in a fire-proof safe. Hardware wallets are basically numbers signifying the currency amount and the encryption. Alternatively, hardware cold wallets, which are thumb drive lockers with password and other security systems, can be used.
There are cases where holders of their own crypto keys have been forced to hand them over with threats of violence. Given the decentralised nature of crypto, fraudulent transactions of stolen crypto cannot be reversed.
Sepior ApS is a Danish digital security company with patents covering this area such as private security signatures for cold wallets. Many crypto holders entrust third party exchanges and their apps like Coinbase or Binance to hold their crypto for them. This raises risks beyond data loss, since someone can relieve you of both data and the cryptocurrency you hold, or an exchange may experience hacks, or go bust by not holding enough reserve currencies. The most famous example of this is Mt. Gox, the most popular exchange in 2014 holding 7% of all Bitcoin in circulation, which was apparently hacked with all crypto stolen and declared bankruptcy shortly afterwards leaving its users out of pocket. Due to this and similar cases, most leading exchanges now claim high-grade security and submit to independent audits.
So what is DeFi?
Crypto leads us into a wider decentralised finance discussion. DeFi as it is known, refers to the creation and use of financial systems run in a decentralised manner. This is the opposite of a currency, usually run through state backed financial systems and large regulated banking institutions. It principally refers to financial applications built on blockchain technologies such as those described above. Lending, borrowing and all sorts of financial services are appearing. Their advantages are low fees and transparency. On centralised crypto exchanges like Coinbase, Gemini and Binance, there are loans, P2P lending, and a variety of financial instruments to use. But that is more like a digital replication of dealing with traditional financial institutions like Fidelity or Citi.
There are also truly decentralised protocols, the most well-known being Uniswap, created in 2018 by a former Siemens engineer. The platform is provided entirely on blockchain networks running open-source software as opposed to any centralised intermediary. Uniswap (and other similar protocols including PancakeSwap and SushiSwap) rely on liquidity pools formed by users adding a pair of tokens to a smart contract which can be bought and sold by other users. To incentivise users to provide liquidity, they are given a percentage of the trading fees earned from each trading pair. There is no centralised exchange. Instead, financial transactions are conducted over peer-to-peer networks. However, the organisation behind it, Universal Navigation has registered its trade marks to protect the trading platform.
So DeFi is a new subsector in the finance industry?
Because so many of these technologies are not owned by anyone but operated publicly on various blockchains, there is a massive brand experiment going on. Customers borrow from and bank with HSBC because it is a trusted brand (backed by trade marks). However, borrowing and lending through unknown blockchain parties, means swapping brand trust for trust in blockchain technology. Evangelists and techies will do this, but for ordinary people it may be harder. Most everyday consumers would need brands to avoid the extensive research otherwise needed.
This is why consumer facing crypto companies are investing in brand building. Crypto.com has spent over USD 1 billion in sports sponsorships in 2021, re-naming the home stadium of the Los Angeles Lakers and Clippers to the “Crypto.com Arena”, as well as sponsoring Formula 1, Paris Saint-Germain football club and the UFC. RobinHood, another consumer focussed investment and crypto company, spent 57% of its 2021 marketing on referral rewards.
IP in the DeFi space will therefore be important if these financial tools hope to reach more customers. Businesses by definition wish to reap profits and investors will help them if they can get returns. Given that the underlying systems are designed to publicly owned, brands appear to be the most likely source of revenue, whether for the platforms you enter and trade through, or other functions from advertising to sponsorship.
Data rules cross everything nowadays – what about crypto?
This is a major problem area. Blockchains operators don’t control the data applied to them. The identities of people buying Mana currency on Ethereum may or may not be visible. However, privacy laws like the EU GDPR as well as other related laws in California and China require someone to control and protect data privacy.
Blockchain dApps are often designed to be operated by users, not centralised operators, therefore conflicts with data privacy laws are inevitable. Who has what role in the transaction might determine their liability for data privacy? At present it is extremely hard to identify where a buyer’s date on their purchase of a coin is held. In fact, there will be multiple copies in multiple locations due to blockchain’s nature. Many could be subject to data laws. But since no one owns a blockchain, it is unclear how this will work.
IP issues are everywhere in crypto and DeFi – what does the future hold?
As more businesses enter this space, IP issues will follow. It is difficult to build a global IP portfolio for a product available anywhere in the world without enormous cost. A few major market registrations may suffice now but when adoption is widespread perhaps not. How would you show trade mark use on a distributed network? Some techies who founded products without proper legal structures and IP may find themselves blocked from operating in some countries.
DeFi is also heavily regulated which is why countries like China have outright banned some forms of it. As of 2021, China has banned all crypto transactions. Soon after, it cracked down on crypto mining (i.e., the means of creating the coins and validation of blockchain transactions). This raises the problem of whether trade mark applications in class 36 will be allowed in various countries, or whether they will be refused as contrary to existing laws. In China, the China Trademark and Patent Office (CTMO) has accepted cryptocurrency related services in class 36 applications, but it is unclear whether that will continue and how trade mark use could be proven.
One challenge is that these DeFi areas now within reach in the real world. These are heavily regulated industries in many countries. Regulated platforms like Coinbase, Gemini and Binance have more limited functionality in conducting peer-to-peer trading and lending activities. Other platforms, however, are less regulated and have vastly more financial options available for users. This is the real DeFi wild west, as not only are these unregulated and decentralised platforms, but they are also often not protected with IP either.
Despite the recent falls, crypto remains a huge industry. While many large businesses, like Coinbase, Gemini and Crypto.com, are substantial IP owners in their own right, more commonly there is an inherent conflict in crypto businesses. Many give up all their software rights (copyright, patent and trade secret), in the spirit of the founding concepts of blockchain and Bitcoin. Many are looking to keep and build brands as a way to monetize their innovation. For advisors, understanding these businesses’ fundamental approach is critical to working out how to develop, give up or own IP.
Whether or not you are participating, with billions of dollars in value/assets managed by various blockchain technologies, IP will no doubt follow. Businesses always try to gain IP advantages. While the altruistic attempts to build a global non-ownership owned platform are great, the operators on top of it will want to create some level of IP exclusivity for their business to grow.