March 18, 2022
Law360
By Michael V. Young, Sr.; Elliot C. Cook; Luke H. MacDonald, Ph.D.
Cryptocurrencies have undeniably captured mainstream attention. Last month, we saw several crypto companies for the first time take out Super Bowl ads. Coinbase Global Inc.'s Super Bowl promotion was so popular that its website received an unprecedented 20 million hits in a single minute during halftime.[1]
Soon after, cryptocurrencies made headlines again when Ukraine raised more than $50 million worth of crypto assets inside a week through a government-sponsored, decentralized finance crowdfunding campaign that continues to grow.[2]
Most recently, on March 9, President Joe Biden signed a highly anticipated executive order addressing cryptocurrency, attempting to strike a balance between encouraging continued innovation while addressing the need to regulate potential risks to consumers and the broader financial system.[3]
But while mainstream interest in cryptocurrencies took off only recently, a significant uptick in patent filings since 2019 foreshadowed this seemingly sudden rise to fame. Unfortunately, many innovators in the cryptocurrency space have failed to recognize what makes a patent valuable.
Satoshi Nakamoto published the now seminal paper on bitcoin in 2008,[4]but many years would pass before inventors in the crypto space filed for any patents. Bitcoin and most altcoins run on open-source "layer 1" blockchain networks, and relatively few people in the early days possessed the technical know-how to actively participate in cryptocurrency projects.
Over time, layer 1 networks matured, and more people became familiar with blockchain technology and its potential to reshape the global financial system through cryptocurrencies. That maturity brought about layer 2 solutions that operate on top of an underlying blockchain protocol to solve scalability, efficiency and usability roadblocks faced by cryptocurrency networks.
This progress eventually gained the attention of institutional investors, which soon sparked a flurry of patenting activity in the crypto space that continues today.
To be sure, the past few years have witnessed a massive increase in new patent application filings directed to blockchain and cryptocurrency innovations.[5]The number of patent applications filed in 2019 represents nearly a tenfold increase over 2016, with corresponding rises in patent issuances following closely behind.[6]
This dramatic increase in patent activity reflects continued layer 1 upgrades and, to a larger extent, a rapid development of layer 2 projects, including the advent of blockchain bridges allowing crypto assets to move between different layer 1 networks; improvements to transactional security, scalability and throughput; and a new era of financial service products.
The inevitable growth of regulation in the crypto field is also likely to lead to further innovation and increased patent filings. Cryptocurrency companies, for example, will soon face pressure to innovate to meet regulations by decentralized, natively digital solutions that retain the features making cryptocurrency attractive in the first instance and avoiding easier means of compliance through the adoption of more traditional, centralized methodologies.
Innovators in this space, however, should recognize that crypto-related innovations face distinct challenges in this increasingly crowded space. For example, cryptocurrency innovations inherently involve software for facilitating financial transactions with digital assets. As a result, patent applications describing these innovations become vulnerable to patent subject matter eligibility rejections under Title 35 of the U.S. Code, Section 101.
It therefore behooves patent drafters to avoid overemphasis on the financial and economic aspects of a solution and, instead, provide a detailed nuts-and-bolts description of how the inventors achieved their solution. A keen technical understanding of cryptocurrency and underlying blockchain operation becomes essential for such a discussion and eventual claiming of the solution in a patent application.
For example, patent claims that recite mathematical concepts used in cryptocurrency, such as hash functions, should avoid generic references to those mathematical concepts. Rather, patent drafters should describe such mathematical concepts in a context making clear their practical applications when used in blockchain technology — e.g., invoking the role of hash functions to improved, trustless authentication protocols.
Similarly, effective patent drafters will describe innovations in a manner that avoids any question of whether the claimed solution could be performed by the human mind, another factor in determining patent eligibility. For most crypto inventions, this is achievable through careful crafting of claim language.
Innovators in this space should seek to patent crypto solutions "necessarily rooted in computer technology in order to overcome a problem specifically arising in the realm of computer networks," per the U.S. Court of Appeals for the Federal Circuit in the 2014 DDR Holdings LLC v. Hotels.com LP decision.[7]Doing so, while avoiding the trap of using generic claim terms that stumble under Section 101, requires a firm grasp of the underlying technology.
As the crypto space continues to mature, patent examiners will increasingly frown upon high-level references to blockchain technology and crypto buzzwords and often find such claims unpatentably abstract.
Like all other patent applications, cryptocurrency applications must also describe and claim a novel and nonobvious improvement before an enforceable patent can issue. While the relevant prior art field may have been relatively uncrowded just a few years ago, that has quickly changed.
To be sure, cryptocurrency applications will face increasing scrutiny going forward under Sections 102 and 103 of the Patent Act for alleged lack of novelty and nonobviousness. Effective patent drafters should therefore ensure they have a comprehensive understanding of an invention before deeming a patent application complete and ready for submission to a patent office.
This would seem to go without saying, but a complete understanding of an invention in the cryptocurrency space often involves the formidable task of pressing inventors for details about measures taken to solve certain technological problems that they consider an uninteresting distraction from the business solution they ultimately achieved.
Wise patent counsel, however, must stay attuned to both the business appeal and the intricacies of the technology. A strong cryptocurrency patent application will provide expansive written description support for any claim amendment later needed to effectively distinguish from the prior art field during prosecution, while maintaining valuable patent scope. A successful patent claim, at the end of the day, protects a business solution through its coverage of a technological advancement.
To that end, it is not enough for patents to merely recite novel and nonobvious subject matter. To be effective, cryptocurrency patent claims must create barriers to entry and otherwise cover critical technology bridges that competitors will need to cross in order to compete effectively. When there are dozens of available techniques for solving a particular problem, each being comparable in ease of implementation and effectiveness, patenting one of them may prove underwhelming for a business.
In such situations, wise patent counsel will consider claim language that protects multiple techniques. Again, a keen understanding of crypto technology becomes necessary to determine the optimal strategic option for a given cryptocurrency invention.
The ability to detect infringement also informs a patent's value. Like the proverbial tree that falls in the woods, infringement of a patent is a nonevent unless someone observes it.
Cryptocurrency inventors are often eager to claim highly specific algorithms or processes that reside deep within a company's backend systems. While such inventions may well be novel and valuable, their patent value stands diminished unless they can be claimed in a manner that allows for detection when infringed. In those cases, keeping the technology a trade secret may offer better protection.
The ability to enforce a patent likewise informs a patent's value. Cryptocurrency technologies, by their nature, operate as decentralized systems. Patent drafters must therefore remain mindful to avoid divided infringement among multiple entities whenever possible.
For example, patent owners will not want to sue potential customers, e.g., end users, so claims should reflect an expectation of direction, control or inducement by competitors, e.g., managing entities. But good patent drafting can often avoid this problem altogether by directing the claims to the activities of one entity.
To obtain valuable patents in the rapidly expanding field of cryptocurrency, patent drafters must possess a deep understanding of the technology to effectively navigate the thorny prosecution and enforcement issues described above.
Although few lawsuits have been filed involving cryptocurrency and blockchain patents to date, that will undoubtedly change as the crypto landscape continues to mature and competition increases. And as the competitive environment heats up, moreover, some companies will inevitably fail. Historically, this has led to the sale of patent assets to litigation-focused nonpracticing entities.
Accordingly, forward-looking crypto companies will take necessary efforts to develop a robust patent portfolio capable of serving as both a sword and shield in the future marketplace.
[1] Everyone Wins at Super Bowl LVI — WAGMI!, The Coinbase Blog (Feb. 14, 2022), https://blog.coinbase.com/everyone-wins-at-super-bowl-lvi-wagmi-c0039452975f.
[2] MacKenzie Sigalos, Ukraine has raised more than $54 million as bitcoin donations pour in to support the war against Russia (Mar. 3, 2022), https://www.cnbc.com/2022/03/03/ukraine-raises-54-million-as-bitcoin-donations-surge-amid-russian-war.html; Amitoj Singh, Ukraine Has Received Close to $100M in Crypto Donations, CoinDesk (Mar 9, 2022), https://www.coindesk.com/business/2022/03/09/ukraine-has-received-close-to-100-million-in-crypto-donations/; David Yaffe-Bellany, Ukraine Gets $22 Million in Crypto Donations to Fight Invasion, The New York Times (Feb. 28, 2022), https://www.nytimes.com/2022/02/28/business/ukraine-crypto-donations.html.
[3] Executive Order Ensuring Responsible Development of Digital Assets (March 9, 2022), https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/09/fact-sheet-president-biden-to-sign-executive-order-on-ensuring-responsible-innovation-in-digital-assets/.
[4] Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (October 31, 2008), https://bitcoin.org/bitcoin.pdf.
[5] Includes applications reciting "blockchain" and/or "cryptocurrency" in the title, abstract, or claims. Complete filing data in 2020 and 2021 unavailable due to 18-month publication rule under 35 U.S.C. 122.
[6] Source: Derwent World Patents Index.
[7] DDR Holdings, LLC v. Hotels.com, L.P., 773 F.3d 1245, 1257 (Fed. Cir. 2014) (finding the challenged claims patent eligible).
Originally printed in Law360 on March 18, 2022. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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