Blockchain’s Incumbent Patent War: a Rite of Passage

Are banks afraid of blockchain? The answer really depends on who is being asked. But some of the biggest names in banking are “quietly” being proactive by patenting some of the world’s most promising blockchain technologies. Some of these patent holders and applicants — which include some of the largest financial institutions in the world — have been accused of “patent trolling.” However, many of them claim that they are simply playing defense and protecting their own internal blockchain-related developments and innovations. Whatever the intention, as blockchain becomes more popular, the value of the virtual currencies it supports increases and more patents are filed, it seems inevitable that blockchain-related patent wars are ahead. As with many of the world’s most impactful technologies, patent wars are a rite of passage and one which blockchain is unlikely to avoid.

What is Blockchain?

For much of the public, the first question is what is blockchain? Simply put, it is somewhat of a ledger that records and secures virtual currency transactions. It has been described as a “distributed ledger that authenticates and records every [virtual currency] transaction.” One key component of blockchains is that they are “permanently distributed spreadsheets or ledgers where information can only be added – never deleted.”[1] Autonomous Research released a report describing blockchain:

“Blockchains are ledgers (like Excel spreadsheets), but they accept inputs from lots of different parties. The ledger can only be changed when there is a consensus among the group. That makes them more secure, and it means there’s no need for a central authority to approve transactions.”

Another key component is that “the blockchain is public: anyone can view it at any time because it resides on the network, not within a single institution charged with auditing transactions and keeping records.”

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Blockchain should not be confused with Bitcoin or other virtual currencies. Blockchain is the technology behind the various virtual currencies on the market. It has been referred to as the “part of the iceberg below Bitcoin.” While Bitcoin and other virtual currencies (Ethereum, Ripple, Litecoin to name some of the most popular) are what users actually purchase and transact, it is the blockchain technology underlying each of those coins that allow the users to transact, records those transactions, and ensures that each coin is not double-spent and that each user actually receives its funds.

There are also a number of new technologies that can be built on top of blockchain including self-effectuating contracts called “smart contracts” and other applications that could provide for more transparent and cost-effective transactions, including international transactions. “Smart contracts allow for logic to be programmed on top of the blockchain transaction.” “When a transaction takes place the smart contract seamlessly executes the contract.” These smart contracts “can be coded and recorded in the blockchain and executed, without human intervention, when the proper conditions are met.” There are reports that smart contracts are “already being used in the financial industry, accounting, supply chain management, healthcare, and more.”

Why do Banks and Financial Institutions Care?

The middlemen that blockchain could potentially cut-out of the equation for various transactions are large banks, financial institutions, and money transmitters that have had a stranglehold on transaction fees for centuries. As one expert explains:

“While the technology is complicated and the word blockchain isn’t exactly sonorous, the main idea is simple. Blockchains enable us to send money directly and safely from me to you, without going through a bank, a credit card company, or PayPal.”

It has been said that blockchain “has the potential to disrupt the global banking industry.” Since users can use the blockchain ledger to “confirm batches of transactions . . . it can take over functions such as verifying payments.” “Some banks may feel threatened because blockchain technology can offer a cheaper alternative to traditional banking and can reach portions of the population without access to banks.”[2]

For example, a consortium of international banks has begun to roll out blockchain-based smart contracts to “process accounts receivable purchase transactions (or invoice financing or factoring) and letter of credit transactions” which is expected to “lower these transaction costs by 10 percent to 15 percent.” The CEO of that consortium noted that “trade financing is a crucial income stream for banks and provides an integral role in enabling businesses in different countries to trade with each other . . . however, the processes used to facilitate trade financing have become antiquated and unfit for purpose in today’s increasingly digital world.” Bank representatives have also commented that blockchain “‘has the potential to redefine transactions’ and can change ‘everything.’”

One study calculated that there are roughly $54 billion in annual clearing and settlement costs globally and that 30% of those costs could be reduced by blockchain by 2021. Blockchain may very well change how financial transactions are conducted and poses at least a theoretical risk to banks and other financial institutions that rely on transaction costs as a steady revenue source. As a result, many of these institutions have taken a proactive role in both adopting and defending against blockchain.

Banks and Financial Institutions Are Stockpiling Blockchain Patents

One commentator stated that because of fear banks may have related to blockchain “some of these banks may be trying to preempt the very tool that could doom their future.”[3]

Recently, some of the largest names in banking and financial institutions have been filing an increasing number of blockchain related parents. In late 2016, the number of blockchain-related patents that companies have obtained or said they’ve applied for has nearly doubled. This may be in response to the visibility of blockchain, the increase in value in popular virtual currencies like Bitcoin and Ethereum, the significant involvement of well-known investors and developers, and the ongoing development of blockchain-related applications. Certain startups like Chain and Hyperledger and “R3” an international banking consortium have even opened up their blockchain-related source codes to the public. These various factors along with the apparent risk of infringing upon banking’s historic stronghold on transaction costs have been met with the biggest names in banking and finance getting their hands on as many patents as possible.

Patents in the hands of large banks and financial institutions could be used as “powerful weapons in protracted lawsuits over intellectual property.” “Increasingly, experts warn [that] established firms will use them to assert exclusive rights over the work of blockchain’s pioneers.” One blockchain expert cautioned that “anybody who’s investing in the [blockchain] ecosystem, anybody who’s interested in the technology should be worried about this.” Another warned about the potential for patent litigation when smaller blockchain companies get purchased by larger software companies: “blockchain software companies may end up being amalgamated into existing software giants, at which point blockchain patents will just become part of the existing patent war.”

Despite some retort about what has been referred to as “patent trolling” (“sitting on the patents and using shell companies to file lawsuits against anyone using blockchain”) many of these banks and financial institutions have been developing their own blockchain technology and claim that they are simply defending their work-product as they would with other technology initiatives. For example, a representative for a large financial institution — which has filed for more than 30 patents related to blockchain and cryptocurrencies — stated: “[w]e have expanded our patent portfolio to protect the company’s thinking, innovations and intellectual property.” Similarly, a source for a large bank stated that it is simply playing defense and the patents are being filed to ensure that another company doesn’t use the bank’s inventions and “monetize it away.”

One commentator theorizes that “as companies both big and small gear up to launch profit-making products, they’re also gearing up to go to patent war.” Patent litigation will most likely arise in the following two scenarios: (1) “a patent-holding small startup might go after a large corporation knowing [or hoping] it’ll get a sizeable payout from the corporation;” or (2) “a large incumbent player might launch a lawsuit against smaller companies in an effort to effectively tax the competition by way of [legal] expenses.”

Are Patents Good for Blockchain?

Although patents could create some ownership certainty which could lead to increased investment which has the potential to promote the advancement of the technology, some blockchain enthusiasts are strongly against the intellectual property grab arguing that it is “antithetical to innovation, collaboration and the openness that’s at the heart of the new digital age.”

Some of these patent filings seem to be quite broad and could cover a number of applications being created by smaller software developers. As one example, one bank has sought a patent for “‘processing financial transactions using a … distributed ledger … [to] store a portion of the ledger corresponding to a respective asset is distributed’ – in other words, using blockchain to settle transactions.” For the blockchain, virtual currency, free-market enthusiasts, these sorts of patents could pose at least a philosophical problem. These technologies were created to promote a libertarian-esque way of transacting without the involvement of centralized gate-keepers or government oversight. This intellectual property grabbing is somewhat similar to the various regulations that have been imposed by Federal and State regulators with regard to State-by-State BitLicenses and money transmitting and money service business licensing requirements. Various regulatory bodies have classified virtual currency differently – and perhaps even contradictory to one another ‑ and have imposed various regulatory and licensing requirements primarily on bitcoin and blockchain-related businesses and exchanges. In fairness, there are far less regulations and requirements on the casual user or investor. Similarly, large institutions asserting claims over various pieces of blockchain intellectual property could potentially limit the sort of peer-to-peer free-flowing transactional atmosphere that the blockchain purists would argue the technology was intended to promote. Only time will tell how these institutions intend to utilize these patents, and particularly for the patents with broader application, whether the U.S. Patent Office will even issue them.

Patent grabbing and subsequent legal battles are a rite of passage for new disruptive technologies. The fact that some of the world’s largest banking and financial institutions have been taking an active approach to blockchain technology could be an indication that the blockchain is here to stay. Whether or not these patent purchasers are strictly using them for defensive measures, it seems inevitable that patent litigation is in blockchain’s future, whatever it may hold.

[1] See Garry Gabison, Policy Considerations for the Blockchain Technology Public and Private Applications, 19 SMU Sci. & Tech. L. Rev. 327 (2016) (“Gabison”).

[2] See Gabison.

[3] See Gabison.