United States: The Role Of IP In The Crypto Bubble

Blockchain patent application filings tripled in the past year.1 Since 2017, more than 500 applications were filed claiming blockchain, distributed ledger and cryptocurrency subject matter.2 Some of the world's largest financial and information technology companies are investing heavily in filing these patent applications, including Bank of America Corp., Alibaba Group Holding Ltd., IBM Corp., Goldman Sachs Group Inc., JPMorgan Chase & Co., Fidelity Bank, TD Bank NA, MasterCard Inc and Dell Technologies Inc.

In 2018 we continue to see strong growth in the quantity of filings and the breadth of companies entering the space. These patent filings reach well beyond early claims encompassing access control, block construction, data processing and decryption technologies, and also include inventions in areas like information coordination, authenticating goods and financial reporting. In this article we seek to explain how companies are using intellectual property rights to create viable, long-lasting corporate value not only in the blockchain and crypto markets, but also in traditional markets where this technology can be leveraged.

To understand this phenomenon, a quick explanation of how patent rights in the U.S. can add value is helpful. When granted, a U.S. patent provides the owner a legal right to exclude others from making, using or selling one's novel technology without first reaching an agreement with the patent owner. Unlike a trade secret, a U.S. patent is granted by the government in exchange for the patentee's disclosure of that technology to the public, which then gets the right 20 years later to use the technology without a license. In addition to encouraging others to pay the patent owner this revenue stream through a license, the patent owner can potentially leverage the patent to cross-license other technologies, which may provide cheaper access to related technologies. A patent might even be used to negotiate a continuing foothold in the innovation loop among larger and more established market players. And of course, a patent owner can use its patent as a measure of value for its company and its technology.

Several known applicants for blockchain and cryptocurrency IP have suggested that they intend to use their patents instead to shield themselves from lawsuits. Certainly, the value derived from successful patent litigation is a consideration for early blockchain and cryptocurrency patent applicants. Yet legal battles are still likely as incumbent companies, quick moving newcomers and nonpracticing entities compete for leverage in the marketplace.3 Filing new patent applications to obtain downstream litigation windfalls, however, is usually a longer-term, more speculative investment. And, it is unlikely that these companies are investing in patents to make quick money, as the crypto market, including initial coin offerings and reverse ICOs have already made access to capital relatively quick and easy.

Why then are so many companies, and such large and well-established companies accelerating their blockchain and cryptocurrency patent filings? Patent protection, and IP protection generally, is playing an increasingly important role in helping well-established companies solidify their foothold in streams-of-commerce for the next generation. History serves as a guide, as the similarities between the blockchain boom and the dot-com bubble of the mid-90s and early 2000s are striking.

The dot-com boom began in the mid-1990s, where whole markets rose to prominence on the back of then new and untested technologies, particularly the World Wide Web. Unrestricted entry into the internet marketplace coupled with relatively easy access to venture capital, resulted in extraordinary valuations for these untested, new companies. Even existing companies listed on NASDAQ that simply added ".com" to their name saw their value soar; and some investors were doubling their money in a single day of trading after an initial public offering.

By the early 2000s, however, the number of IPOs shrunk from about 457 to 76 in just two years,4 leaving behind a glut of abandoned corporate office space and Herman Miller Aeron chairs. Despite these dismal remnants, aggressive experimentation with the internet and its seemingly endless applications left behind groundbreaking innovation. Voice over Internet Protocol, e-commerce, 3G networks, online shopping and big data analytics are just some of the technologies that emerged from the dot-com bubble and that continue to carry us further into the 21st century.

The survivors of the dot-com bubble prioritized viable business models that could yield sustained and long-term growth over the "get big fast" mindset. Companies that failed to protect their technology and their competitive advantages during the bubble and burst were often left thereafter without accessible IP rights. Likewise, companies that failed to build and protect their brands during this time found themselves similarly disadvantaged. According to a retrospective study on the survival of IPOs during the dot-com boom, "firms that were unable or unwilling to seek patent protection were much less likely to survive the collapse of the dot.com bubble after 2001."5 The dot-com bubble is yet another example of a lesser-known adage: "patent or perish."6

We may be at such a critical point now with respect to blockchain and cryptocurrency technology. It wasn't until 2014 that people began to appreciate how combining the new, complex and untested technologies—distributed algorithms, encryptiom and data storage—to transcend the bitcoin use case presented in Satoshi Nakamoto's 2008 white paper.7 During the boom in 2017, the crypto marketplace emerged from the fringes of the internet to become the next gold rush. Initial coin offerings became the new IPOs, and adding the word "coin" to a company became the new ".com." The meteoric rise in value of cryptocurrencies, ICOs, reverse ICOs and digital collectibles yielded an unprecedented influx of capital—even though many of these projects had no concrete business models or articulated revenue streams.

However, like the dot-com bubble, crypto markets experienced a sharp downturn, losing approximately 60 percent of their value in the first half of 2018.8 Again, we witnessed the unfettered pursuit of wealth and validation bring with it significant new market possibilities. Among the endless repositories of whitepapers and blog posts, new technologies and immense innovation is sprouting. Blockchain, digital scarcity and proof of work are just some of the innovations emerging from the blockchain and crypto boom that will change the way we interact and engage in commerce and communications for decades to come.

Some newcomers hit the market quickly at its peak, with an eye toward showcasing a quick and profitable exit. And for those with longer-term ambitions, moving quickly resulted in the sacrifice of tried and tested business management and valuation methods in favor of no-holds-barred expansion and a period of "hype." Which companies and which technologies will survive to become household names with fundamental technologies remains unknown. But we are seeing companies both large and small filing blockchain related patent applications as well as other forms of IP in an attempt to survive and thrive long-term in this new crypto space.

Consider Patents

Startups and large companies using blockchain and related technologies should think early and strategically about creating and protecting their IP, despite the current market trajectory. If done strategically, merely applying for IP rights can demonstrate value, attract investments, create new revenue streams, secure and protect business relationships, and help limit risks in the production and distribution of a company's products and services.

During the crypto boom in 2017, simply posting a white paper opened the door to immense funding, in some cases, but also overwhelming and quick-moving competition. Without some sort of IP protection, a competitor could just as quickly dry up your funding, yank you out of the sweet spot you created in an innovation loop with your business partners, or force you to pivot to a less desirable business model. According to Bitcoin.com and TokenData, in 2018 there were 902 ICOs available for investment on the market, of which 59 percent either failed or are deemed by analysts failures-in-the-making.9 In fact, Bitcoin.com refers to the ICO marketplace as a "Digital Graveyard of Broken Promises," where one can find "abandoned Twitter accounts, empty Telegram groups, websites no longer hosted, and communities no longer tended."10 For companies finding it easier than ever to start a technology company we are reminded of another adage: "easy come, easy go," or possibly worse "live by the sword, die by the sword."

Whether challenged by a competitor or facing a market downturn, strategically positioned IP rights can help keep a company financially and technologically relevant through even turbulent times. Startups and relatively young companies in markets can use IP rights to distinguish themselves from the blockchain and crypto pack by demonstrating that they have prospects for long-term value. Larger and well-established companies already know how to use IP rights strategically. Take AOL, for example, the leading online service provider through the dot-com boom in the 1990s and early 2000s. Following a period of strategic patent development and patent filings, AOL was able to sell 800 patents to Microsoft Corp. for $1.056 billion in 2012, almost 30 years after it was founded.11

Also Consider Trademarks

While patent protection can secure numerous business advantages in the blockchain and crypto space, you should also consider the value of branding and trademark protection. Over time, strategically created and registered trademarks can be used to extract brand value from successful products and marketing activities, can help retain and attract larger customer bases, and can help transfer that value into new technologies, new products and new business lines. Even Silicon Valley technology companies often find that their brands and brand recognition become more valuable than their technologies. Consider all the dot-com brands that remain household names in markets well beyond their early technologies, like Google and Amazon. Using trademarks to build a global brand demonstrates to consumers, investors and competitors that the company intends to be a long-term repeat player in the market, which then helps attract and retain funding, business partnerships, and customers.

Trademarks also help position companies to better survive business downturns. This is already occurring in the highly volatile and quickly evolving blockchain and cryptocurrency marketplaces. As compared to their peers, brands like Bitcoin, Ethereum, Litecoin and Ripple are becoming iconized by consumers and other businesses as beacons of stability and sources for business partnerships. This is especially important in a marketplace where it is difficult for most people to distinguish companies based on a fundamental understanding of the underlying technology. In a sense, while the patents and patent filings can speak to a company's potential technical merits, the quicker moving brand names and associated good will can position a company as an ideal partner in the marketplace and facilitate the integration of the company's technology into platforms and a wider variety of other applications.

The crypto marketplace is filled with product names and logos that some consumers may find confusingly similar. In 2018 alone, there were nearly 150 U.S. trademark applications filed that include the word "coin," nearly 100 including the word "crypto," and numerous other applications using variations of the terms, or related designs. Perhaps even more telling about the perceived growth in value of these technologies is that more than 2,100 trademark applications filed that include either the term "blockchain" or "cryptocurrency" in their list of goods and services, and that more than half of these were filed after the 2018 drop in cryptocurrency value.

In an interview, Brynly Llyr, general counsel of Ripple Labs Inc., stated that "[Ripple is] a technology company, so IP and IP protection is a big deal for us, of course. Our trademarks around the world [and] our patent portfolio" are crucial to the success of the cryptocurrency and underlying company.12 A financially solvent platform with the promise of protectable technology, that is also cultivating significant goodwill in the marketplace, could significantly transform not only a particular company, but entire portions of the growing industry, from hobbyists to a mainstream technological infrastructure.

Whether you are a Fortune 500 company or a one-person startup, investing in intellectual property early and as an integral part of a company's business strategy, can help you survive crypto bubbles and bursts, can help you establish partnerships and new revenue streams, and can help you transform your technology into mainstream infrastructure.

Footnote

1 https://www.ft.com/content/197db4c8-2e92-11e8-9b4b-bc4b9f08f381 

2 https://www.coindesk.com/rate-blockchain-patent-applications-nearly-doubled-2017/ 

3 https://www.economist.com/business/2017/01/12/a-rush-to-patent-the-blockchain-is-a-sign-of-the-technologys-promise 

4 https://www.wired.com/insights/2013/08/tech-boom-2-0-lessons-learned-from-the-dot-com-crash/ 

5 http://www.nber.org/papers/w13146.pdf 

6 https://www.technologyreview.com/s/401438/economic-bust-patent-boom/ 

7 https://bitcoin.org/bitcoin.pdf 

8 https://www.coinbase.com/charts 

9 https://news.bitcoin.com/46-last-years-icos-failed-already/ 

https://static1.squarespace.com/static/5a19eca6c027d8615635f801/t/5a73697bc8302551711523ca/1517513088503/The+State+of+the+Token+Market+Final2.pdf 

10 https://news.bitcoin.com/46-last-years-icos-failed-already/ 

11 https://www.reuters.com/article/us-aol-microsoft/microsoft-trumps-amazon-others-for-aol-patents-idUSBRE83809X20120409 

12 https://www.law.com/therecorder/2017/11/01/qa-ripple-gc-on-cryptocurrency-the-law-and-blockchain-hype/ 

Originally published in Law360

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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