Why it matters: With headline news ranging from J.P. Morgan CEO Jamie Dimon and Russian President Vladimir Putin to the Winklevoss twins and Floyd “Money” Mayweather, the hype surrounding cryptocurrency—think bitcoin, ethereum and an ever-expanding list of niche altcoins—has gone mainstream. As with any new industry, over the past five years there has been a rapid increase of applications for blockchain- and cryptocurrency-related patents filed with the U.S. Patent and Trademark Office by entrepreneurs and financial institutions alike looking to monetize some part of this technology. Notably, higher levels of patenting activity bring nonpracticing entities, aka patent trolls, out of the woodwork. In March 2017, the Blockchain Intellectual Property Council was formed to, among other things, play defense against the trolls.

Detailed discussion: The cryptocurrency industry is booming, and with it the underlying blockchain technology that makes it run. As with any new industry (think back on the advent of smartphones), over the past five years there has been a rapid increase in patent applications filed with the USPTO by entrepreneurs and financial institutions looking to monetize some application or variation of the blockchain. We explore the origin, developments and ownership of blockchain technology further below.

What is blockchain technology? Earlier this week, Vitalik Buterin, the mind behind ethereum, defined blockchain, in simple terms, as “a decentralized system that contains some kind of shared memory.” Buterin went on to explain that “a good blockchain application is an application that #1 needs decentralization and #2 needs some concept of shared memory.” In addition, consulting firm TechTarget further explained the processes handled by the computers responsible for building and verifying the blockchain as follows:

“When a transaction is made, it is packaged up with other transactions into a ‘block’ and recorded across a network of computers, a majority of which are required to confirm the transaction in order for it to be accepted as legitimate—a process referred to as achieving consensus. The block is then time-stamped with a cryptographic hash. Each block also contains a reference to the previous block’s hash, creating a ‘chain’ of records that is considered impossible to falsify.”

The origin of the blockchain: With most new technologies, the relatively short path from invention to implementation can be easily traced, and one or more inventors can be easily identified. However, bitcoin and the blockchain represent the evolution of prevailing demand for autonomy and anonymity during a period of market uncertainty and Wall Street distrust. The inventor(s) behind bitcoin is/are known only by the pseudonym Satoshi Nakamoto, who authored the 2008 white paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” Whether Satoshi Nakamoto is a single individual or a group remains unknown.

Unfortunately, the challenges in determining cryptocurrency inventorship extend beyond the mysterious identity of Satoshi Nakamoto. Most blockchain-based projects, including bitcoin and ethereum, have been developed by loosely organized developer/enthusiast communities, complicating issues of inventorship and assignment, even when the development team is known.

Blockchain- and cryptocurrency-related patent applications are booming: Our patent system is built around a system of incentives and trade-offs for inventors, granting limited-duration monopolies to inventors in exchange for contributing their inventions to the common good. As such, if an inventor does not file an application to patent his or her invention within one year of the invention’s publication, public use or sale, the invention falls into the public domain. After that year passes, anyone can make, use or sell the invention, without compensating the original inventor.

Today, only improvements and nonobvious applications of the blockchain are eligible for patent protection. Many of the blockchain-based pending applications and issued patents focus on improvements related to fintech, security, off-chain records, and attempts to increase the responsiveness of the blockchain without sacrificing core tenets of decentralization and consensus verification. Some examples of issued patents include bitcoin mining derivatives, in-car cryptocurrency payments and blockchain-based shareholder voting.

On July 27, 2017, CoinDesk, an online news site specializing in bitcoin and digital currencies, estimated that nearly 400 patent applications published between January and July 2017 related in some way to the blockchain. It is impossible to search unpublished patent applications, but analysis of available records indicates that some major financial institutions are heavily investing and innovating in the space. From published records, it appears that Bank of America has filed for at least 20 patent applications relating to the blockchain and cryptocurrency, while Citibank and a number of other banks have developed their own internal blockchain-based coins for internal testing and development. Even governments are showing interest in the technology, with the Australian Securities Exchange investing in blockchain developers and Dubai announcing its goal of becoming the world’s first blockchain-powered government.

The number of issued patents relating to the blockchain is steadily increasing, as those applications have climbed their way to the top of the USPTO’s infamous backlog. Aside from the usual patentability questions of novelty, many of these applications face an uphill climb in view of the USPTO’s challenging subject matter eligibility guidance for patent examination. The key is to include significant technical support in the clients’ blockchain patent applications to avoid subject matter eligibility rejections for this disruptive technology.

The Blockchain Intellectual Property Council and patent trolls: In recognition of the rapid growth of the blockchain technology industry and in an attempt to get control of the IP issues related to it, in March 2017, the Chamber of Digital Commerce created the Blockchain Intellectual Property Council. On its website, the CDC states that its initiative promotes “innovation in blockchain and distributed ledger technologies (DLT) by addressing intellectual property issues. The council helps balance the protection of proprietary information with the openness necessary for innovation.” Notably, the BIPC executive committee includes a who’s who of blockchain and fintech stakeholders.

The BIPC will explore various IP protection models that have worked in other sectors, including (a) drafting nonaggression agreements, where industry players agree not to assert patents against each other; (b) developing patent pools, where cross-licensing options are available to all pool participants; and (c) reducing inventory, where groups are formed and the members agree not to sell patents without first granting a license to all group members.

What lies ahead? As adoption of blockchain technology continues to expand, various stakeholders across numerous industries are heavily investing not only in implementing—but also in building patent portfolios to protect and monetize—particular applications of the blockchain. In this area of rapid growth, it is crucial to talk to your counsel about how best to protect your innovation and avoid potentially infringing activity.