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Thursday 25 May 2017
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Bitcoin Suppression via the Patent System

The advent of Bitcoin presents the global economy with an issue it has never had to face before. Bitcoin is the first currency that is fundamentally a technology. It’s not simply an electronic network for keeping track of who owns how much fiat currency like the Automated Clearing House. Nor is it a technological abstraction of an underlying non-technical asset like an oil futures contract. It is, at every level of the protocol, a novel and unobvious technological advancement, and many of its embodiments are therefore patentable.

Before going any further, it is important to make a distinction. The Bitcoin protocol itself has been open-sourced and is no longer patent eligible. Many of the innovations developed on top of the blockchain, however, could be patented. If an inventor successfully obtained such a patent, it would grant them monopoly power to exclude others from its use for the next 20 years.

A good clarifying example of the relationship between patents and Bitcoin can be seen in the dairy industry. Milk, as a product naturally occurring in nature, is not patentable. Nevertheless, technologies developed to keep milk fresh, safe, and to transport it to the breakfast table certainly are patentable. The same is true with Bitcoin. While the protocol itself is not patentable, embodiments like QR code transactions, dual signature wallets, and serverless cloud storage like MaidSafe certainly are.

Bitcoin represents a massive disruption of the natural order that traditional transaction companies like Visa, Mastercard, and Western Union come to expect. These companies are accustomed to skimming 3% or more off the top of every transaction. When retailers and consumers are offered a viable alternative, which costs them nearly nothing and provides an equal or greater level of security, they will migrate in droves to the cryptocurrency economy. This will cut deeply into the profit margins of the traditional transaction companies, thus highly incentivizing them to suppress the adoption of cryptocurrencies.

Examples of established power structures suppressing the adoption of disruptive innovations are all around us. As a taxicab company, what do you do when Uber comes into your territory? You first kick yourself for not leveraging the computer in your customer’s pockets to better serve them. Next, you lash out with your monopolistic taxicab medallion laws you paid to put in place. Or, as a car dealership, what do you do when Elon Musk says he’s going to circumvent the dealership system and sell Telsa cars directly to consumers? You dust off your ancient tomes of anti-competitive automotive franchise law (again, that you paid to have written) and load your lawsuit cannons.

As Bitcoin begins to transact a larger portion of the economy, traditional transaction companies will react. They will attempt to suppress the adoption of cryptocurrency technologies with the most effective tool at their disposal…the patent system. One could imagine that credit card companies, pressured to keep profits up, may sue companies like Coinbase for their merchant-integration API, Robocoin for their ATM, and Xapo for their debit card.

Examples of patent-based technology suppression are all too real. The 3D printer was first invented in 1984, but key patents on laser sintering technologies have kept the price of quality 3D printers prohibitively high and therefore out of the hands of average consumers. After 20 years, these patents are expiring and only now might we see the decentralized manufacturing revolution. It’s exciting to see this revolution begin to take shape today but sad to consider that the patent system may have needlessly delayed it for so long.

Early Linux innovators saw the risk that patent suppression posed to an open source operating system. They founded the Open Invention Network (OIN) to pool Linux-related patents for a common defense and to keep Linux royalty-free. They knew that offering free software would draw the ire of the powerful proprietary software vendors. In 2007, a patent licensing company with ties to these powerhouse software companies called IP Innovation LLC, tested OIN’s resolve by asserting old Xerox patents from the late ‘80s against Novell and RedHat for their use of Linux. The OIN community came to their defense, mounting a massive prior art search. After 3 years of court battles, the jury looked to this prior art and finally found IP Innovation’s patents invalid. OIN drew a line in the sand and today the Linux kernel is found on almost half of all mobile devices.

Members of the Bitcoin community need to be aware of the economic forces at play in the nascent cryptocurrency economy. Bitcoin adoption is undermining traditional power structures and it is predictable how those losing power will react. If we want Bitcoin to flourish like Linux, rather than stall like 3D printers, we need to actively engage the patent system and leverage it to our advantage.

Reed Jessen

Reed Jessen is a patent analyst and the creator of the The Cryptocurrency Defense Foundation. The Foundation is a defensive patent aggregator that acquires cryptocurrency related patents and licenses them openly to all those who agree to not enforce their patents against other members of the community. Reed regularly blogs about intellectual property at PreferredEmbodiment.com.

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  • Martin A. Hay

    When it is working properly, as intended, the patent system provides innovators with an incentive to research and develop new technology. Cryptocurrencies are based upon a fascinating, disruptive technology that will completely reshape social structures. The incentive to research and develop this technology for application to cryptocurrencies lies in the ability of those involved to make money from it by mining coins and providing a means for exchanging them for money. The patent system can be viewed as presenting an obstacle to this. However, the technology also has the potential to replace money, and indeed to eliminate the need for using ANY imaginary store of value in exchange, including the coins themselves. The pursuit of wealth by mining imaginary stores of value cannot provide an incentive for the development of an alternative to using imaginary stores of value in exchange! Only the patent system can do this. So while it is important that only valid patents are granted, the patent system does have a very important role to play in incentivizing the innovative development of the technology upon which cryptocurrencies are based, so that it can realize its full potential.