blockchain and ip: smart contracts, protecting innovations, enforcing...

Blockchain and IP: Smart Contracts, Protecting

Innovations, Enforcing Licenses, and More

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THURSDAY, JANUARY 23, 2020

Presenting a live 90-minute webinar with interactive Q&A

Brian Chau, Senior Lawyer, Patent Agent, Norton Rose Fulbright Canada, Toronto

Bennett Collen, Partner, Triblock Advisory, Boston

Evan Smith, Managing Partner, Cogent Law Group, Washington, D.C.

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Blockchain – what is it?

Copyright© 2020 GoDaddy Inc. All Rights Reserved. 5

Not bitcoin, not “the” blockchain

Many different blockchains, cryptocurrencies, protocols and distributed ledgers

Definition is continuously changing

Type of distributed database – blocks of data chained together at regular intervals

Blockchain (in a sentence)


No single centralized party keeping a “master” record

Task of record keeping shared among the users of the system (decentralized, distributed)

Underlying technology verifies that all users are keeping matching records, updated at regular intervals

Digital “spreadsheet” of transactions

Bitcoin


Decentralized, peer-to-peer electronic cash system

Anyone can run the software and participate

▪No personal information required

▪Only need blockchain “wallet” address

▪“Trustless”

Enabled darknet transactions (initially)

In reality, pseudononymous

▪Ross William Ulbricht aka “Dread Pirate Roberts”

traced and tracked down via bitcoin payments

Zcash, Monero

Bitcoin:

Satoshi Nakomoto

“Digital Cash”

Double Spend

8

Great for sharing

Not unique/scarce

9

Solves the “double spend” problem – can create digital scarcity

10

A party develops a protocol to coordinate with others (who aren’t inherently trusted) to achieve an outcome

○ “rules” of the protocol are set

○ consensus – how do the participants agree on what data will be added to

the shared ledger?

○ what constitutes a valid transaction?

○ Public vs. private?

○ Permissioned vs. permissionless?

○ Distributed vs. decentralized

○ Decentralized consensus: No one party makes decisions for the entire

system

○ Transfers trust to the virtual network/protocol

Step 1: Protocol


Network of computers communicate with each other to validate entries to shared ledger (“Digital Spreadsheet”)

○ Each computer has complete copy of ledger, communicates with

the other computers (computers / participants called “nodes”)

○ New transactions broadcast to the network and verified by

each node

○ Verification based on predefined protocol

○ Maintain the integrity and accuracy of the ledger

Blockchain – basic mechanics


○ Verified transactions grouped together

into blocks of data

○ New blocks added to “digital

spreadsheet” in regular intervals

○ Each node is updated with the new

transaction information

○ Each new block is chained to the one

prior

○ Each new block contains a

“summary” of data in previous

block

○ Each node has exhaustive history

of transactions

Blockchain – basic mechanics


1 2 3

6 5 4

7 8 9

Blockchain – characteristics


Security result of two main factors:

1. Entries are linked/chained together: Entries dependent on previous

entries.

1. Tampering with historic data entries causes failure, changes

wouldn’t be allowed

2. Change to historical entry in ledger causes ripple effect - all

proceeding ledger entries would also become invalid

3. This “node” would have different data from others in network

= invalid

2. Data not centrally located (i.e. distributed): tampering extremely

difficult

1. Changing one computer’s ledger would cause it to be different

from the others

2. Since computers communicate with each other to ensure the

data is valid, “divergent” computer becomes invalid

Tamperproof and Secure: exhaustive history + computer science + mathematics + game theory + decentralization = trust

Blockchain – characteristics


1. Hashing: hash = a unique fingerprint that can verify that a certain

piece of information has not been altered, without needing to see

the information itself

• Information compressed into string of letters, numbers

“hash” →D04B98F48E8F8BCC15C6AE5AC050801CD6DCFD428FB5F9E65C4E16E7807340FA

• If original string altered even slightly, different string will be generated

– “hash ” →CA3DE6B4B781A53A95AA1AED152D9F2CF8B9841A3C4BEF5195DAF4FDC703EE9A

• In this way can guarantee tamper-resistance

2. Public/Private Key Pairs

• Public: “address” where encrypted info is sent/received

• Private: how messages/info/txns are digitally “signed”

• Analogy: email– Public: email address

– Private: password/account access

Privacy: encryption, hashing, public/private keys, and digital signatures

https://blockgeeks.com/guides/what-is-blockchain-technology/16

Smart Contracts


Traditional contracts: a series of “if this, then that statements”

Smart contract turns that into computer code

Smart contract = computer code that controls a digital asset

doesn’t necessarily make a contract in legal sense

“Programmable trust”

Foundation of most applications “dApps”

Applications far beyond money/finance

Smart Contracts


Transactions no longer require middlemen

can execute automatically based on predefined “rules” in smart contract

can store data

Vending machine = smart contract

Put $1 in, you get a soda

No dollar no soda

Trust machine

“The court of the internet”

Beyond Bitcoin: Blockchain Functions


1. Cryptocurrency

2. Computing Infrastructure

3. Transaction Platform

4. Decentralized Database

5. Distributed Accounting Ledger

6. Development Platform

7. Open Source Software

8. Financial Services Marketplace

9. Peer-to-Peer Network

10. Trust Services Layer

Mougayar, William. The Business Blockchain. Hoboken: John Wiley & Sons, 2016

Blockchain and IP: Navigating Emerging Issues

Brian Chau

[email protected]

Norton Rose Fulbright Canada LLP

January 23, 2020

20

Overview

• What is your problem? (Patentable Subject Matter)

• What are you doing? (Patent Trends)

• Why are you copying me? (Copyright)

• What tools are out there? (Open Source)

• Can you stop that? (Proprietary Code)

21

Distributed Ledgers are Copies

• What is being stored on the ledger?

• Financial Transactions

• Images

• Contracts

• Software

• Digital Pets / Monsters

• Copies of software defining blockchain rules (mining, consensus, block structure, etc.) are running on computer nodes

• Separate the concept of record keeping data structure (blockchain) from the data record propagation / synchronization mechanism (distributed ledgers)

• Node governance: public / private / permissioned blockchains

• Mining / performance incentives for conducting node computing activities

22

Is it Patentable?

Blockchain and distributed ledger technologies rely on:

• Computing devices

• Communication between devices

• Software

• Rules, schemes, mathematics, encryption

Courts, patent offices invalidating/rejecting computed-implemented patents and applications for lack of patentable subject matter / written description requirements – rules are still evolving

Patent considerations:

• Lag time between application to grant – process is slower than speed of innovation

• Early filings with broad claims may ultimately lead to aggressive patent litigation campaigns

• e.g., perhaps an elegant solution to improve transaction speeds on highly distributed public blockchain networks

23

Is it Patentable? – Drafting Tips

• Draft with an eye on tighter European / Canadian practice

• Identify “target” art units and attempt to avoid if possible 36XX art units

(field, summary, first few paragraphs of description are useful for this)

• Focus on technical improvements and technical benefits before describing

use cases or economic benefits

• Keep in mind shifting written description requirements – “algorithm” level

details may be required one day

• “Non-transitory computer readable medium claims may be useful (hybrid

apparatus method claim)

• Avoid nonce words if possible – support features with physical structure

where available

• Preambles can be used to good effect24

Is it Patentable?

• U.S.

• Post Alice – 35 USC 101

• Creating shadow credit/debit records – fundamental economic practice –

ineligible for patent protection

• Abstract? Significantly More?

• Clearer guidance in October Patent Eligiblity Guidance

• Splitting of Step 2A into Prong One (3 M’s) and Prong Two (integration

into practical application)

• Updated Examples are useful (especially the neural network Example 39,

user interface Example 37 – claim 2)

• Don’t forget to look at Dist Ct. decisions and PTAB decisions

25

Is it Patentable?

• U.S. (Cont’d)

• Examiner interviews are very useful – model arguments based on pre-

identified decisions and examples – even District Court or PTAB decisions

can be persuasive

• Work with Examiner to come up with suggestions

• In my experience, many Examiners have been very up to date on CAFC

caselaw and are willing to entertain District Court or PTAB decisions, and

are also willing to reconsider previous rejections in view of the updated

guidance, especially Prong Two

26

Is it Patentable?

• Canada

• Amazon one click patent – Federal Court of Appeal

• Examiner’s strip out computer elements if they are not “essential” to the

invention – questionable practice

• We’ve had success in Canada arguing technical effect (computer problem /

computer solution), improvements in computer functioning

• There are somewhat useful Commissioner’s Decisions in Canada (in

particular, VAT Refund and remote computing cases)

27

Is it Patentable?

• Europe

• Software must cause a “further technical effect”

• EPO published a blockchain conference report in March 2019 – “Talking

about a new revolution: blockchain”

“The first test is the so-called eligibility approach: is there an

invention and is there some technical aspect involved? If it is about

business methods and is abstract, then the invention usually has to be

excluded from patentability. Since blockchain employs

cryptographic methods, all blockchain-related patent applications

will pass this test and are therefore eligible for patentability.”

• Approach similar to other computer implemented inventions – technical

solution / technical problem

28

What is your problem?

• Developments will have greater chance of success if they:

– Improve the operation of a computer / technical process

– Provide a solution to a challenge that does not exist outside the realm of computers

• Blockchain / Distributed Ledger Technical Challenges

• Scalability

• Low transactions per second

• Slow confirmation times

• Blockchain size

• Computational waste

• Cybersecurity

• Consensus rules – majority hash attacks

• Key management / security

• Smart contract auditing

• Quantum computing resilience

• Smart Contract Execution

• Custodial safety mechanisms

• Identity / Fraud

• Sovereign cryptocurrencies

• Other

• Connecting external world with blockchains

• Privacy / ease of traversal / exploration

29

Patent Trends – Blockchain / DLT Filings

0 0 0 0 1 11

63

286

815

$0.30 $5.27 $13.28

$770.44

$313.92 $434.46

$997.69

$13,412.44

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

0

100

200

300

400

500

600

700

800

900

2010 2011 2012 2013 2014 2015 2016 2017 2018

PublishedApplications/Patents

Bitcoin Price

30

Patent Trends – Top Applicants

31

Copyrights

• Is it subject to copyright?

• Who owns the copyright?

• Do I have a license?

• What tools am I using?

• How am I using these tools?

• Am I modifying the underlying code or am I just linking to

the code (e.g., as a library)

• Is the linking static or dynamic? (important for LGPL)

32

Open source software / platform

• Open source software licenses are prevalent in DLT solutions

• Most popular• Apache 2.0• GPL v3

• Can impugn patent, copyrights• In derivatives/improvements, code built with libraries

• OSS Licenses• May restrict ability to sell / license code, enforce IP rights• May grant free licenses to your code / patents• May terminate your license to use the open source code

• Also• MIT• BSD

33

Open source software / platform

34

Tool License Type

Hyperledger Apache 2.0

Corda (R3) Apache 2.0

Ethereum LGPL-3.0 (Linking

exception)

Hydrachain MIT

BigChainDB Apache 2.0

36

Disclaimer

Norton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients.

References to ‘Norton Rose Fulbright’, ‘the law firm’ and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.

The purpose of this communication is to provide general information of a legal nature. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

Blockchains and IP: Navigating Emerging Issues

Legal Compliance and the BlockchainsEvan Smith

Cogent Law [email protected]

The information provided in this presentation is an overview of issues and is not legaladvice; to ensure compliance you should obtain specific legal advice taking intoaccount your activities in specific jurisdictions

37

Blockchain businesses potentially subject to a range of laws and regulations:

1. EU General Data Protection Regulation (GDPR)

2. U.S. Laws and Regulations

• Financial Crimes Enforcement Network

• Securities and Exchange Commission

• Commodity Futures Trading Commission

• State Regulations

Overview: Legal Compliance and the Blockchains

Evan Smith

[email protected]

Collection and storage of data relatively unregulated in the U.S.

EU’s GDPR provides significant individual rights to control how data is stored. The regulations include:

• Consent requirements for retention of personal data.

• The ”Right to be forgotten”

• The Right to access and rectify data

Privacy on the Blockchains: The GDPR

39Evan Smith

[email protected]

Key compliance issues/requirements:

1. Obtaining consent of the person whose data is stored.

2. Enabling the “right to be forgotten.”

GDPR and Blockchain Technology

40Evan Smith

[email protected]

Distributed nature of many blockchain applications leaves open issues:

1. Who is the responsible party for a given blockchain?

2. When and how does EU law apply?

3. How to comply with an individual’s request to delete their data, if the data is stored in an immutable, distributed ledger that nobody can edit?

Complicated Questions

41Evan Smith

[email protected]

1. Article 29 Working Party Opinion 05/2014 (WP 216)— defines difference between pseudonymized and anonymized data.

2. Data protection rules don’t apply to anonymous data, but threshold to qualify as anonymous is high.

3. Hashing is considered a pseudonymization technique, doesn’t anonymize.

Result: Many organizations are avoiding storage of data in a distributed blockchain until regulatory requirements become clear.

Possible Technical Solutions?

42Evan Smith

[email protected]

Evolving regulatory frameworks:

• Financial Crimes Enforcement Network (FinCEN) – anti-money laundering, transaction reporting, national security.

• Securities and Exchange Commission –Token offerings, exchanges.

• Commodity Futures Trading Commission –Token sales, options.

• State Regulators – Money Transmitter regulation and other state-specific laws.

U.S. Compliance Overview

43Evan Smith

[email protected]

The Financial Crimes Enforcement Network is an agency of the Treasury Dept.

The Bank Secrecy Act requires monitoring and reporting of suspicious activities.

• FinCEN Registration required if your business meets their definition of a Money Services Business.

• Common situation: Blockchain-related businesses engaged in “currency dealing or exchange” (e.g. trading Bitcoin for cash) usually must register.

• Rules require implementing a written anti-money laundering, know-your-customer (AML/KYC) program and reporting certain transactions, with a person assigned to oversee compliance.

FinCEN/BSA Overview

44Evan Smith

[email protected]

Securities Law: ICOs, STOs, IEOs and IDOs

Evan Smith

[email protected]

Initial Coin Offerings (ICOs) and response:• 2017: digital token craze begins - $6B raised in

875 ICOs.

• July 2017: SEC Investigative Report warns that ICOs are subject to regulation.

• 2018: $8B raised in 1,253 ICOs (80% thought to be “scams”).

• SEC/CTFC enforcement actions ensue.

• 2019: 96% drop - $350M raised in 84 projects.

2017: SEC Warningson Coin/Token Offerings

July 25, 2017

“[V]irtual organizations and associated individuals and entities increasingly are using distributed ledger technology to offer and sell instruments … to raise capital. These offers and sales have been referred to, among other things, as Initial Coin Offerings or Token Sales….”

“[T]he U.S. federal securities law may apply to various activities, including distributed ledger technology, depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular offer or sale.”

Evan Smith

[email protected]

SEC Warnings Re: ExchangesJuly 25, 2017

Exchanges: Systems that meet the definition of an exchange must register as an exchange or qualify for an exemption. Under Exchange Act Rule 3b-16(a), you are operating an exchange if you:

(1) bring together the orders for securities of multiple buyers and sellers; and

(2) use established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of the trade.

Evan Smith

[email protected]

SEC Coin/Token Actions

December 2017: SEC Action re the MuncheeICO.

• https://www.sec.gov/litigation/admin/2017/33-10445.pdf.

April 2018: SEC Charges Founders of Mayweather-backed ICO; arrests founder while trying to flee the U.S.

• https://www.coindesk.com/sec-halts-mayweather-endorsed-ico-charges-founders-fraud/

Aug. 2018: SEC Cease & Desist Order re Tomahawk Exploration LLC

Evan Smith

[email protected]

https://www.sec.gov/litigation/admin/2017/33-10445.pdf

https://www.coindesk.com/sec-halts-mayweather-endorsed-ico-charges-founders-fraud/

SEC & CFTC Coin/Token Actions

2018: SEC and CFTC announce and pursue coordinated regulatory oversight

• My Big Coin – Jan 16, 2018: CFTC sues for fraud for pocketing $6 million in customer funds that had been solicited between 2014 and 2018.

• Cabbage Tech, May 7, 2018. CFTC sues Cabbage Tech and Federal District Judge agrees with CFTC that cryptocurrencies are commodities.

Evan Smith

[email protected]


Evan Smith

[email protected]

Starting in 2018, issuers submit to regulation:

Security Token Offerings (STOs) / asset-backed tokens

• Regulated financial securities

• Make offering legitimate, arguably reduce fraud

• STO protocols include KYC and AML checks.


Evan Smith

[email protected]

Initial Exchange Offerings (IEOs)

• The new rage for 2019.

• Many exchanges will only list new offerings under an IEO. In an IEO, the exchange provides:

• Venue for launch.

• Legal and financial support services.• Common platform where buyers and sellers

see listings, evaluate offerings and buy/sell tokens.

• Ongoing platform for exchange.

(BTW - exchange makes more money)


Evan Smith

[email protected]

Latest vehicle:

Initial DEX Offerings (IDOs)

• DEX is a decentralized exchange vs. the IEO which is conducted on a traditional centralized exchange.

• Otherwise similar to IEO.• Cuts the exchange out of the initial profit.

Securities Law: Current Smackdown?

Evan Smith

[email protected]

Jan. 14, 2020: SEC issues Investor Alert and Bulletin on IEOs, warning:

• Exchanges may be selling unregistered and non-exempt securities.

• Online platforms may not be registered or in compliance with broker-dealer requirements.

• Overseas IEOs selling in the U.S. may be in violation of of SEC rules.

See: https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_initialexchangeofferings

1. Money Transmitter License Laws

• Originally intended to prevent consumer fraud or loss when businesses receive and transmit consumer funds.

• Depending on the process used, crypto purchase/sale transactions may be “money transmission.”

• Many state laws are unclear - state-by-state evaluation needed.

• One technique to confirm that a license is not required is requesting a “No Action Letter.”

2. Coin/Token-Specific State Laws - example, New York “BitLicense”

State Laws

Evan Smith

[email protected]

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