FROM ALICE TO BOB: THE PATENT ELIGIBILITY OF BLOCKCHAIN IN A POST-CLS BANK WORLD.

Author:DiNizo, Antonio M., Jr.
 
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Table of Contents INTRODUCTION 3 I. BACKGROUND 6 A. BITCOIN 7 B. BLOCKCHAIN 10 C. A BLOCKCHAINPATENT 12 II. THE PATENT-ELIGIBILITY OF BUSINESS METHODS AND SOFTWARE PATENTS UNDER CLS BANK 13 A. PATENT-ELIGIBILITY--PRE-CLS BANK 14 B. PATENT-ELIGIBILITY--POST-CLS BANK 18 III. BLOCKCHAIN IS PATENT-ELIGIBLE IN LIGHT OF CLS BANK 21 A. BLOCKCHAINISNOTDIRECTEDTOWARDSEXCLUDEDSUBJECT MATTER 21 B. BLOCKCHAINDEMONSTRATESANINVENTIVECONCEPT 23 C. DRAFTINGABLOCKCHAINPATENT 24 IV. THE REGULATORY IMPLICATIONS OF A BLOCKCHAIN PATENT 25 CONCLUSION 28 INTRODUCTION

Every year the World Economic Forum publishes a list of the top ten emerging technologies that will likely have the biggest impact on the world (1). This list includes a diverse list of breakthrough technologies that may eventually help solve some of the most pressuring technological challenges our world faces (2). In previous years, the World Economic Forum has recognized synthetic biology and metabolic engineering (3), 3-D printing and remote manufacturing (4), self-healing biomimicry materials (5), and human microbiome therapeutics (6). While some technologies included on the list are not new, selection is based on the likelihood that the technology will meaningfully impact our world (7). In 2016, Blockchain dominated the list (8).

Our society is going through a digital revolution: the world is at our fingertips and digital technology has encroached almost every aspect of our lives (9). The financial services industry is no exception to this sweeping change to our way of life (10). Financial technology, or FinTech for short, is the dynamic intersection between the financial services industry and the computer technology industry (11). FinTech includes any technological innovation that effects how people transact business or deliver financial solutions (12). In 2015, investments into the FinTech industry grew 75%, surpassing the $22 billion mark (13). Financial technology is expected to place over 20% of the financial services industry at risk of being obsolete, with FinTech encompassing the reinsurance industry, the commercial banking industry, the brokerage services industry, the wealth management industry, the consumer banking industry, and the fund transfer and payment industry (14).

Blockchain is a rapidly evolving financial technology that offers revolutionary potential in how people transact business (15). While Blockchain started as the technology that powers the digital cryptocurrency Bitcoin and became publically known in 2008 (16), venture capitalists have recently taken interest in Blockchain investing over $1 billion into the technology in 2015 alone (17). Blockchain is described as a technology that can radically disrupt the way markets and governments work, creating massive economic and social chang (18). Blockchain can radically reshape the way we transfer funds; purchase insurance securities; record contracts; sell real estate, sports tickets, stock, and almost any type of property; and process secure business transactions (19). Blockchain poses a threat to governments, international currency converters, attorneys, financial institutions, brokers, and a host of other business professionals (20).

Despite its consideration as a game changing technology, Blockchain is still relatively unknown to financial services executives (21). A recent poll found that approximately 25% of financial industry executives had no familiarity with Blockchain, 15% were very familiar with Blockchain, and 0% were extremely familiar with Blockchain (22). Additionally, Bitcoin, the cryptocurrency for which Blockchain was developed, shares a similar surreptitious past (23). Satoshi Nakamoto, the developer of Bitcoin and Blockchain, never communicated with the public by phone or in-person when presenting his technology (24). He exclusively used email (25). After developing both technologies in 2008 and releasing them in early 2009, Satoshi Nakamoto cut off all communications with the public in 2011 and has not been heard from since (26). It is unknown if Satoshi Nakamoto is even a real person or if that name is an alias for one or many different programmers behind the development Bitcoin (27).

Satoshi Nakamoto never filed a patent application for Bitcoin or Blockchain (28). Various computer programmers have either claimed to be Satoshi Nakamoto or have been implicated as Satoshi Nakamoto; however, no person has produced evidence credibly substantiating their claim to authoring the technology (29). While no foundational Blockchain patent exists, tech startups and financial institutions are launching Blockchain-derived technologies (30). These companies are in business to make profits and want to exclude others from using their technology (31).

In order to be awarded patent protection, an invention must be patent-eligible (32). Patent eligibility is governed by the provisions of 35 U.S.C. [section] 101 (33). Bitcoin and Blockchain are considered business methods and software patents (34). While business methods and software once enjoyed broad patent-eligibility (35), the Supreme Court's decision in Alice v. CLS Bank (36) significantly restricted Section 101 (37). In dissent, one Federal Circuit Judge proclaimed CLS Bank "is the death of hundreds of thousands of patents, including all business method, financial system, and software patents as well as many computer implemented and telecommunications patents." (38) Despite this, Blockchain should be patent-eligible. Patent protection establishes a financial reward for creation, creates property rights, and ensures that knowledge is distributed openly for societal benefit (39). Blockchain is a specific improvement to computer technology, and a Blockchain patent would promote innovation.

This note will discuss the patent eligibility of Blockchain in light of the holding in CLS Bank. Section I will discuss the technology behind Bitcoin and Blockchain. It will discuss what Bitcoin is, why Bitcoin was developed, and how Bitcoin functions. This section will then discuss what Blockchain is, why Blockchain was developed, and how Blockchain functions. This section will conclude by discussing what a Blockchain patent would look like. Section II will discuss the patent-eligibility of business methods and software patents under CLS Bank. This section will discuss pre-CLS Bank patent-eligibility and post-CLS Bank patent-eligibility. Section III will apply the CLS Bank framework for patent-eligibility to Blockchain, and determine if Blockchain and Blockchain derived technologies are patent-eligible. Section IV will discuss the regulatory implications of a Blockchain patent.

  1. BACKGROUND

    Bitcoin is a decentralized digital cryptocurrency that relies on peer-to-peer networking and cryptography to function, and is not backed by any government or central issuing authority (40). Bitcoin was developed by a programmer, known as Satoshi Nakamoto, who sought to eliminate the need for trusted third-party intermediaries to complete online transactions (41). In most transactions over the internet, services like PayPal, American Express, or a banking institution are needed to complete the transaction (42). The intermediary operates as a ledger for the account holder, deducting the amount needed to complete the transaction from the account holders account and transmitting it to the other parties' accounts (43).

    Prior to Bitcoin, trust was a major problem for earlier cryptocurrencies (44). Trusted third-party intermediaries function as a money-clearing service and prevent account holders from spending their funds twice (45). Early cryptocurrencies depended on a trusted third-party to prevent double-spending and did not offer major advantages over paper currency and traditional services like PayPal (46). Ownership rights would be broadcasted to a central authority to verify the currency's authenticity and prevent double-spending, and new currency would be issued by the central authority (47). While this approach solved the double-spending problem, it opened up concerns about hacking, expense, and limited privacy (48).

    1. BITCOIN

      to Satoshi Nakamoto released Bitcoin in 2009 (49), and designed the technology solve the problems seen in earlier cryptocurrencies (50). Bitcoin does not utilize a trusted third-party to verify currency: instead, Bitcoin verified currency through cryptographic proof-of-work transactions, and time-stamped Blockchain ledgers (51). Blockchain ledgers register and time-stamp all Bitcoin transactions, and are distributed among Bitcoin users and transmitted via a peer-to-peer network (52). New Bitcoin transactions are verified against the Blockchain to prevent double-spending and Bitcoin's user base replaces the need for having a trusted intermediary (53).

      Public-Key cryptography is used to verify transactions within the Bitcoin network (54). Cryptography is an encryption technique for transactions and transfers between two people (55). Public-Key cryptography involves the use of two keys: one private key that is kept secret from other users and one public key that is shared with all users on the Bitcoin network (56). Transferring information in cryptography from one party to another is informally known as from "Alice to Bob." (57) When transactions occur on the Bitcoin network, Alice transmits a message to the Blockchain that is signed with Alice's private key and includes Bob's public key (58). The transaction can be verified by looking at Alice's public key and the transfer of ownership from Alice to Bob is recorded, time-stamped, and displayed on the Blockchain (59).

      The Bitcoin network uses mining to generate new currency (60). Since there is no central-issuing authority creating Bitcoins, users are awarded Bitcoins based on the processing power they contribute to the Bitcoin network (61). Since the Bitcoin network relies on a decentralized Blockchain ledger, the network depends on users contributing processing power to log...

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