The price of the bitcoin bubble: Patent trolls are digging into the blockchain

  • The surge in the price of bitcoin has brought attention to the blockchain, the technology that underlies digital currencies.
  • Banks and other corporations are interested in the blockchain as a new method of executing transactions.
  • Patent trolls could also make a play for blockchain intellectual property as the innovative field emerges similar to the software boom of the 90s.
The bitcoin logo is displayed on a power supply unit at a cryptocurrency mining facility in Incheon, South Korea, on Friday, Dec. 15, 2017.
SeongJoon Cho | Bloomberg | Getty Images
The bitcoin logo is displayed on a power supply unit at a cryptocurrency mining facility in Incheon, South Korea, on Friday, Dec. 15, 2017.

The blockchain, the digital ledger system that underlies the boom in cryptocurrencies like bitcoin, is an innovation born within the open-source software community, where software coders pride themselves on the sharing of information. But the blockchain's open-source formative years may not stay that way.

As bitcoin nears $20,000 and other digital currencies experience unprecedented gains, some of the biggest names in the corporate world are seeking patents related to the blockchain — financial companies like Visa, retailers like Walmart and the tech old guard like IBM. And in what likely would cause distress in the open-source movement, patenting of intellectual property related to the blockchain could lead to a patent war akin to battles that emerged in the 1990s during the software boom.

A patent war "is inevitable," said Nick Spanos, founder and CEO of Blockchain Technologies, which has patented a blockchain-based election voting system among a handful of blockchain patents. He also is co-founder of the blockchain-based smart contract app Zap Project.

"There are a lot of applications out there that people do to make their company look good with press releases and fluff, when they want to make their company look good. ... The legal battles will ensue; we will see what the landscape looks like when the dust settles."

Misfit trolls, geeks and wonks who 'are going to crush it'

In late November one of the patent world's controversial capitalists announced he was creating a blockchain-related business.

Erich Spangenberg, who became notorious in Silicon Valley for challenging tech patents, has put together a new group to unlock the value in blockchain IP. Spangenberg wrote in a recent blog post, "The financial press is having fun talking about Bitcoin, but another important story that gets less attention is the technology underlying Bitcoin called 'blockchain.'"

Spangenberg has created IPwe with a team of 20 full-time staff, as well as consultants, to "apply blockchain, artificial intelligence and predictive analytics to improve patents," Spangenberg wrote. "It is a curious path how a collection of misfit trolls, geeks and wonks ended up here — but we are going to crush it and make a fortune."

But Spangenberg isn't using a narrow, short-term profit approach. He is in the blockchain for the long haul, seeing it as a key piece of his new company's plan to remake a broken patent system.

He told CNBC that any money to be made from specific blockchain patents — his firm has filed for a few — wouldn't come for years if patents are eventually granted and isn't the real story anyway. He acknowledged that his history in the software boom might lead many to conclude that he sees dollar signs in amassing blockchain patents — he bought a portfolio of tech patents in the 90s for $1 million and turned that into $150 million — but Spangenberg sees a much bigger opportunity in reforming the entire patent world. Since CNBC first wrote about his interest in the blockchain, Spangenberg said he has received "hundreds of calls" from people, many claiming to have "cheap" blockchain patents.

"There's certainly a lot of money there." -Matt Rappaport, co-founder of patent strategy firm IP Checkups

Many of the early players in the digital currencies and blockchain space adhere to an open-source philosophy, and there are a number of companies that have been trying to put together an open-source blockchain infrastructure. Spangenberg's IPwe doesn't plan to make money by litigating patents — IPwe will give its technology away for free.

But he said with the expote Mark Lemley, director of the Stanford Law School program in Law, Science and Technology, said, "Patent trolls follow the money, so it's not surprising that the growth of blockchain value has caused them to come out of the woodwork," he said.

The bitcoin boom has resulted in more than one new way to cash in on the blockchain. Riot Blockchain — which for years was a biotech company, changed its name in October and announced it was getting into both blockchain and bitcoin mining. Its shares surged after that announcement. That attracted the attention of noted short seller Citron Research.

There are now 150 hedge funds investing in digital currencies, according to a New York Times report.

"There's certainly a lot of money there," said Matt Rappaport, co-founder of patent strategy firm IP Checkups.

James Bessen, an economist and executive director of the Technology & Policy Research Initiative at Boston University School of Law, said the idea behind IPwe is typical for the patent troll space: putting together a group of people to sit in an office all day and dream up patents. "Spangenberg, he has made out well," Bessen said. "You want to go into a new field like blockchain because there won't be a lot of patents, and the original stuff was open source."

Just how many patents have been granted and applied for in the U.S. related to blockchain and bitcoin remains difficult to assess, but the growth in the past few years has been significant, according to Pedram Sameni, president and CEO of crowd-based intellectual property company Patexia. Patexia.s research found a spike from 2 blockchain patents and 25 blockchain patent applications in 2015 to 32 patents and 341 applications in 2017. Bitcoin patent applications increased from six in 2012, to 134 by 2014, and to 471 last year.

The top holders of blockchain and bitcoin patents

The top 5 holders of blockchain patents and/or patent applications are Bank of America, Mastercard, Fidelity Management and Research, IBM and Coinbase, according to Patexia's data. The top 5 holders of bitcoin patents and/or patent applications are Game Play Network, Bank of America, IBM, Elwha (an affiliate of Intellectual Ventures) and United Parcel Service.

Intellectual Ventures has received criticism for trolling activity in past decades, though it also creates many of the innovations behind some of its patents and in funds it manages. It did not respond to a request for comment on its blockchain patents.

Sameni said the patent activity related to bitcoin and the blockchain is "not that active" compared to other techs like WiFi or bluetooth, but the growth has been exponential in the past few years, and companies are filing aggressively for fundamental and foundational platforms. He cautioned that some of the patents he reviewed may overlap — involving both bitcoin and blockchain. And there is also an 18 month gap between the time patent applications are filed and published so it's likely that a lot of recent patent activity related to the blockchain boom has yet to surface.

"The problem is that if the PTO is issuing too many foundational patents, defensive collection of patents won't help avoid the patent trolls," Lemley said. "There do seem to be a large number of companies claiming some pretty fundamental [blockchain] technologies," he added.

Bessen, while not a blockchain expert specifically, has written widely on innovation and intellectual property and said some of the blockchain patents concern him — precisely for being overly broad. Patents can be designed to take a trivial idea and describe it in a different way, and that can lead to no one knowing the exact scope of what it covers.

"It can go far beyond what the inventor actually did," Bessen said.

As an example, he cited a patent awarded for a system to make payments over an internet browser that used blockchain as a form of encryption. People have used encryption before the blockchain and Bessen said it seems "fairly obvious" that a browser with a secure form of communication is not novel and should not lead to a patent being granted. But he added that a security component with blockchain may look novel to the patent office and once granted, it can be expensive to attempt to overturn the patent.

"Some trolls are bottom feeders and send out thousands of letters, can be tens of thousands of letters, for a few thousand bucks each, and lots of people paid up in those cases," Bessen said.

The history of the software industry's first boom includes a troubling precedent that resulted in thousands of "crap patents," Bessen said, being granted to cover digital payment methods. Many patents ultimately acquired by patent trolls led to lawsuits against businesses large and small challenging any e-commerce transactions, and the courts sided with the patent trolls.

"The big problem is this creates risk for the real innovators, the guy who is actually innovating has to pay off patent trolls who have not invented anything," Bessen said.

Recent Supreme Court rulings have eliminated the most extreme excesses of the tech patent wars, and it is now much harder to get a patent that is no more than a form of taking something already being done for years and doing it on a computer.

The open-source model has also had its stumbles.

A recent review of the open-source blockchain efforts by Deloitte and the software collaboration platform GitHub found that a majority of the open-source experiments have failed. More than 26,000 open-source blockchain projects were created on GitHub in 2016, according to research by Deloitte, but just 8 percent of these projects remain active

Several large banks, including J.P. Morgan and Goldman Sachs, had been involved in a big open-source blockchain project, R3, but it saw those banks and others drop out last year.

In the tech-sector failure has always been an important part of innovation, or as Spanos said of the Deloitte/GitHub findings, "So what? ... Edison had 1,000 lightbulb projects that failed."

IBM developed a new blockchain-based payment platform to speed up cross-border payments earlier this year. A number of international banks collaborated on the project, including BBVA, Bank Danamon and National Australia Bank. Hong Kong and Singapore's central banks agreed to work together on a cross-border trade finance network based on blockchain technology.

In building blockchain systems, including one partnership with food giants Nestlé, Unilever and Walmart for a blockchain-based food safety tracking system, IBM has used Hyperledger Fabric, an open-source blockchain framework overseen by the Linux Foundation. For its banking system, IBM partnered with nonprofit blockchain organization Stellar.

The big banks would be a likely target for a patent troll as the blockchain use increases — the banks have been targets in the past, Bessen said, citing suits against banks for check imaging technology.

"The bet is that over the next five years, how we transact and commercially interact is going to change, particularly where intermediaries are involved. Banks and financial institutions are obvious candidates — but there are many more," Spangenberg wrote in his blog post. He continued: "By 2017, the crazy ideas started to slow down and the better ones took over. I began assembling the team of programmers, data scientists, communications specialists and patent wonks we would need to implement and create a new business model that intelligently captures the power of blockchain in the patent space."

With all the development in the digital currency space, it's still early days, and there is no way to know how a patent war will play out. Spanos said only early patent holders are the ones that are probably protected, "as opposed to somebody who might have filed something last weekend." He added, "Challengers can try to arrive with a ton of money and the best lawyers, but they'll be wasting their time."

"Patent trolls are unfortunately a cost of innovating today," said Lemley.

Patent trolls are most successful when they can target companies that are cash rich and put up a long and drawn-out fight over it. "The whole game is to make litigation costly before you even get into it," Bessen said.

He added, "If they can find out who to target, it could be more like a speculative bet."

That has a very "bitcoin" ring to it, but Spanos is sure that no matter where a patent war in the blockchain leads, there is one group assured of cashing in: "Patent lawyers are the ones who get paid from all this strife," he said.

This story has been updated to include comments from Erich Spangenberg on how his firm plans to use blockchain, and data from Patexia on the top holders of blockchain and bitcoin patents.